UNITED STATES


SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C.
20549







FORM 10-Q




(Mark
One)


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




FOR THE QUARTERLY PERIOD
ENDED December 31, 2008




OR




 ̈ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934.




For the transition period from
             to
            .




Commission file number
000-24487







MIPS TECHNOLOGIES,
INC.


(Exact
name of registrant as specified in its charter)






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




1225 CHARLESTON ROAD, MOUNTAIN VIEW,
CA 94043-1353


(Address
of principal executive offices)




Registrant’s
telephone number, including area code: (650) 567-5000





Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes  x    No   ̈




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




Large
      accelerated filer ̈
            Accelerated
      filer  x
            Non-accelerated
      filer   ̈
            Smaller
      reporting company   ̈




Indicate
by check mark whether the registrant is a Shell Company (as defined in Rule12b-2
of the Exchange Act).    Yes   ̈    No
  x




As
of January 31, 2009, the number of outstanding shares of the registrant’s
common stock, $0.001 par value, was 44,681,283.














PART
      I – FINANCIAL INFORMATIONItem Item 1.
                  Financial Statements
      (Unaudited):Condensed
      Consolidated Balance SheetsCondensed Consolidated Statements of
      OperationsCondensed
      Consolidated Statements of Cash FlowsNotes to
      Condensed Consolidated Financial StatementsItem Item 2.
                  Management’s
      Discussion and Analysis of Results of Operations and Financial
      ConditionItem Item 3.
                  Quantitative and Qualitative Disclosures About Market
      RiskItem Item 4.
                  Controls and
  ProceduresPART II – OTHER
      INFORMATIONItem Item 1.
                  Legal
      ProceedingsItem Item 1A.
                  Risk
      FactorsItem 4.
                  Submission of Matters to a Vote of Security
    HoldersItem Item 6.
                  ExhibitsSignatures


Table of Contents


PART I – FINANCIAL INFORMATION
  ITEM 1.  FINANCIAL STATEMENTS
  MIPS
TECHNOLOGIES, INC.
  CONDENSED CONSOLIDATED BALANCE SHEETS
 (In
thousands)
   December
      31,
                    2008
                  
                  
                  June 30,
                    2008(unaudited)ASSETSCurrent
      assets:Cash and cash
      equivalents
                  
                  $
                  20,503
                  
                  
                  $
                  13,938Accounts receivable,
      net
                  
                  
                  7,283
                  
                  
                  
                  9,866Unbilled
      receivables
                  
                  
                  2,525
                  
                  
                  
                  4,596Short term restricted
      cash
                  
                  
                  19,740
                  
                  
                  
                  22,649Prepaid expenses and other
      current assets
                  
                  
                  1,945
                  
                  
                  
                  2,154Total
      current assets
                  
                  
                  51,996
                  
                  
                  
                  53,203Equipment, furniture and
      property, net
                  
                  
                  12,707
                  
                  
                  
                  16,307Intangible assets,
      net
                  
                  
                  13,888
                  
                  
                  
                  18,324Goodwill
                  
                  
                  30,852
                  
                  
                  
                  40,624Long term restricted
      cash
                  
                  
                  —
                  
                  
                  
                  7,385Other
      assets
                  
                  
                  18,967
                  
                  
                  
                  16,901$
                  128,410
                  
                  
                  $
                  152,744LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                  
                  $
                  1,919
                  
                  
                  $
                  3,441Accrued
      liabilities
                  
                  
                  37,853
                  
                  
                  
                  51,963Short-term
      debt
                  
                  
                  6,770
                  
                  
                  
                  18,641Deferred
      revenue
                  
                  
                  3,807
                  
                  
                  
                  4,283Total
      current liabilities
                  
                  
                  50,349
                  
                  
                  
                  78,328Long-term
      liabilities:Long-term
      debt
                  
                  
                  9,688
                  
                  
                  
                  —Other long term
      liabilities
                  
                  
                  25,590
                  
                  
                  
                  29,496Total
      long term liabilities
                  
                  
                  35,278
                  
                  
                  
                  29,496Stockholders’
      equity:Common
      stock
                  
                  
                  44
                  
                  
                  
                  44Preferred
      stock
                  
                  
                  —
                  
                  
                  
                  —Additional paid-in
      capital
                  
                  
                  255,560
                  
                  
                  
                  252,263Accumulated other
      comprehensive income
                  
                  
                  11,781
                  
                  
                  
                  15,224Accumulated
      deficit
                  
                  
                  (224,602)
                  
                  
                  
                  (222,611
                  )Total
      stockholders’ equity
                  
                  
                  42,783
                  
                  
                  
                  44,920$
                  128,410
                  
                  
                  $
                  152,744
  See
accompanying notes.
  
 
 
 1
 Table of Contents
 
 
 MIPS
TECHNOLOGIES, INC.
  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
  (In
thousands, except per share data)
   Three
      Months Ended
                                                                          
                                                                          
                                                                          Six
      Months EndedDecember 31,
                                                                          
                                                                          
                                                                          December 31,2008
                                                                          
                                                                          
                                                                          2007
                                                                          
                                                                          
                                                                          2008
                                                                          
                                                                          
                                                                          2007Revenue:Royalties
                                                                          
                                                                          $
                                                                          12,953
                                                                          
                                                                          
                                                                          $
                                                                          12,515
                                                                          
                                                                          
                                                                          $
                                                                          24,785
                                                                          
                                                                          
                                                                          $
                                                                          23,035Contract
      revenue
                                                                          
                                                                          
                                                                          13,446
                                                                          
                                                                          
                                                                          
                                                                          13,935
                                                                          
                                                                          
                                                                          
                                                                          27,831
                                                                          
                                                                          
                                                                          
                                                                          25,568Total
      revenue
                                                                          
                                                                          
                                                                          26,399
                                                                          
                                                                          
                                                                          
                                                                          26,450
                                                                          
                                                                          
                                                                          
                                                                          52,616
                                                                          
                                                                          
                                                                          
                                                                          48,603Cost
      of Contract Revenue
                                                                          
                                                                          
                                                                          5,792
                                                                          
                                                                          
                                                                          
                                                                          9,379
                                                                          
                                                                          
                                                                          
                                                                          13,436
                                                                          
                                                                          
                                                                          
                                                                          12,703Gross
      Margin
                                                                          
                                                                          
                                                                          20,607
                                                                          
                                                                          
                                                                          
                                                                          17,071
                                                                          
                                                                          
                                                                          
                                                                          39,180
                                                                          
                                                                          
                                                                          
                                                                          35,900Costs
      and expenses:Research
      and development
                                                                          
                                                                          
                                                                          6,797
                                                                          
                                                                          
                                                                          
                                                                          9,493
                                                                          
                                                                          
                                                                          
                                                                          14,146
                                                                          
                                                                          
                                                                          
                                                                          18,506Sales
      and marketing
                                                                          
                                                                          
                                                                          4,354
                                                                          
                                                                          
                                                                          
                                                                          6,153
                                                                          
                                                                          
                                                                          
                                                                          9,399
                                                                          
                                                                          
                                                                          
                                                                          11,739General
      and administrative
                                                                          
                                                                          
                                                                          3,993
                                                                          
                                                                          
                                                                          
                                                                          7,869
                                                                          
                                                                          
                                                                          
                                                                          10,949
                                                                          
                                                                          
                                                                          
                                                                          14,878Acquired
      in-process research and development
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          910
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          6,350Restructuring
                                                                          
                                                                          
                                                                          548
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          5,479
                                                                          
                                                                          
                                                                          
                                                                          —Total
      operating expenses
                                                                          
                                                                          
                                                                          15,692
                                                                          
                                                                          
                                                                          
                                                                          24,425
                                                                          
                                                                          
                                                                          
                                                                          39,973
                                                                          
                                                                          
                                                                          
                                                                          51,473Operating
      income (loss)
                                                                          
                                                                          
                                                                          4,915
                                                                          
                                                                          
                                                                          
                                                                          (7,354
                                                                          )
                                                                          
                                                                          
                                                                          (793
                                                                          )
                                                                          
                                                                          
                                                                          (15,573
                                                                          )Other
      income (expense), net
                                                                          
                                                                          
                                                                          (875
                                                                          )
                                                                          
                                                                          
                                                                          (1,220
                                                                          )
                                                                          
                                                                          
                                                                          (2,312
                                                                          )
                                                                          
                                                                          
                                                                          (727
                                                                          )Income
      (loss) before income taxes
                                                                          
                                                                          
                                                                          4,040
                                                                          
                                                                          
                                                                          
                                                                          (8,574
                                                                          )
                                                                          
                                                                          
                                                                          (3,105
                                                                          )
                                                                          
                                                                          
                                                                          (16,300
                                                                          )Provision
      for (benefit from) income taxes
                                                                          
                                                                          
                                                                          (937
                                                                          )
                                                                          
                                                                          
                                                                          3,511
                                                                          
                                                                          
                                                                          
                                                                          (1,115
                                                                          )
                                                                          
                                                                          
                                                                          2,816Net
      income (loss)
                                                                          
                                                                          $
                                                                          4,977
                                                                          
                                                                          
                                                                          $
                                                                          (12,805
                                                                          )
                                                                          
                                                                          $
                                                                          (1,990
                                                                          )
                                                                          
                                                                          $
                                                                          (19,116
                                                                          )Net
      income (loss) per share basic
                                                                          
                                                                          $
                                                                          0.11
                                                                          
                                                                          
                                                                          $
                                                                          (0.28
                                                                          )
                                                                          
                                                                          $
                                                                          (0.04
                                                                          )
                                                                          
                                                                          $
                                                                          (0.44
                                                                          )Net
      income (loss) per share diluted
                                                                          
                                                                          $
                                                                          0.11
                                                                          
                                                                          
                                                                          $
                                                                          (0.28
                                                                          )
                                                                          
                                                                          $
                                                                          (0.04
                                                                          )
                                                                          
                                                                          $
                                                                          (0.44
                                                                          )Common
      shares outstanding, basic
                                                                          
                                                                          
                                                                          44,586
                                                                          
                                                                          
                                                                          
                                                                          43,902
                                                                          
                                                                          
                                                                          
                                                                          44,460
                                                                          
                                                                          
                                                                          
                                                                          43,834Common
      shares outstanding, diluted
                                                                          
                                                                          
                                                                          44,588
                                                                          
                                                                          
                                                                          
                                                                          43,902
                                                                          
                                                                          
                                                                          
                                                                          44,460
                                                                          
                                                                          
                                                                          
                                                                          43,834
 
  See
accompanying notes.
  
 
 2
 Table of Contents
 
 
 MIPS
TECHNOLOGIES, INC.
  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
  (In
thousands)
  
 Six
      Months Ended
                                                        December 31,2008
                                                      
                                                      
                                                      2007Operating
      activities:Net
      loss
                                                      
                                                      $
                                                      (1,990
                                                      )
                                                      
                                                      $
                                                      (19,116
                                                      )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
                                                      
                                                      
                                                      1,931
                                                      
                                                      
                                                      
                                                      1,603Stock-based
      compensation
                                                      
                                                      
                                                      2,473
                                                      
                                                      
                                                      
                                                      4,343Acquired
      in-process research and development
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      6,350Amortization
      of intangibles
                                                      
                                                      
                                                      2,425
                                                      
                                                      
                                                      
                                                      3,794Other
      non-cash charges
                                                      
                                                      
                                                      1,621
                                                      
                                                      
                                                      
                                                      396Changes
      in operating assets and liabilities:Accounts
      receivable
                                                      
                                                      
                                                      3,485
                                                      
                                                      
                                                      
                                                      296Prepaid
      expenses and other current assets
                                                      
                                                      
                                                      (1
                                                      )
                                                      
                                                      
                                                      742Other
      assets
                                                      
                                                      
                                                      (1,845
                                                      )
                                                      
                                                      
                                                      550Accounts
      payable
                                                      
                                                      
                                                      (1,253
                                                      )
                                                      
                                                      
                                                      1,577Accrued
      liabilities
                                                      
                                                      
                                                      3,581
                                                      
                                                      
                                                      
                                                      (7,474
                                                      )Deferred
      revenue
                                                      
                                                      
                                                      77
                                                      
                                                      
                                                      
                                                      (168
                                                      )Long-term
      liabilities
                                                      
                                                      
                                                      (2,594
                                                      )
                                                      
                                                      
                                                      4,205Net
      cash provided by (used in) operating activities
                                                      
                                                      
                                                      7,910
                                                      
                                                      
                                                      
                                                      (2,902
                                                      )Proceeds
      from sales of marketable investments
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      25,940Capital
      expenditures
                                                      
                                                      
                                                      (665
                                                      )
                                                      
                                                      
                                                      (1,012
                                                      )Acquisition
      of Chipidea Microelectronica, S.A., net of cash acquired
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      (120,601
                                                      )Restricted
      cash
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      (27,163
                                                      )Net
      cash used in investing activities
                                                      
                                                      
                                                      (665
                                                      )
                                                      
                                                      
                                                      (122,836
                                                      )Net
      proceeds from issuance of common stock
                                                      
                                                      
                                                      825
                                                      
                                                      
                                                      
                                                      2,273Proceeds
      from debt, net
                                                      
                                                      
                                                      16,236
                                                      
                                                      
                                                      
                                                      19,423Repayments
      of debt
                                                      
                                                      
                                                      (18,231
                                                      )
                                                      
                                                      
                                                      —Repayments
      of capital lease obligations
                                                      
                                                      
                                                      (296
                                                      )
                                                      
                                                      
                                                      27Net
      cash provided by (used in) financing activities
                                                      
                                                      
                                                      (1,466
                                                      )
                                                      
                                                      
                                                      21,723Effect
      of exchange rate on cash
                                                      
                                                      
                                                      786
                                                      
                                                      
                                                      
                                                      164Net
      increase (decrease) in cash and cash equivalents
                                                      
                                                      
                                                      6,565
                                                      
                                                      
                                                      
                                                      (103,851
                                                      )Cash
      and cash equivalents, beginning of period
                                                      
                                                      
                                                      13,938
                                                      
                                                      
                                                      
                                                      119,039Cash
      and cash equivalents, end of period
                                                      
                                                      $
                                                      20,503
                                                      
                                                      
                                                      $
                                                      15,188Supplemental
      disclosures of cash transaction:Payment
      of restricted cash by escrow agent to former shareholders of
      Chipidea
                                                      
                                                      $
                                                      9,175
                                                      
                                                      
                                                      $
                                                      —
 
 
 See
accompanying notes.
   
  
 3
 Table of Contents
 
 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 global supplier of semiconductor design
intellectual property (IP) and analog IP.  We believe MIPS
Technologies is the only company that provides a combined portfolio of
processors, analog IP and software tools for the system on chip, or SoC market.
We operate with two business groups, Processor Business Group (PBG) and Analog
Business Group (ABG). Our technology is broadly used in markets such as mobile
consumer electronics, digital entertainment, wired and wireless communications
and networking, office automation, security, microcontrollers, and automotive.
We offer our customers high-performance, easy-to-use functionality at a fraction
of the cost and time to market that internal development would require. Our
PBG customers pay us license fees for architectural and product rights, as well
as royalties based on processor unit shipments.
  The
addition of Chipidea in August 2007, now operating as the ABG of MIPS
Technologies, has allowed us to grow the base of products we offer to a larger
set of customers. Analog and mixed signal IP are used in most SoCs. These are
the same integrated circuits that usually require a microprocessor core,
permitting us to sell both kinds of products to the same customers for the same
applications in many circumstances. Analog and mixed signal IP are difficult to
develop, and the number of well-trained engineers in this field is much smaller
than for digital circuitry. With the acquisition of Chipidea, we have gained a
particularly strong team of such designers for the development and sale of
commercial analog IP.
  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 included 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, 2008 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, 2008, included in our 2008 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 adjustments (consisting only of 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.
  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
$2.2 million and $2.3 million at December 31, 2008 and June 30, 2008,
respectively.
 
 Reclassifications.  Certain
balances in our fiscal 2008 consolidated financial statements have been
reclassified to conform to the presentation in fiscal 2009.
   4
 Table of Contents
  
 Note
2.  Computation of 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 net income
(loss) per share (in thousands, except per share amounts):
 
 Three
      Months Ended
                                                December 31,
                                              
                                              
                                              Six
      Months Ended
                                                December 31,2008
                                              
                                              
                                              2007
                                              
                                              
                                              2008
                                              
                                              
                                              2007Numerator:Net
      income (loss)
                                              
                                              $
                                              4,977
                                              
                                              
                                              $
                                              (12,085
                                              )
                                              
                                              $
                                              (1,990
                                              )
                                              
                                              $
                                              (19,116
                                              )Denominator:Weighted-average
      shares of common stock outstanding
                                              
                                              
                                              44,586
                                              
                                              
                                              
                                              43,927
                                              
                                              
                                              
                                              44,460
                                              
                                              
                                              
                                              43,862Less:
      Weighted-average shares subject to repurchase
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (25
                                              )
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (28
                                              )Shares
      used in computing net income (loss) per basic share
                                              
                                              
                                              44,586
                                              
                                              
                                              
                                              43,902
                                              
                                              
                                              
                                              44,460
                                              
                                              
                                              
                                              43,834Effect
      of dilutive securities-employee stock options and shares subject to
      repurchase
                                              
                                              
                                              2
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Shares
      used in computing net income (loss) per diluted share
                                              
                                              
                                              44,588
                                              
                                              
                                              
                                              43,902
                                              
                                              
                                              
                                              44,460
                                              
                                              
                                              
                                              43,834Net
      income (loss) per basic share
                                              
                                              $
                                              0.11
                                              
                                              
                                              $
                                              (0.28
                                              )
                                              
                                              $
                                              (0.04
                                              )
                                              
                                              $
                                              (0.44
                                              )Net
      income (loss) per diluted share
                                              
                                              $
                                              0.11
                                              
                                              
                                              $
                                              (0.28
                                              )
                                              
                                              $
                                              (0.04
                                              )
                                              
                                              $
                                              (0.44
                                              )Potentially
      dilutive securities excluded from net income (loss) per diluted share
      (A)
                                              
                                              
                                              13,313
                                              
                                              
                                              
                                              11,523
                                              
                                              
                                              
                                              12,665
                                              
                                              
                                              
                                              9,335
 
 (A)
              For
      the three months ended December 31, 2008, we excluded 13.3 million shares
      underlying outstanding weighted average stock options from the calculation
      of diluted earnings per common share because the exercise prices of these
      stock options were greater than or equal to the average market value of
      the common shares.  Some portion, or all, of the shares
      underlying  these options would be included in the calculation of
      earnings per share in future periods when we report net income if the
      average market value of the common shares increases and is greater than
      the exercise price of these options.
                
                For
      the three months ended December 31, 2007 and the six months ended December
      31, 2008 and 2007, potentially dilutive securities were excluded from net
      loss per share because they are
anti-dilutive.
 
 Note
3.  Comprehensive Income (loss)
 
 Total
comprehensive 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 second quarter
of fiscal 2009 was $4.8 million and total comprehensive loss for first six
months of fiscal 2009 was $5.4 million compared to total comprehensive loss of
$9.5 million and $12.6 million for the comparable periods in the prior
year.
   5
 Table of Contents
  
 Note
4.  Acquisition and Goodwill
 
 Chipidea
Acquisition
  On
August 27, 2007, we completed the acquisition of Chipidea, a privately held
supplier of analog and mixed signal IP 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.
 
 In
connection with the acquisition, $12.5 million of consideration was set aside in
an escrow account denominated in Euro (remaining amount approximates $4.4
million at December 31, 2008). Under the terms of the escrow agreement, payments
are due 12 months and 24 months from the acquisition date based on the
shareholders continuing to provide services to us under the terms of the escrow
agreements.  We paid $6.9 million to the former shareholders on the
first anniversary of the acquisition in August 2008.  In addition, we
paid one former shareholder an additional $2.3 million in September 2008 as his
services were terminated from the company in September 2008.  The
remaining balance is due to the other former shareholders of Chipidea on the
second anniversary of the acquisition under the terms of the escrow
agreements.  The consideration payable to former shareholders has been
ratably expensed in the Statement of Operations as payments are contingent upon
continued provision of services to us. The unpaid consideration has been
recorded as deferred purchase price consideration liability. A restricted
cash account has been established for the funding of this payment and is
recorded in short term restricted cash.
 
 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 scheduled to be released on the one year
anniversary of the acquisition date. In August 2008, we made certain claims
under the indemnification escrow agreement.  We are uncertain of the
specifics and timing of when these claims with the former shareholders of
Chipidea will be resolved.  A restricted cash account has been
established for the funding of this payment and is recorded in short term
restricted cash.
  The
changes in the carrying amount of goodwill by operating segment for the six
months ended December 31, 2008, were as follows:
 
 Processor
      Business
                    Group
                  
                  
                  Analog
                    Business
      Group
                  
                  
                  Total(In
      thousands)Balances
      at June 30, 2008
                  
                  $
                  565
                  
                  
                  $
                  40,059
                  
                  
                  $
                  40,624Goodwill
      adjustments (1)
                  
                  
                  —
                  
                  
                  
                  (5,122
                  )
                  
                  
                  (5,122
                  )Currency
      translation adjustment
                  
                  
                  —
                  
                  
                  
                  (4,650
                  )
                  
                  
                  (4,650
                  )Balances
      at December 31, 2008
                  
                  $
                  565
                  
                  
                  $
                  30,287
                  
                  
                  $
                  30,852
  (1)
              Adjustments
      to goodwill primarily represent changes in assumed pre-acquisition income
      tax liabilities accounted for under FIN 48.  To the extent that
      actual amounts differ from the estimated amounts recorded, the differences
      may result in future adjustments to
goodwill.
   6
 Table of Contents
   Note
5.  Purchased Intangible Assets
  The balances
of acquisition related intangible assets consisted of the following as of
December 31, 2008:
 
 December
      31, 2008Weighted
                      Average
                      Amortization
                      Period
      (in
                      months)
                    
                    Gross
      Carrying Value
                    
                    Accumulated
      Amortization
                    
                    Net
      Carrying Value(In
      thousands, except months)Developed
      and core technology
                    
                    
                    70
                    
                    
                    $
                    14,686
                    
                    
                    $
                    (8,463
                    )
                    
                    $
                    6,223Customer
      relationships and backlog
                    
                    
                    56
                    
                    
                    
                    12,972
                    
                    
                    
                    (6,172
                    )
                    
                    
                    6,800Other
                    
                    
                    63
                    
                    
                    
                    1,519
                    
                    
                    
                    (654
                    )
                    
                    
                    865Total
                    
                    
                    65
                    
                    
                    $
                    29,177
                    
                    
                    $
                    (15,289
                    )
                    
                    $
                    13,888
  The balances
of acquisition related intangible assets consisted of the following as of
June 30, 2008:
  June 30,
      2008Weighted
                    Average
                    Amortization
                    Period
      (in
                    months)
                  
                  
                  Gross
                    Carrying
                    Value
                  
                  
                  Accumulated
                    Amortization
                  
                  
                  Impairment
                    Losses
                  
                  
                  Net
                    Carrying
                    Value(In
      thousands, except months)Developed
      and core technology
                  
                  
                  70
                  
                  
                  $
                  28,116
                  
                  
                  $
                  (7,997
                  )
                  
                  $
                  (12,164
                  )
                  
                  $
                  7,955Customer
      relationships and backlog
                  
                  
                  56
                  
                  
                  
                  15,286
                  
                  
                  
                  (5,351
                  )
                  
                  
                  (692
                  )
                  
                  
                  9,243Other
                  
                  
                  63
                  
                  
                  
                  3,041
                  
                  
                  
                  (579
                  )
                  
                  
                  (1,336
                  )
                  
                  
                  1,126Total
                  
                  
                  65
                  
                  
                  $
                  46,443
                  
                  
                  $
                  (13,927
                  )
                  
                  $
                  (14,192
                  )
                  
                  $
                  18,324
  Developed and core technology are
being amortized over their useful lives of 5 to 15 years.  Customer
relationships and backlog are being amortized over their useful lives of 1 to 7
years.  Other intangible assets are being amortized over their useful
lives of 3 to 5 years.
  Estimated
future amortization expense related to acquisition related intangible assets as
of December 31, 2008 is as follows:
  In thousandsFiscal
      YearRemaining
      2009
                  
                  $
                  1,8662010
                  
                  
                  3,7322011
                  
                  
                  3,2542012
                  
                  
                  2,7962013
                  
                  
                  900Thereafter
                  
                  
                  1,340Total
                  
                  $
                  13,888
   7
 Table of Contents
 
  Note
6.  Debt
 
 The
components of debt are as follows (in thousands):
  December
      31, 2008
                  
                  
                  June
      30, 2008Credit agreement
                  
                  $
                  13,438
                  
                  
                  $
                  16,000Bank
      lines of credit
                  
                  
                  2,769
                  
                  
                  
                  2,476Other
                  
                  
                  251
                  
                  
                  
                  165Total
      Debt
                  
                  
                  16,458
                  
                  
                  
                  18,641Less:
      current portion
                  
                  
                  6,770
                  
                  
                  
                  18,641Long
      term debt, net of current portion
                  
                  $
                  9,688
                  
                  
                  $
                  —
  Credit
Agreement
 
 On July
3, 2008, we entered into a loan and security agreement with Silicon Valley Bank
(“SVB”).  The loan and security agreement provides for a $15 million
term loan and a revolving credit facility in an amount up to $10
million.  The proceeds borrowed on July 3, 2008, which included the
full amount of the $15 million term loan, together with approximately $1.2
million of borrowings under the revolving credit facility, were used to repay
all outstanding loans under our existing revolving credit agreement with
Jeffries Finance LLC.  The borrowing availability under the revolving
credit facility varies according to MIPS’ accounts receivable and recurring
royalty revenues and other terms and conditions described in the loan and
security agreement.  The revolving credit facility is also available
for the issuance of letters of credit, cash management services and foreign
exchange contracts.  The revolving credit facility will mature on July
2, 2009, while the term loan is to be repaid in 48 equal monthly payments of
principal plus accrued interest. In December 2008, we amended our credit
facility agreement with SVB, providing us more flexibility to fund the
international operations of our subsidiaries.  As of December 31,
2008, outstanding balances under these facilities were $13.5 million for the
term loan and $1.2 million for the revolving credit facility.  We
borrowed the full amount available under the $15 million term loan facility and
paid off approximately $1.5 million in the six months ended December 31,
2008.  We had $8.8 million available to borrow under the revolving
credit line at December 31, 2008. Loans under this facility are secured by
virtually all of our assets with the exception of IP, and the facility contains
affirmative and negative covenants that impose restrictions on the operation of
our business. At the Company’s election, borrowings under the facility bear
interest at prime rate plus 0.50% and borrowings under the revolving credit
agreement bear interest at prime plus 0.25% as defined in the credit facility
agreement.  The prime rate at December 31, 2008 was
3.25%.
 
 Bank
Lines of Credit
  We
have bank line of credit agreements with several Portuguese banks with a
total aggregate available credit of approximately $1.5 million as of
December 31, 2008. The interest rates on these agreements range from
3.89% to 4.35% and the agreements have expiration dates ranging from April 12,
2009 to April 14, 2009, with automatic renewal provisions for additional 90-day
period. As of December 31, 2008, we have outstanding borrowings of $1.5
million and no credit line available 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 $0.3 million at December 31,
2008.
 
 As
of December 31, 2008, we have entered into letters of credit for approximately
$2.4 million with various financial institutions in Portugal, Belgium, France
and Norway in association with certain building leases and government
grants.
   8
 Table of Contents
 
 Note
7.  Restructuring
 
 We record
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).
 
 In August
2008 we announced a plan to reduce the Company’s operating costs by a reduction
in employee headcount in the Company’s facilities in United States, Israel,
Portugal and closing our facilities in Belgium and
France.  In the second quarter of fiscal 2009, approximately $0.5
million of severance and benefits costs were recorded as restructuring expense
for ABG and $35,000 of severance, benefits and other costs for
PBG.  These costs primarily related to ABG costs of $0.3 million of
severance costs and $0.2 million of facilities closure
costs.   For the six months ended December 31, 2009, we incurred
$5.5 million for restructuring costs of which, $5.1 million related to ABG and
$0.4 related to PBG.  We expect to incur additional costs of
approximately $0.5 million in our ABG as we complete this restructuring.
 The reductions in personnel and operating expenses are expected to be
fully achieved prior to March 31, 2009, and we expect to complete all actions
under the restructuring plan by June 30, 2009.
 
 The
following table provides a summary of the restructuring activities and related
liabilities included in accrued liabilities as of December 31,
2008:
  Severance
      and related benefits
                                          
                                          
                                          Other exit-
      related costs
                                          
                                          
                                          Total(in
      thousands)Balance
      at June 30, 2008
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          236
                                          
                                          
                                          $
                                          236Current
      changes
                                          
                                          
                                          4,699
                                          
                                          
                                          
                                          232
                                          
                                          
                                          
                                          4,931Cash
      payments
                                          
                                          
                                          (3,348
                                          )
                                          
                                          
                                          (170
                                          )
                                          
                                          
                                          (3,518
                                          )Amount
      included in accounts payable
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (5
                                          )
                                          
                                          
                                          (5
                                          )Impact
      of foreign currency
                                          
                                          
                                          (24
                                          )
                                          
                                          
                                          (21
                                          )
                                          
                                          
                                          (45
                                          )Non-cash
      charges
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (84
                                          )
                                          
                                          
                                          (84
                                          )Balance
      at September 30, 2008
                                          
                                          
                                          1,327
                                          
                                          
                                          
                                          188
                                          
                                          
                                          
                                          1,515Current
      changes
                                          
                                          
                                          274
                                          
                                          
                                          
                                          274
                                          
                                          
                                          
                                          548Cash
      payments
                                          
                                          
                                          (557
                                          )
                                          
                                          
                                          (90
                                          )
                                          
                                          
                                          (647
                                          )Amount
      included in accounts payable
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (78
                                          )
                                          
                                          
                                          (78
                                          )Impact
      of foreign currency
                                          
                                          
                                          (23
                                          )
                                          
                                          
                                          8
                                          
                                          
                                          
                                          (15
                                          )Non-cash
      charges
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (37
                                          )
                                          
                                          
                                          (37
                                          )Balance
      at December 31, 2008
                                          
                                          $
                                          1,021
                                          
                                          
                                          $
                                          265
                                          
                                          
                                          $
                                          1,286
 
 Note
8.  Other Income (Expense), Net
  The
components of other income (expense), net are as follows (in
thousands):
 
 Three
      months ended December 31,
                  
                  
                  Six
      months ended December 31,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Interest
      income
                  
                  $
                  80
                  
                  
                  $
                  128
                  
                  
                  $
                  117
                  
                  
                  $
                  1,177Interest
      expense
                  
                  
                  (356
                  )
                  
                  
                  (646
                  )
                  
                  
                  (829
                  )
                  
                  
                  (833
                  )Other
                  
                  
                  (599
                  )
                  
                  
                  (702
                  )
                  
                  
                  (1,600
                  )
                  
                  
                  (1,071
                  )Total
      other income (expense), net
                  
                  $
                  (875
                  )
                  
                  $
                  (1,220
                  )
                  
                  $
                  (2,312
                  )
                  
                  $
                  (727
                  )
  
 9
 Table of Contents
   Note
9.  Equipment, Furniture and Property
 
 The
components of equipment, furniture and property are as follows (in
thousands):
  December
      31, 2008
                      
                      
                      June
      30, 2008Equipment
                      
                      $
                      13,860
                      
                      
                      $
                      16,363Land
      and buildings
                      
                      
                      7,656
                      
                      
                      
                      8,661Furniture
      and fixtures
                      
                      
                      3,661
                      
                      
                      
                      3,913Leasehold
      improvements
                      
                      
                      808
                      
                      
                      
                      81225,985
                      
                      
                      
                      29,749Accumulated
      depreciation and amortization
                      
                      
                      (13,278
                      )
                      
                      
                      (13,442
                      )Equipment,
      furniture and property, net
                      
                      $
                      12,707
                      
                      
                      $
                      16,307
 
 Note
10.   Other Long-Term Assets
 
 The
components of other long-term assets are as follows (in thousands):
  December
      31, 2008
                  
                  
                  June
      30, 2008Investments
      in other companies
                  
                  $
                  2,144
                  
                  
                  $
                  2,157Engineering
      design software licenses
                  
                  
                  14,290
                  
                  
                  
                  11,458Investments
      related to employee deferred compensation plan
                  
                  
                  1,509
                  
                  
                  
                  2,070Other
      long-term assets
                  
                  
                  1,024
                  
                  
                  
                  1,216$
                  18,967
                  
                  
                  $
                  16,901
  Note
11.  Accrued and Other Long-Term Liabilities
 
 The
components of accrued liabilities are as follows (in thousands):
  December
      31, 2008
                  
                  
                  June
      30, 2008Accrued
      compensation and employee-related expenses
                  
                  $
                  5,184
                  
                  
                  $
                  6,457Income
      taxes payable
                  
                  
                  807
                  
                  
                  
                  (48
                  )Payable
      to Chipidea shareholders
                  
                  
                  15,361
                  
                  
                  
                  15,212Capital
      lease obligations, short term
                  
                  
                  1,039
                  
                  
                  
                  8,044Deferred
      purchase price consideration
                  
                  
                  1,418
                  
                  
                  
                  6,123Liabilities
      related to engineering design software licenses
                  
                  
                  5,738
                  
                  
                  
                  5,212Restructuring
      related liabilities
                  
                  
                  696
                  
                  
                  
                  —Short-term
      deferred tax liability
                  
                  
                  64
                  
                  
                  
                  —Other
      accrued liabilities
                  
                  
                  7,546
                  
                  
                  
                  10,963$
                  37,853
                  
                  
                  $
                  51,963
   10
 Table of Contents
   The
components of other long-term liabilities are as follows (in
thousands):
  December
      31, 2008
                  
                  
                  June
      30, 2008Deferred
      compensation
                  
                  $
                  1,656
                  
                  
                  $
                  2.530Long-term
      restructuring related liabilities
                  
                  
                  590
                  
                  
                  
                  —Long-term
      deferred tax liability
                  
                  
                  3,783
                  
                  
                  
                  7,548Long-term
      income tax liability
                  
                  
                  3,979
                  
                  
                  
                  11,758Long-term
      accounts payable
                  
                  
                  7,363
                  
                  
                  
                  6,052Long-term
      capital lease
                  
                  
                  6,512
                  
                  
                  
                  —Other
      long-term liabilities
                  
                  
                  1,707
                  
                  
                  
                  1,608$
                  25,590
                  
                  
                  $
                  29,496
  Note
12.  Commitments and Contingencies
 
 Purchase
Commitments with Suppliers
 
 We have
outstanding purchase orders for ongoing operations of approximately $12.7
million as of December 31, 2008. Payments of these obligations are subject to
the provision of services or products.
 
 Litigation
  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.
  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.
   11
 Table of Contents
  Note 13. 
Stock-Based Compensation
 
 The
following table shows total stock-based employee compensation expense included
in the condensed consolidated statement of operations for the three months ended
December 31, 2008 and 2007 and  six months ended December 31,
2008 and 2007 (in thousands):
  Three
      Months Ended
                            December 31,
                          
                          Six
      Months Ended
                            December 31,2008
                          
                          2007
                          
                          2008
                          
                          
                          2007Costs
      and expenses:Research
      and development
                          $463
                          
                          $825
                          
                          $
                          977
                          
                          
                          $
                          1,658Sales
      and marketing
                          398
                          
                          636
                          
                          
                          665
                          
                          
                          
                          1,298General
      and administrative
                          451
                          
                          621
                          
                          
                          831
                          
                          
                          
                          1,517Total
      stock-based compensation expense
                          $1,312
                          
                          $2,082
                          
                          $
                          2,473
                          
                          
                          $
                          4,473
  There was
no capitalized stock-based employee compensation cost as of December 31, 2008 or
2007.  There were no material recognized tax benefits during the first
six months of either fiscal 2009 or fiscal 2008.
   12
 Table of Contents
 
  Note
14.  Income Taxes
  We
recorded an income tax benefit of $0.9 million and $1.1 million for the three
and six months ended December 31, 2008. We recorded an income tax expense of
$3.5 million and $2.8 million for the comparable periods in fiscal 2008. For the
Processor Business Group, we continued to recognize a valuation allowance
against the U.S. deferred tax assets as we believe that it is more likely
than not that the deferred tax assets will not be recognized.
  Our
estimated annual income tax for fiscal 2009 primarily consists of tax benefits
from the loss generated by the Analog Business Group and releases of
unrecognized tax benefits that are no longer applicable, partially offset by US
deferred tax from goodwill amortization, foreign tax, and withholding tax. Our
estimated annual income tax for fiscal 2008 primarily consists of US federal,
state, foreign income taxes, withholding taxes, offset in part by certain
foreign tax credits and general business tax credits.
 
 The total
amount of gross unrecognized tax benefits as of December 31, 2008 and June 30,
2008 was approximately $7.8 and $13.8 million, respectively. The decrease was
primarily due to the release of unrecognized tax benefits related to
international tax exposures that are no longer applicable. Approximately $5.2
million of acquisition related unrecognized tax benefits were released to
goodwill and approximately $1.3 million of unrecognized tax benefits were
released to the income tax provision as a benefit for the six months ended
December 31, 2008.
  We accrue
interest and penalties related to uncertain tax positions as a component of the
provision for income taxes. Accrued interest and penalties relating
to income tax on the unrecognized tax benefits as of December 31, 2008 and
June 30, 2008 was approximately $0.8 million and $1.5 million, respectively,
with approximately $32,000 and $75,000 being included as a component of
provision for income taxes for the three and six months ended December 31, 2008.
Also, the total amount of unrecognized tax benefits that, if recognized, would
affect the effective tax rate was $1.6 million as of December 31, 2008 and $3.0
million as of June 30, 2008.
 
 Although
we file U.S. federal, U.S. state, and tax returns in several overseas tax
jurisdictions, our major tax jurisdictions are the United States and Portugal.
Our fiscal 2005 and subsequent tax years remain subject to examination by the
IRS for U.S. federal tax purposes, and our calendar 2005 and subsequent tax
years remain subject to examination by the appropriate governmental agencies for
Portuguese tax purposes.  The Company has determined that it is
reasonably possible that the total amount of uncertain tax benefits relating to
certain foreign tax liabilities will change in the next 12 months due to various
statute of limitations expiring. The amount of unrecognized tax benefits that
could change is approximately $0.2 million.
 
 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 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
excluded costs are certain corporate expenses such as impairment costs related
to intangible assets, general and administrative expenses, selling costs, IT
costs, certain corporate marketing costs, the amortization of purchased
intangible assets associated with the Chipidea acquisition, employee share-based
compensation expense, certain acquisition costs related to the purchase of
Chipidea and restructuring costs. Our costs and operating results 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 December 31, 2008. Future changes to the internal financial
structure may result in changes to the reportable segments
disclosed.
   13
 Table of Contents
   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 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 many 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. The
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 is a summary of net
revenue, gross margin and operating income (loss). Prior period segment
information has been reclassified to conform to the current period presentation
(in thousands):
  Three
      Months Ended
                      December
      31,2008
                    
                    
                    2007Processor
      Business GroupNet
      revenue
                    
                    $
                    20,336
                    
                    
                    $
                    16,623Gross
      margin
                    
                    
                    19,891
                    
                    
                    
                    16,079Operating
      income
                    
                    
                    14,286
                    
                    
                    
                    8,382Analog
      Business GroupNet
      revenue
                    
                    
                    6,063
                    
                    
                    
                    9,827Gross
      margin
                    
                    
                    1,511
                    
                    
                    
                    3,186Operating
      income
                    
                    
                    792
                    
                    
                    
                    2,007All
      OtherNet
      revenue
                    
                    
                    —
                    
                    
                    
                    —Gross
      margin
                    
                    
                    (795
                    )
                    
                    
                    (2,194
                    )Operating
      loss
                    
                    
                    (10,163
                    )
                    
                    
                    (17,743
                    )TotalNet
      revenue
                    
                    
                    26,399
                    
                    
                    
                    26,450Gross
      margin
                    
                    
                    20,607
                    
                    
                    
                    17,071Operating
      income (loss)
                    
                    
                    4,915
                    
                    
                    
                    (7,354
                    )Interest
      income
                    
                    
                    80
                    
                    
                    
                    128Interest
      expense
                    
                    
                    (356
                    )
                    
                    
                    (646
                    )Other expense,
      net
                    
                    
                    (599
                    )
                    
                    
                    (702
                    )Income
      (loss) before income taxes
                    
                    
                    4,040
                    
                    
                    
                    (8,574
                    )Provision
      for (benefit from) income taxes
                    
                    
                    (937
                    )
                    
                    
                    3,511Net
      income (loss)
                    
                    $
                    4,977
                    
                    
                    $
                    (12,085
                    )
 
  14
 Table of Contents
  
 Six
      months ended
                      December
      31,2008
                    
                    
                    2007Processor
      Business GroupNet
      revenue
                    
                    $
                    39,916
                    
                    
                    $
                    36,555Gross
      margin
                    
                    
                    39,305
                    
                    
                    
                    35,708Operating
      income
                    
                    
                    27,050
                    
                    
                    
                    19,384Analog
      Business GroupNet
      revenue
                    
                    
                    12,700
                    
                    
                    
                    12,048Gross
      margin
                    
                    
                    2,114
                    
                    
                    
                    3,220Operating
      loss
                    
                    
                    158
                    
                    
                    
                    1,361All
      OtherNet
      revenue
                    
                    
                    —
                    
                    
                    
                    —Gross
      margin
                    
                    
                    (2,239
                    )
                    
                    
                    (3,028
                    )Operating
      loss
                    
                    
                    (28,001
                    )
                    
                    
                    (36,318
                    )TotalNet
      revenue
                    
                    
                    52,616
                    
                    
                    
                    48,603Gross
      margin
                    
                    
                    39,180
                    
                    
                    
                    35,900Operating
      loss
                    
                    
                    (793
                    )
                    
                    
                    (15,573
                    )Interest
      income
                    
                    
                    117
                    
                    
                    
                    1,177Interest
      expense
                    
                    
                    (829
                    )
                    
                    
                    (833
                    )Other expense,
      net
                    
                    
                    (1,600
                    )
                    
                    
                    (1,071
                    )Loss
      before income taxes
                    
                    
                    (3,105
                    )
                    
                    
                    (16,300
                    )Provision
      for (benefit from) income taxes
                    
                    
                    (1,115
                    )
                    
                    
                    2,816Net
      loss
                    
                    $
                    (1,990
                    )
                    
                    $
                    (19,116
                    )
  Management
does not allocate long-lived assets to the corporate function when evaluating
the performance of the business groups.
   15
 Table of Contents
   Note
16.  Recent Accounting Pronouncements
  In April
2008, the FASB finalized Staff Position (“FSP”) No. 142-3, Determination of the Useful Life of
Intangible Assets(FSP 142-3). The position amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB SFAS 142,
Goodwill and Other Intangible
Assets.  The position applies to intangible assets that are acquired
individually or with a group of other assets and both intangible assets acquired
in business combinations and asset acquisitions. FSP 142-3 is effective for
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. We are currently evaluating the impact of the pending
adoption of FSP 142-3 on our consolidated financial
statements.
 
 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. We are currently
evaluating the impact that SFAS 141R will have on our financial
statements.
  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 year ending June 30, 2009.   Adoption of
this standard did not have material impact to us.
   16
 Table of Contents
 
  ITEM 2.  MANAGEMENT'S DISCUSSIONANDANALYSIS OF RESULTS OF OPERATIONSANDFINANCIAL
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 ended
our second quarter of fiscal 2009 with cash and investments of $20.5 million, up
approximately $4.3 million from the prior quarter and up approximately $6.6
million from June 30, 2008.  Our aggregate loan balance
outstanding as of December 31, 2008 was $16.5 million which includes
$1.8 million of debt associated with our Analog Business unit in Portugal
and the balance due under our credit facility in the United States through
Silicon Valley Bank.
 
 Total
revenue in the second quarter of fiscal 2009 of $26.4 million was slightly
higher than the $26.2 million reported in the prior quarter and essentially flat
from the $26.5 million reported in the same quarter a year ago. Total second
quarter revenue from the PBG was $20.3 million and revenue from the ABG was
$6.1 million.
 
 Royalty
revenue in the second quarter of fiscal 2009 was $13.0 million, an increase
of 9% from the $11.8 million reported in the prior quarter and an increase of 3%
from the $12.5 million reported in the same quarter a year ago.  Our
processor licensees reported shipments of 126 million units during
our second quarter of fiscal 2009, approximately 13% higher than the 112
million units shipped in the prior quarter and an increase of a little over 18%
compared with the 107 million units shipped in second quarter of fiscal
2008.  As royalties reported by our customers are one quarter in
arrears, shipments and revenue reported in our second quarter represented our
customer shipments from the quarter ended September 30, 2008.
 
 Contract
and license revenue in the second quarter of fiscal 2009 was $13.4 million, a
decrease of 7% from the $14.4 million reported in the prior quarter and 4% lower
than the $13.9 million reported in the same quarter a year
ago.  License revenue from the processor business was $7.8 million
with 10 new license agreements signed during the quarter. Contract and License
revenue from the analog business was $5.7 million generated from existing
contracts along with a portion of the 14 new license agreements signed during
the quarter.
 
 We
continue to improve our gross margins.  Our second quarter gross
margin of $20.6 million increased $2.0 million or 10% compared to
first quarter results benefitting from higher royalty revenues and a favorable
mix of foreign exchange rates and lower ABG cost of sales.  Our
blended gross margin for the quarter was 78% which is up from 71% in the first
quarter of fiscal 2009 and 65% in the fourth quarter of fiscal
2008.
 
 Our
operating expense in the second quarter of fiscal 2009 was $15.7 million,
including a restructuring charge of $0.5 million as compared to our
operating expense in the first quarter of fiscal 2009 which was $24.3 million
including a restructuring charge of $4.9 million reflecting the positive impact
of our restructuring plan. Approximately $0.5 million of our cost savings in the
second quarter of fiscal 2009 was due to refunds or updated estimates of
expenses for which we do not expect similar savings in future
quarters.  Included in our operating expenses in the second quarter of
fiscal 2009 was approximately $1.3 million in stock based compensation expense
and $0.9 million in amortization charges related to the Chipidea intangible
assets.
 
 Our
initial estimated range of restructuring expense relating to the August 2008
corporate restructuring plan as reported in our 2008 Annual Report on Form 10-K
was $6.5 million to $7.5 million.  We now expect the restructuring expense
to be approximately $6.0 million in fiscal 2009.  The reduction in our
expected costs is primarily due to the weakening of the euro relative to
the dollar and to the related impact on severance and contract termination
costs in our European operations.
   17
 Table of Contents
 
  Our
Operating Segments
  We operate
with 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 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.
  Our
reportable segments are the same as our operating segments.  The
following tables provide a summary of our net revenue and operating loss by
segment (in thousands):
  Three
      Months Ended
                    December
      31,2008
                  
                  
                  2007Processor
      Business GroupNet
      revenue
                  
                  $
                  20,336
                  
                  
                  $
                  16,623Gross
      margin
                  
                  
                  19,891
                  
                  
                  
                  16,079Operating
      income
                  
                  
                  14,286
                  
                  
                  
                  8,382Analog
      Business GroupNet
      revenue
                  
                  
                  6,063
                  
                  
                  
                  9,827Gross
      margin
                  
                  
                  1,511
                  
                  
                  
                  3,186Operating
      loss
                  
                  
                  792
                  
                  
                  
                  2,007All
      OtherNet
      revenue
                  
                  
                  —
                  
                  
                  
                  —Gross
      margin
                  
                  
                  (795
                  )
                  
                  
                  (2,194
                  )Operating
      loss
                  
                  
                  (10,163
                  )
                  
                  
                  (17,743
                  )TotalNet
      revenue
                  
                  
                  26,399
                  
                  
                  
                  26,450Gross
      margin
                  
                  
                  20,607
                  
                  
                  
                  17,071Operating
      income (loss)
                  
                  
                  4,915
                  
                  
                  
                  (7,354
                  )Interest
      income
                  
                  
                  80
                  
                  
                  
                  128Interest
      expense
                  
                  
                  (356
                  )
                  
                  
                  (646
                  )Other expense,
      net
                  
                  
                  (599
                  )
                  
                  
                  (702
                  )Income
      (loss) before income taxes
                  
                  
                  4,040
                  
                  
                  
                  (8,574
                  )Provision
      for (benefit from) income taxes
                  
                  
                  (937
                  )
                  
                  
                  3,511Net
      income (loss)
                  
                  $
                  4,977
                  
                  
                  
                  $  (12,085
                  )
  
 18
 Table of Contents
 Six
      months ended
                        December
      31,2008
                      
                      
                      2007Processor
      Business GroupNet
      revenue
                      
                      $
                      39,916
                      
                      
                      $
                      36,555Gross
      margin
                      
                      
                      39,305
                      
                      
                      
                      35,708Operating
      income
                      
                      
                      27,050
                      
                      
                      
                      19,384Analog
      Business GroupNet
      revenue
                      
                      
                      12,700
                      
                      
                      
                      12,048Gross
      margin
                      
                      
                      2,114
                      
                      
                      
                      3,220Operating
      loss
                      
                      
                      158
                      
                      
                      
                      1,361All
      OtherNet
      revenue
                      
                      
                      —
                      
                      
                      
                      —Gross
      margin
                      
                      
                      (2,239
                      )
                      
                      
                      (3,028
                      )Operating
      loss
                      
                      
                      (28,001
                      )
                      
                      
                      (36,318
                      )TotalNet
      revenue
                      
                      
                      52,616
                      
                      
                      
                      48,603Gross
      margin
                      
                      
                      39,180
                      
                      
                      
                      35,900Operating
      loss
                      
                      
                      (793
                      )
                      
                      
                      (15,573
                      )Interest
      income
                      
                      
                      117
                      
                      
                      
                      1,177Interest
      expense
                      
                      
                      (829
                      )
                      
                      
                      (833
                      )Other expense,
      net
                      
                      
                      (1,600
                      )
                      
                      
                      (1,071
                      )Loss
      before income taxes
                      
                      
                      (3,105
                      )
                      
                      
                      (16,300
                      )Provision
      for (benefit from) income taxes
                      
                      
                      (1,115
                      )
                      
                      
                      2,816Net
      loss
                      
                      $
                      (1,990
                      )
                      
                      $
                      (19,116
                      )
  PBG
 
 PBG net
revenue of $20.3 million in the second quarter of fiscal 2009 increased by 22
percent compared to net revenue of $16.6 million in the second quarter of fiscal
2008. Net revenue increased primarily as a result of a $3.2 million increase in
license and contract revenue and an increase of royalty revenue of $0.5
million.   PBG net revenue of $39.9 million for the six months
ended December 31, 2008 increased by 9% compared to net revenue of $36.6 million
for the comparable period for six month ended December 31, 2007.  Net
revenue increased as a result of  $1.6 million increase in license and
contract revenue and an increase of royalty revenue of $1.7
million.
 
 PBG gross
margin of $19.9 million in the second quarter of fiscal 2009 increased by 24
percent compared to gross margin of $16.1 million in the second quarter of
fiscal 2008. Gross margin increased primarily as a result of the increase in PBG
revenue for the quarter.  PBG gross margin of $39.3 million for the
six months ended December 31, 2008 increased by 10 percent compared to gross
margin of $35.7 million for the comparable period a year ago.
 
 PBG
operating income of $14.3 million in the second quarter of fiscal 2009 increased
by 70 percent compared to operating income of $8.4 million in the second quarter
of fiscal 2008. Operating income increased primarily as a result of the
quarterly decrease in PBG operating expenses for the quarter ended December 31,
2008 as compared to the same period of the prior year.  PBG operating
income of $27.1 million for the six months ended December 31, 2008 increased by
40 percent compared to operating income of $19.4 million for the comparable
period a year ago.  Operating income increased primarily as a result
of the increases in PBG revenue coupled with decreases in PBG operating expenses
during fiscal year 2009.
   19
 Table of Contents
   ABG
  ABG net
revenue of $6.1 million in the second quarter of fiscal 2009 decreased 38
percent compared to net revenue of $9.8 million in the second quarter of fiscal
2008.  The revenue decrease was due to the continuing deterioration in
global economic conditions along with the disruptions associated with our
restructuring efforts announced during the first quarter of fiscal
2009.  ABG revenue of $12.7 million during the six months ended
December 31, 2008 increased by 5% compared to the same period of the prior year
as only 5 weeks of ABG revenue and cost of sales was recorded in the first
quarter of fiscal 2008.
 
 ABG gross
margin of $1.5 million in the second quarter of fiscal 2009 decreased from a
gross margin of $3.2 in the second quarter of fiscal 2008. Gross margin
decreased primarily due to the decrease in ABG revenue, partially offset by an
increase in gross margins as a percentage of sales in the December 2008 quarter
as compared to the quarter ended December 31, 2007 due to the positive effects
of our restructuring plan.  ABG gross margin for the six months ended
December 31, 2008 decreased to $ 2.1 million from a gross margin of $3.2 million
primarily because ABG revenue in the first six months of fiscal 2008 was earned
substantially over a period of four months and one week due to the timing of the
acquisition whereas ABG revenue in the first six months of fiscal 2009 included
the full period.  The higher monthly concentration of revenue in the
prior year led to higher utilization and cost savings as compared to fiscal
2009.
 
 ABG
operating income decreased to $0.8 million in the second quarter of fiscal 2009
as compared to $2.0 million during the second quarter of fiscal
2008.  The ABG operating income for six months ended December 31, 2008
is $0.2 million compared to $1.4 million during the comparable period a year
ago.  These decreases in operating income are primarily due to a
decrease in the monthly ABG revenue rate.
 
 All
Other Category
 
 All Other
negative gross margin of $0.8 million in the second quarter of fiscal 2009
compared to negative gross margin of $2.2 million in the second quarter of
fiscal 2008. All Other negative gross margin of $2.2 million for the six months
ended December 31, 2008 decreased compared to negative gross margin of $3.0
million for the same period of the prior year. The decrease in negative gross
margin was primarily due to the decrease in intangible asset amortization in
fiscal 2009 as compared to fiscal 2008, primarily as a result of the impairment
write-off the company recorded in the fourth quarter of fiscal
2008.  The amount of the decrease in the six month period in fiscal
2009 was effected by our having only approximately four months of amortization
in fiscal 2008 as compared to six months in fiscal 2009.
 
 All Other
operating loss of $10.2 million in the second quarter of fiscal 2009 compared to
operating loss of $17.7 million in the second quarter of fiscal
2008.  All Other operating loss of $28.0 million for the six months
ended December 31, 2008 compared to operating loss of $36.3 million in the same
period of fiscal 2008.  These losses are primarily driven by
intangible asset amortization costs, general and administrative costs, selling
costs, IT costs, certain corporate marketing costs, stock compensation costs and
Chipidea acquisition costs.  The decrease in costs in fiscal 2009 as
compared to the comparable periods in  fiscal 2008 is primarily due to
the substantial amount of non-recurring outside service and integration costs we
incurred in fiscal 2008 in connection with the Chipidea
acquisition.
   20
 Table of Contents
  Results
of Operations
  Revenue.Total revenue
consists of royalties and contract revenue. Royalties are based upon sales by
licensees of products incorporating our technology. 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 six-month periods ended December 31, 2008 and
December 31, 2007 was as follows (in thousands, except
percentages):
  Three Months Ended December 31,
                          
                          
                          Six Months
      Ended December 31,2008
                          
                          
                          2007
                          
                          
                          Change in
                            Percent
                          
                          
                          2008
                          
                          
                          2007
                          
                          
                          Change in
                            PercentRevenueRoyalties
                          
                          $
                          12,953
                          
                          
                          $
                          12,515
                          
                          
                          
                          3
                          %
                          
                          
                          24,785
                          
                          
                          $
                          23,035
                          
                          
                          
                          8
                          %Percentage
      of Total Revenue
                          
                          
                          49
                          %
                          
                          
                          47
                          %
                          
                          
                          
                          
                          
                          
                          47
                          %
                          
                          
                          47
                          %Contract
      Revenue
                          
                          $
                          13,446
                          
                          
                          $
                          13,9355
                          
                          
                          
                          -4
                          %
                          
                          
                          27,831
                          
                          
                          $
                          25,568
                          
                          
                          
                          9
                          %Percentage
      of Total Revenue
                          
                          
                          51
                          %
                          
                          
                          53
                          %
                          
                          
                          
                          
                          
                          
                          53
                          %
                          
                          
                          53
                          %Total
      Revenue
                          
                          $
                          26,399
                          
                          
                          $
                          26,450
                          
                          
                          
                          0
                          %
                          
                          $
                          52,616
                          
                          
                          $
                          48,603
                          
                          
                          
                          8
                          %
 
 Royalties.  
The increase in royalties in the second quarter of fiscal 2009 from the
comparable period in fiscal 2008 is primarily due to a 18% 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.
 
 Royalties
in the first six months of fiscal 2009 were up 8% from the comparable period in
fiscal 2008.  The increase of $1.6 million from PBG and $0.1 million
from ABG is due to the increase in unit volumes shipped by our royalty paying
licensees for our royalty paying licensees offset in part by a decline in the
average selling price of chips sold by our licensees.
  Contract Revenue.  The
4% decrease in contract revenue was due to decrease of ABG revenue in
the quarter ended December 31, 2008 as compared to the second quarter of fiscal
2008, partially offset by an increase in PBG contract revenue in the same
period.  In the second quarter of fiscal 2009, ABG contract
revenues were $5.7million compared to $9.4 million in second quarter of fiscal
2008.   Revenue from ABG contracts is generally recognized on a
percentage of completion basis over the period of contract
performance.  The ABG revenue decrease was offset in part by
a $3.2 million increase in PBG contract revenue.  There
were 10 new PBG license agreements in second quarter of fiscal 2009
compared to 5 in second quarter of fiscal 2008.
 
 Contract
revenue for the six months ended December 31, 2008 was up 9% from the comparable
period in fiscal 2008.  The increase was due to an increase of $1.7
million in PBG contract revenue due to the favorable size and timing
of PBG deals that closed in 2009 as compared to 2008, and $0.5 million increase
in ABG contract revenue due to the first six months of fiscal 2009
including the full period as compared to only four months plus one week from the
prior year due to the timing of the Chipidea acquisition.
 
 In our
Processor Business Group, we entered into a number of unlimited use license
agreements with our customers.  Under these agreements, customers
generally pay a larger fixed up-front fee to use one or more of our cores in
unlimited SoC designs during the term of the agreement, which can be up to 7
years.  We recognize all license revenues under these unlimited use
license agreements upon execution of the agreement provided all revenue
recognition criteria had been met.  Contract revenue from unlimited
use license agreements was $1.8 million in second quarter of fiscal 2009 as
compared with $0.8 million in second quarter of fiscal 2008. Contract
revenue from unlimited use license agreements was $6.1 million in the first six
months of fiscal 2009 as compared with $5.8 million in same period of fiscal
2008.
   21
 Table of Contents
 
  Comparison
of Gross Margin and Operating Expenses
 
 The
following is a summary of certain consolidated statement of operations data for
the periods indicated:
  Three
      Months Ended
                    December 31,2008
                  
                  
                  2007
                  
                  
                  Change
                    in
                    Percent(in
      thousands, except for percentages)Cost
      of Sales
                  
                  $
                  5,792
                  
                  
                  $
                  9,379
                  
                  
                  
                  -38
                  %Gross
      Margin
                  
                  $
                  20,607
                  
                  
                  $
                  17,071
                  
                  
                  
                  21
                  %Gross
      Margin Percentage
                  
                  
                  78
                  %
                  
                  
                  65
                  %Research
      and Development
                  
                  $
                  6,797
                  
                  
                  $
                  9,493
                  
                  
                  
                  -28
                  %Sales
      and Marketing
                  
                  $
                  4,354
                  
                  
                  $
                  6,153
                  
                  
                  
                  -29
                  %General
      and Administrative
                  
                  $
                  3,993
                  
                  
                  $
                  7,869
                  
                  
                  
                  -49
                  %Acquired
      in-process research & development
                  
                  $
                  —
                  
                  
                  $
                  910
                  
                  
                  
                  —Restructuring
                  
                  $
                  548
                  
                  
                  $
                  —
                  
                  
                  
                  —
  
  Six
      Months Ended
                    December 31,2008
                  
                  
                  2007
                  
                  
                  Change
                    in
                    Percent(in
      thousands, except for percentages)Cost
      of Sales
                  
                  $
                  13,436
                  
                  
                  $
                  12,703
                  
                  
                  
                  6
                  %Gross
      Margin
                  
                  $
                  39,180
                  
                  
                  $
                  35,900
                  
                  
                  
                  9
                  %Gross
      Margin Percentage
                  
                  
                  74
                  %
                  
                  
                  74
                  %Research
      and Development
                  
                  $
                  14,146
                  
                  
                  $
                  18,506
                  
                  
                  
                  -24
                  %Sales
      and Marketing
                  
                  $
                  9,399
                  
                  
                  $
                  11,739
                  
                  
                  
                  -20
                  %General
      and Administrative
                  
                  $
                  10,949
                  
                  
                  $
                  14,878
                  
                  
                  
                  -26
                  %Acquired
      in-process research & development
                  
                  $
                  —
                  
                  
                  $
                  6,350
                  
                  
                  
                  —Restructuring
                  
                  $
                  5,479
                  
                  
                  $
                  —
                  
                  
                  
                  —
 
   22
 Table of Contents
 
 Cost of Sales.Cost of
sales includes salaries, depreciation, and the amortization of intangible
assets.  PBG cost of sales has historically been insignificant as the
majority of our PBG revenue is derived from royalties and licenses which have
insignificant related costs.  With the addition of the ABG in August
2007, our blended margins have decreased as ABG revenue is substantially driven
by relatively lower margin service related contract revenue.
 
 ABG
revenue is generated by projects which include the development
of technology that is directly related to the requirements of particular
licensees and license agreements and, accordingly entails a higher cost of sales
as compared to PBG.  As the acquisition was in the latter half of the
first quarter of fiscal 2008, our results for the first six months of fiscal
year 2008 included four months and one week of ABG cost of sales as compared to
six full months of ABG sales for the comparable period in fiscal
2009.
 
 Gross Margin.Gross
margin as a percentage of net revenue increased to 78 percent in the second
quarter of fiscal 2009 compared to 65 percent in the comparable quarter in
fiscal 2008. The increase in gross margin was primarily due to the increase in
PBG revenue as a percentage of total revenue.   In addition, the
weakening euro as compared with the dollar and the complete amortization of an
intangible asset lowered ABG cost of sales, thus improving their gross
margin.
 
 Gross
margin for six months ended December 31, 2008 was relatively flat compared to
comparable period in fiscal 2008.
 
 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 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.
  The $2.7
million decrease in research and development expenses for the second quarter of
fiscal 2009 compared to the same period in fiscal 2008 was primarily due to $1.3
million decrease in salary expense, $1.1 million decrease in commissions and
bonus expense and $0.3 million decrease in stock compensation
expense.
 
 The $4.4
million decrease in research and development expenses for the six months ended
December 31, 2008 compared to the same period in fiscal 2008 was primarily due
to $1.8 million decrease in salary expense, $1.3 million decrease in commissions
and bonus expense and $1.0 million decrease in stock compensation
expense.  The remainder of the $0.3 million decrease was spread across
various expenses and primarily related to the additional activities in the prior
year associated with the acquisition and integration of Chipidea.
 
 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 $1.8
million decrease in sales and marketing expense for second quarter of fiscal
2009 over the comparable period in fiscal 2008 was primarily due to $0.9 million
in decrease in salary expense, $0.2 million decrease in stock compensation
expense and $0.2 million decrease in travel and entertainment.  The
remaining $0.5 million decrease was spread across various expenses and primarily
related to the additional activities in the prior year associated with the
acquisition and integration of Chipidea.
 
 The $2.3
million decrease in sales and marketing expense for the six months ended
December 31, 2008 over the comparable period fiscal 2008 was primarily due to
$1.1 million decrease in salary expense, $0.5 million decrease in stock
compensation expense, $0.2 million decrease in travel and entertainment, $0.2
million decrease in supplies and maintenance and $0.2 million decrease in
outside services.  The remaining $0.1 million decrease was spread
across various expenses and primarily related to the additional activities in
the prior year associated with the acquisition and integration of
Chipidea.
   23
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  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 $3.9
million decrease in general and administrative expenses for the second quarter
of fiscal 2009 compared to the same period in fiscal 2008 was primarily due to
$2.7 million decrease in outside services, $0.7 million decrease in
commissions and bonus expense, $0.3 million decrease in recruiting expenses
and $0.2 decrease in travel related expenses.
 
 The $3.9
million decrease in general and administrative for the six months ended December
31, 2008 compared to the same period in fiscal 2008 was primarily due $4.2
million decrease in outside services, partially offset by an increase of $0.2
million in consulting.
 
 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. 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 $0.9 million in the second quarter of fiscal 2008 and $6.4 million in
the first six months of fiscal 2008.
  Restructuring Expense. 
In August 2008 we announced a plan to reduce the Company’s operating costs by a
reduction in employee headcount in the Company’s facilities in United States,
Israel, Portugal, and the closing of our facilities in Belgium and
France facilities.  In the second quarter of fiscal 2009,
approximately $0.5 million of severance and benefits costs were recorded as
restructuring expense.  For the six months ended December 31, 2008
approximately $5.5 million of severance and benefits costs, asset disposal and
other costs was recorded as restructuring expenses.
  Other Income (expense),Net.  Other income
(expense), net for the second quarter of fiscal 2009 was an expense of $0.9
million as compared to expense of $1.2 million for the comparable period in
fiscal 2008.  The decrease in other expense was primarily due to decrease
of interest expense as we refinanced our debt in July 2008.  Interest
expense in the second quarter of fiscal 2009 was $0.4M as compared to $0.6M in
the same period of the prior year.
  Income Taxes.   We
recorded an income tax benefit of $0.9 million and $1.1 million for the three
and six months ended December 31, 2008. We recorded an income tax expense of
$3.5 million and $2.8 million for the comparable periods in fiscal 2008,
respectively. For the PBG, we recognize a valuation allowance against the U.S.
deferred tax assets as we believe that it is more likely than not that the
deferred tax assets will not be recognized.  Our estimated annual
income tax for fiscal 2009 primarily consists of tax benefits from the loss
generated by the ABG and releases of unrecognized tax benefits that are no
longer applicable, partially offset by US deferred tax from goodwill
amortization, foreign tax, and withholding tax. Our income tax for fiscal 2008
primarily consisted of US federal and state and foreign income taxes and
withholding taxes, offset in part by certain foreign tax credits and general
business tax credits.
   24
 Table of Contents
  Liquidity
and Capital Resources
 
 At
December 31, 2008, we had cash and cash equivalents of $20.5 million, an
increase of approximately $6.6 million from June 30, 2008.
 
 On
July 3, 2008, we entered into a new credit facility with Silicon Valley
Bank (SVB). This new facility includes a four year term loan of $15 million and
a revolving credit line allowing us to borrow up to $10 million for which
related borrowings will be due on July 2, 2009. In December 2008, we
amended our credit facility agreement with SVB, providing us more flexibility to
fund the international operations of our subsidiaries.  As of December
31, 2008, outstanding balances under this facility were $13.5 million for the
term loan and $1.2 million for the revolving credit facility.  We
borrowed the full amount available under the $15 million term loan facility and
paid off approximately $1.5 million in the six months ended December 31,
2008.  We had $8.8 million available to borrow under the revolving
credit line at December 31, 2008. Loans under this facility are secured by
virtually all of our assets with the exception of IP, and the facility contains
affirmative and negative covenants that impose restrictions on the operation of
our business. Proceeds of $16.2 million from this new facility were used to pay
off our prior loan balance.
 
 On
August 13, 2008, we announced a restructuring plan designed to reduce
approximately $5 million in costs of sales and operating expenses per quarter.
With the reduction in interest and principle payments associated with the new
loan and the operating cost reductions being implemented in fiscal 2009, our
liquidity position improved in both the first and second quarters of fiscal 2009
as we were able to generate positive cash of approximately $2.3 million in the
first quarter of fiscal 2009 and approximately $4.3 million in the second
quarter of fiscal 2009.
  For
complete statements of cash flows for the six months ended December 31, 2008 and
2007, see our consolidated financial statements.
 
 Net cash
provided by operating activities was $7.9 million for the six months ended
December 31, 2008. Our loss in the first six months of fiscal 2009 of $2.0
million was more offset by non-cash charges of $2.5 million of stock based
compensation, $2.4 million relating to amortization of acquired
intangible assets and $1.9 million of depreciation expense.  In
addition, we generated operating cash in connection with a decrease in our
accounts receivable balance at December 31, 2008 compared to June 30,
2008.  This decrease was primarily due to our mix of sales in the
second quarter of fiscal 2009 including more upfront customer payments as
compared to the quarter ended June 30, 2008.
  Net cash used in operating activities
was $2.9 million for the six months ended December 31, 2007, 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. Cash was used by a decrease in our income taxes payable
and a decrease in accrued compensation due to the payout of approximately $3.8
million in accrued bonuses. These uses of cash were partially offset by cash
provide by an increase in our long-term liabilities due to extended payment
terms on Computer Aided Design (CAD) time-based licenses and increases in our
deferred tax assets.
 
 Net cash used
in investing activities was $0.7 million for the six months ended December 31,
2008 as a result of capital expenditures in the quarter.
  Net cash used in investing activities
was $122.8 million for the six months ended December 31, 2007 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 financing activities was $1.5 million for the six months ended December 31,
2008.  This usage was due to the net payment of $2.0 million of debt
in the six months ended December 31, 2008 and capital lease payments of $0.3
million, offset by $0.8 million in proceeds from the issuance of common
stock.
  Net cash provided by financing
activities was $21.7 million for the six months ended December 31, 2007. Net
cash provided by financing activities was primarily attributable to the
loan of $20 million under our prior revolving credit agreement and activity
under our employee stock plans, offset in part by cash paid for loan
origination fees.
   25
 Table of Contents
   Our future liquidity and capital
requirements could vary significantly from quarter to quarter, depending on
numerous factors, including, among others:
  ·           from
time to time we have certain significant payments to suppliers including CAD
system vendors required under long term purchase agreements. These payments vary
and can be up to $2 million per quarter.
  ·           from
time to time we have certain significant payments to investors relating to prior
acquisitions. These payments can range up to $1.0 million a quarter, excluding
payments from funds previously set aside in escrow accounts.
  ·           our
ability to continue to generate cash flow from operations.
  ·           financing
activities under borrowing arrangements. Our borrowing availability with SVB
varies according to our accounts receivable and recurring royalty revenues and
other terms and conditions described in the loan and security
agreement.
  ·           the
costs associated with capital expenditures and our land and building in
Portugal.
  ·           level
and timing of restructuring activities. In August 2008, we announced a corporate
restructuring to better integrate the ABG and reduce overall cost structure. See
Note 7 of the Notes to Condensed Consolidated Financial Statements for
additional details on our restructuring activities.
  We
believe that we have sufficient cash and borrowing capabilities to meet our
projected operating and capital requirements for the foreseeable future and at
least the next twelve months. However, 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 could have a material
adverse effect on our business, results of operations and financial
condition.
   26
 Table of Contents
 Our
contractual obligations as of December 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
      yearsOperating
      lease obligations (1)
                    
                    $
                    4,164
                    
                    
                    $
                    1,770
                    
                    
                    $
                    1,671
                    
                    
                    $
                    704
                    
                    
                    $
                    19Capital
      lease obligations (2)
                    
                    
                    10,424
                    
                    
                    
                    1,311
                    
                    
                    
                    2,204
                    
                    
                    
                    1,669
                    
                    
                    
                    5,240Purchase
      obligations (3)
                    
                    
                    12,674
                    
                    
                    
                    12,346
                    
                    
                    
                    328
                    
                    
                    
                    —
                    
                    
                    
                    —Short
      Term Debt (4)
                    
                    
                    7,248
                    
                    
                    
                    7,248
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Other
      short-term liabilities reflected on our Balance Sheet
      (5)
                    
                    
                    24,722
                    
                    
                    
                    24,722
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Long
      Term Debt (6)
                    
                    
                    10,178
                    
                    
                    
                    —
                    
                    
                    
                    7,963
                    
                    
                    
                    2,215
                    
                    
                    
                    —Other
      long-term liabilities and obligations (7)
                    
                    
                    1,940
                    
                    
                    
                    —
                    
                    
                    
                    1,940
                    
                    
                    
                    —
                    
                    
                    
                    —Total
                    
                    $
                    71,350
                    
                    
                    $
                    47,397
                    
                    
                    $
                    14,106
                    
                    
                    $
                    4,588
                    
                    
                    $
                    5,259
  (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 $0.3 million, which is
      guaranteed by a time-based certificate of deposit.  In addition,
      we have entered into letters of credit of approximately $2.4
      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. Since September 30,
      2008, purchase obligations have increased by approximately $5.0 million
      largely due to additional CAD licenses.
  (4)
              Short
      term debt includes $5.5 million of principal and interest due under our
      SVB term loan and revolving credit facility, $1.5 million due under
      various credit lines and $0.3 million primarily due to a loan with a
      government agency in Portugal and the related future interest
      payment.
  (5)
              Short
      term liabilities includes:  $15.1 million related to an escrow
      account related to the Chipidea acquisition completed in August
      2007, $4.4 million liabilities related to an escrow account for
      the consideration contingent due upon continued employment of certain
      employees related to the Chipidea acquisition, $2.3 million related to a
      deposit received on our Portugal, Lisbon building, $1.5 million due to
      shareholders of a company acquired by Chipidea prior to August 2007, and
      $1.4 million in payables for computer aided design licenses not included
      under outstanding purchase orders.
  (6)
              Long
      term debt includes $10.2 million of principal and interest due under the
      SVB term loan.
  (7)
              Long-term
      liabilities and obligations include:  $1.7 million due to
      employees under a deferred compensation plan, under which
      distributions are elected by the employees, and $0.3 million in
      payables for CAD licenses not included in outstanding purchase
      orders.
  The
      table above excludes liabilities, aggregating $4.0 million, estimated
      under FASB Interpretation No. 48, “Accounting for Uncertainty in Income
      Taxes” as we are unable to reasonably estimate the ultimate amount or
      timing of settlement.
   27
 Table of Contents
   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 2008 Form
10-K.
  ITEM 3.QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKETRISK
  We believe
there have been no significant changes to the discussion of quantitative and
qualitative disclosures about market risk in our 2008 Form
10-K.
 
 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 13a-15(e)
or 15(d)-15(e) under the Exchange Act) were not effective as of December 31,
2008, because of the material weakness described in Part II, Item 9A, in
our 2008 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.
 
 Management began
implementing a remediation plan for this material weakness during
fiscal 2007.  Our remediation plan includes: a) reduction in the
turnover of internal and external tax professionals, b) 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 c) consultation with tax experts in a timely
manner.   Though we have made progress in hiring qualified tax
personnel and have set in place additional review procedures, that plan is
still in progress.  We expect to complete the implementation of the
controls included in this remediation plan during fiscal 2009. Competition for
highly qualified tax personnel remains intense in the Bay Area. Our inability to
attract and retain personnel with adequate experience and skills could make it
difficult to timely complete the remediation plan.
 
 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 such term is
defined under Rule 13a-15(f) under the Exchange Act) that occurred during the
second quarter of fiscal 2009 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
 
 28
 Table of Contents
  
 PART II – OTHER INFORMATION
  ITEM 1.  LEGAL
PROCEEDINGS
 
 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. For additional information regarding intellectual property
litigation, see Part I, Item 1A. Risk factors—“We may be subject to claims
of infringement”.
  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, which could individually or
collectively cause our stock price to decline. The following list is not
exhaustive and you should carefully consider these risks and uncertainties
before investing in our common stock.
  Our financial results could be
negatively impacted by economic conditions.The U.S. economy
and other global economies are in a recession and we cannot predict when global
economic conditions will cease to deteriorate. The markets served by the
Company, and those of our customers, can be highly cyclical, and our financial
results, both our royalty revenue and our ability to secure new contracts,
could be impacted by consumer spending in the U.S. and global
economies.  The semiconductor industry appears to be facing
particularly challenging economic trends and our prospects and results are
influenced in a significant way by conditions in this
industry.  Royalty revenues depend significantly on worldwide economic
conditions, including business and consumer spending, which have recently
deteriorated significantly in many countries and regions, including the United
States, and may remain depressed indefinitely. Contract revenues depend on the
willingness of our potential customers to invest in new products, and may be
impacted by weak economic conditions in consumer spending and infrastructure
spending. Some of the factors that could influence the levels of consumer
and infrastructure spending include continuing increases in fuel and other
energy costs, conditions in the residential real estate and mortgage markets,
labor and healthcare costs, access to credit, consumer confidence and other
macroeconomic factors affecting consumer spending behavior. These and other
economic factors could have a material adverse effect on demand for our products
and services, and on our financial condition and operating results.
  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.
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 Table of Contents
   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 and expense associated with integrating and managing a large acquired
business, which challenge will be further complicated 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 of the recent resignation of Jose Franca, founder
and CEO of Chipidea prior to the acquisition, and the ongoing risk of the loss
of additional key personnel 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. In the fourth quarter of fiscal 2008 we recorded substantial
charges for the impairment of goodwill and intangible assets from this
acquisition, as our updated forecasts for the business showed lower near and
long term profitability than we had estimated at the time of completing the
acquisition. 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.
  Our  capacity to meet
financial obligations depends on our ability to generate positive cash
flow.   We used all of our available cash and short term
investments to complete the acquisition of Chipidea and we now have significant
debt. This use of cash, coupled with negative cash flow in our Analog
Business Group, 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.  Our term
loan with Silicon Valley Bank in the amount of $15 million is due and payable in
monthly installments over four years and has a revolving credit line in the
amount of $10 million. Under the terms of a Loan and Security Agreement we must
pay off all amounts due under the Revolving Credit Agreement or extend the
agreement on or before July 2, 2009. Loans under the new 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.  Certain restrictive covenants may limit our ability to fund the
international operations of our subsidiaries and therefore may substantially and
negatively impact our ability to conduct business overseas or may accelerate the
timing of when principal payments are due.  In addition, 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 interest payments for so long as this debt is
outstanding. This 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 may prevent us from taking advantage
of opportunities that are otherwise available to us or could cause an earlier
acceleration of the facility.  We may not be able to obtain favorable
credit terms related to any debt that we may incur in the future.
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 Table of Contents
   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 revenues are somewhat independent of our expenses 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 very
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 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, particularly as we have become more reliant on larger
transactions in PBG;
  ·           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.
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 Table of Contents
   The success of our business depends
on sustaining or 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 declined 12% in fiscal 2006, increased by 42% in
fiscal 2007 and declined by 23% in fiscal 2008. In addition, our PBG contract
revenue increased by 12% in the first six months of fiscal 2009 as compared to
the same period of fiscal 2008. In our PBG, we entered into a number of
unlimited use license agreements with our customers. Under these agreements,
customers generally pay a larger fixed up-front fee to use a number of our cores
in unlimited SoC designs during the term of the agreement, which is generally
between 4 and 7 years. The number of licensed cores can vary from one core to
every core currently available. We recognize all license revenues under these
unlimited use license agreements upon execution of the agreement, provided all
revenue recognition criteria had been met. Contract revenue from unlimited use
license agreement was 69% in fiscal 2008, 49% in fiscal 2007, and 32% in fiscal
2006 of the total PBG license and contract revenue. Additionally, contract
revenue from unlimited use license agreements was $6.1 million in first six
months of fiscal 2009 as compared with $5.8 million in first six months of
fiscal 2008. Historically, a license-based business can have strong quarters or
weak quarters depending on the number and size of the license deals closed
during the quarter. 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.
  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 IP product offerings
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 IP product
offerings 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 IP
product offerings 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.
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   In our Processor
business 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.As royalties reported by our customers
are one quarter in arrears, shipments and revenue reported in our second quarter
represented our customer shipments from the quarter ended September 30,
2008.  Due to the recent slowdown in the semiconductor and consumer
electronics segments, our royalties will likely be negatively impacted in our
third and fourth quarters of fiscal 2009.  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.
  If we do not compete effectively in
the market for SoC intellectual property cores and related designs, our business
will be adversely affected.  Competition in the market for SoC
intellectual property and related designs is intense. Our products compete with
those of other designers and developers of IP product offerings, 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.
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   We may incur restructuring charges in
the future, which could harm our results of operations.On
August 13, 2008, we announced a plan to reduce the Company’s operating
costs by a reduction in employee headcount. This plan involves the termination
of employees in our facilities in the United States, Israel and Europe. We
expect to complete all actions under the restructuring by June 30, 2009 and
we now expect to incur aggregate costs associated with this plan of
approximately $6.0 million. It is expected that the majority of these costs will
consist of employee severance charges. 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.
Further, our restructuring plans could result in a potential adverse effect on
employee capabilities that could harm our efficiency and our ability to act
quickly and effectively in the rapidly changing technology markets in which we
sell our products.
  Our operations in foreign countries
are subject to political and economic risks.With the
acquisition of Chipidea we have substantially expanded our operations outside
the United States. In addition to the main Chipidea facilities in Portugal,
we also have operations in China, France, Macau, Norway, Switzerland and Poland
as well as sales offices in China, Germany, Japan, Israel, Korea and
Taiwan.  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 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.
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  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 respond to
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. 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.
  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.
  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.
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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.  Although we took a substantial charge in the fourth
quarter of fiscal 2008 for the impairment of goodwill and acquired intangible
assets associated with the Chipidea acquisition and prior acquisitions, we
continue to carry substantial amounts of acquired intangible assets and
goodwill. If we complete additional acquisitions in the future, our acquired
intangible asset amortization expenses could further increase, and we may be
required to record additional amounts of goodwill. In addition, 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 acquired intangible assets, goodwill 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 make a
further determination 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. Our determination of fair value of long-lived assets 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 additional goodwill impairment
charges.
  We cannot be assured that our recent
restructurings will sufficiently reduce our expenses relative to future revenue
and may have to implement additional restructuring plans in order to reduce our
operating costs.    We have implemented restructuring
plans in the past to reduce our operating costs, including plans announced in
January and August 2008. We may not realize fully the anticipated benefits of
the restructuring plans, which may lead to additional future restructurings to
align our expenses with our anticipated revenue. If we are required to do so, we
likely would incur additional amounts of material restructuring
charges.
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  ITEM 4. 
SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
 
 (a)  We
held our 2008 Annual Meeting of Stockholders on November 12,
2008.  Proxies for the meeting were solicited pursuant to Regulation
14A.
 
 (b)  The
matters described below were voted on at the Annual Meeting of Stockholders and
the numbers of votes cast with respect to each matter and with respect to the
election of directors were as indicated.
 
 (1)  Holders
of our common stock voted to elect three Class I directors to serve for
three-year terms and one Class II director to serve a one-year term as
follows:
 
 For
                  
                  
                  Against
                  
                  
                  Withheld
                  
                  
                  Abstentious/Broker
      Non-VoteAnthony
      B. Holbrook
                  
                  
                  36,745,431
                  
                  
                  
                  —
                  
                  
                  
                  5,037,338
                  
                  
                  
                  —John
      E. Bourgoin
                  
                  
                  38,939,530
                  
                  
                  
                  —
                  
                  
                  
                  2,843,239
                  
                  
                  
                  —Robert
      R. Herb
                  
                  
                  38,706,396
                  
                  
                  
                  —
                  
                  
                  
                  3,076,373
                  
                  
                  
                  —Robin
      L. Washington
                  
                  
                  40,005,388
                  
                  
                  
                  —
                  
                  
                  
                  1,777,381
                  
                  
                  
                  —
 
 (2)  Holders
of our common stock voted to ratify the appointment of Ernst & Young LLP as
our independent auditors for the fiscal year ending June 30, 2009 as
follows:
  For
                      
                      
                      Against
                      
                      
                      Withheld
                      
                      
                      Abstentious/Broker
      Non-Vote41,549,998
                      
                      
                      
                      137,120
                      
                      
                      
                      —
                      
                      
                      
                      95,650
  (3)  Additionally,
each of the following directors continued their term of office after the
meeting:  Fred M. Gibbons, Kenneth L. Coleman and William M.
Kelly.
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   ITEM 6. 
EXHIBITS
  (a) 
Exhibits
  10.1
              Amendment No. 1 to Loan and Security Agreement with
      Silicon Valley Bank.
  10.2
                Amendment to Change in Control
      Agreement.
 
 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.
 
  ITEMS 2,
3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.




MIPS Technologies, Inc., a
      Delaware corporationFebruary 6,
      2009
            By:
            /s/ MAURY
      AUSTINMaury AustinVice President and Chief
      Financial Officer(Principal Financial
      Accounting Officer)








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