**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

##### **FORM 10-Q**

** **

**(Mark One)**

| **ý****  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE   SECURITIES EXCHANGE ACTS OF 1934.**                         |
|-------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                      |
| **FOR  THE QUARTERLY PERIOD ENDED September 30, 2003**                                                                                    |
|                                                                                                                                      |
| **OR**                                                                                                                                    |
|                                                                                                                                      |
| **o****  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934.**                               |
|                                                                                                                                      |
| **For  the transition period from         to          .** |

** **

## **Commission file number 000-24487**

** **

| **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** |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý   No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Securities Exchange Act of 1934).   Yes o   No ý

 

As of October 31, 2003, the number of outstandingshares of the Registrant’s Class A common stock, $.001 par value, was15,777,130.  As of October 31, 2003, thenumber of outstanding shares of the Registrant’s Class B common stock, $.001par value, was 25,057,715.

 

 

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## **PART I - FINANCIALINFORMATION**

 
| Item 1.                         | Financial Statements  (Unaudited):                                                          |
|---------------------------------|---------------------------------------------------------------------------------------------|
|                            |                                                                                        |
|                            | Condensed  Consolidated Balance Sheets                                                      |
|                            | Condensed  Consolidated Statements of Operations                                            |
|                            | Condensed  Consolidated Statements of Cash Flows                                            |
|                            | Notes  to Condensed Consolidated Financial Statements                                       |
|                            |                                                                                        |
| Item  2.                        | Management’s  Discussion and Analysis of Results of Operations and Financial Condition |
|                            |                                                                                        |
| Item  3.                        | Quantitative  and Qualitative Disclosures About Market Risk                                 |
|                            |                                                                                        |
| Item 4.                         | Controls and  Procedures                                                                    |
|                            |                                                                                        |
| **PART II - OTHER INFORMATION** |
|                            |                                                                                        |
| Item 6.                         | Exhibits and  Reports on Form 8-K                                                           |
|                            |                                                                                        |
| Signatures                      |
|                                 |                                                                                             |  |

 

2

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**PARTI - FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIALSTATEMENTS**

 

**MIPS TECHNOLOGIES, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Inthousands)**

 
|                                          |   | **September 30,  2003** |       | **June 30,  2003** |       |
|-----------------------------------------------|--------|-------------------------|------------|--------------------|------------|
|                                          |   | **(unaudited)**         |       |               |       |
| **ASSETS**                                    |   |                    |       |               |       |
| Current assets:                               |   |                    | ** ** |               | ** ** |
| Cash  and cash equivalents                    |   | $                       | 73,692     |               | $          | 83,839 |   |
| Short-term  investments                       |   | 4,975                   |       | —             |       |
| Accounts  receivable, net                     |   | 4,010                   |       | 4,762              |       |
| Prepaid  expenses and other current assets    |   | 2,603                   |       | 3,648              |       |
| Total  current assets                         |   | 85,280                  |       | 92,249             |       |
| Equipment  and furniture, net                 |   | 5,607                   |       | 4,202              |       |
| Intangible  assets, net                       |   | 3,621                   |       | 3,769              |       |
| Other  assets                                 |   | 3,590                   |       | 5,129              |       |
|                                          |   | $                       | 98,098     |               | $          | 105,349 |   |
|                                          |   |                    |       |               |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY** |   |                    | ** ** |               | ** ** |
| Current  liabilities:                         |   |                    |       |               |       |
| Accounts  payable                             |   | $                       | 523        |               | $          | 504 |   |
| Accrued  liabilities                          |   | 9,034                   |       | 10,977             |       |
| Deferred  revenue                             |   | 2,248                   |       | 2,592              |       |
| Total  current liabilities                    |   | 11,805                  |       | 14,073             |       |
| Long-term  liabilities                        |   | 2,496                   |       | 1,900              |       |
|                                          |   | 14,301                  |       | 15,973             |       |
|                                          |   |                    |       |               |       |
| Stockholders’  equity:                   |   |                    |       |               |       |
| Common  stock                                 |   | 40                      |       | 40                 |       |
| Additional  paid-in capital                   |   | 180,518                 |       | 180,504            |       |
| Accumulated  other comprehensive income       |   | 711                     |       | 702                |       |
| Deferred  compensation                        |   | (1,176                  | )          | (1,337             | )          |
| Accumulated  deficit                          |   | (96,296                 | )          | (90,533            | )          |
| Total  stockholders’ equity              |   | 83,797                  |       | 89,376             |       |
|                                          |   | $                       | 98,098     |               | $          | 105,349 |   |

 

See accompanyingnotes.

 

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**MIPS TECHNOLOGIES, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)**

**(In thousands, except per share data)**

 
|                                                           |   | **Three Months Ended  September 30,** |   |
|----------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                           |   | **2003**                              |   | **2002** |   |
| Revenue:                                                       |   |                                  |   |   |   |
| Royalties                                                      |   | $                                     | 5,088  |   | $ | 3,533 |   |
| Contract revenue                                               |   | 5,325                                 |   | 5,909 |   |
| Total revenue                                                  |   | 10,413                                |   | 9,442 |   |
| Costs and  expenses:                                           |   |                                  |   |   |   |
|                                                           |   |                                  |   |   |   |
| Research and  development                                      |   | 8,144                                 |   | 8,507 |   |
| Sales and  marketing                                           |   | 2,796                                 |   | 3,243 |   |
| General and  administrative                                    |   | 1,644                                 |   | 1,831 |   |
| Acquired  in-process research and development                  |   | —                                |   | 394 |   |
| Restructuring                                                  |   | 3,233                                 |   | — |   |
| Total costs and  expenses                                      |   | 15,817                                |   | 13,975 |   |
| Operating loss                                                 |   | (5,404                                | )      | (4,533 | ) |
| Other income,  net                                             |   | 208                                   |   | 655 |   |
| Loss before  income taxes                                      |   | (5,196                                | )      | (3,878 | ) |
| Provision for  income taxes                                    |   | 567                                   |   | — |   |
| Net loss                                                       |   | $                                     | (5,763 | ) | $ | (3,878 | ) |
|                                                           |   |                                  |   |   |   |
| Net loss per  basic and diluted share                          |   | $                                     | (0.14  | ) | $ | (0.10 | ) |
|                                                           |   |                                  |   |   |   |
| Shares used in  computing net loss per basic and diluted share |   | 40,172                                |   | 39,619 |   |

 

See accompanying notes.

 

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**MIPS TECHNOLOGIES, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)**

**(In thousands)**

** **
|                                                                              |   | **Three  Months Ended  September 30,** |   |
|-----------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                              |   | **2003**                               |   | **2002** |   |
|                                                                              |   |                                   |   |   |   |
| Operating  activities:                                                            |   |                                   |   |   |   |
| Net loss                                                                          |   | $                                      | (5,763 | ) | $ | (3,878 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:      |   |                                   |   |   |   |
| Depreciation                                                                      |   | 1,002                                  |   | 1,182 |   |
| Acquired  in-process research and development                                     |   | —                                 |   | 394 |   |
| Amortization of  intangibles                                                      |   | 308                                    |   | 651 |   |
| Other non-cash  charges                                                           |   | (3                                     | )      | (23 | ) |
| Changes in  operating assets and liabilities:                                     |   |                                   |   |   |   |
| Accounts  receivable                                                              |   | 752                                    |   | 3,310 |   |
| Accounts payable                                                                  |   | 19                                     |   | (567 | ) |
| Other assets and  liabilities, net                                                |   | 905                                    |   | 228 |   |
| Net cash  provided by (used in) operating activities                              |   | (2,780                                 | )      | 1,297 |   |
|                                                                              |   |                                   |   |   |   |
| Investing  activities:                                                            |   |                                   |   |   |   |
| Purchases of  short-term investments                                              |   | (4,975                                 | )      | (5,000 | ) |
| Capital  expenditures                                                             |   | (2,410                                 | )      | (334 | ) |
| Acquisition of  Algorithmics Limited and an affiliated company, DFS3 Limited, net |   | —                                 |   | (1,265 | ) |
| Payment related  to purchase of intangible assets in a prior period               |   | —                                 |   | (900 | ) |
| Net cash used in  investing activities                                            |   | (7,385                                 | )      | (7,499 | ) |
|                                                                              |   |                                   |   |   |   |
| Financing  activities:                                                            |   |                                   |   |   |   |
| Net proceeds  from issuance of common stock                                       |   | 15                                     |   | — |   |
| Loan repayment                                                                    |   | —                                 |   | (302 | ) |
| Net cash  provided by (used in) financing activities                              |   | 15                                     |   | (302 | ) |
| Effect of  exchange rate on cash and cash equivalents                             |   | 3                                      |   | 2 |   |
| Net decrease in  cash and cash equivalents                                        |   | (10,147                                | )      | (6,502 | ) |
| Cash and cash  equivalents, beginning of period                                   |   | 83,839                                 |   | 90,712 |   |
| Cash and cash  equivalents, end of period                                         |   | $                                      | 73,692 |   | $ | 84,210 |   |

 

See accompanyingnotes.

 

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**MIPSTECHNOLOGIES, INC.**

 

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED**

 

#### **Note 1.   Description of Business and Basis ofPresentation**

 

***Formation of MIPS Technologies, Inc. (MIPS).***  MIPS Technologies, Inc.’s predecessor, MIPSComputer Systems, Inc., was founded in 1984 and was engaged in the design anddevelopment of reduced instruction set computing, or RISC, processors for thecomputer systems and embedded markets. Silicon Graphics, Inc. (SiliconGraphics) adopted the MIPS architecture for its computer systems in 1988 andacquired MIPS Computer Systems, Inc. in 1992. Following the acquisition, Silicon Graphics continued the MIPS processorbusiness through its MIPS Group (a division of Silicon Graphics), which focusedprimarily on the development of high-performance processors for SiliconGraphics’ workstations and servers.   Inorder to increase the focus of the MIPS Group on the design and development ofprocessor applications dedicated to the embedded market, in December 1997Silicon Graphics initiated a plan to separate the business of the MIPS Groupfrom its other operations.

 

In April 1998, our Board of Directors approved atransaction pursuant to which Silicon Graphics transferred to us the assets andliabilities related to the design and development of processor intellectualproperty for embedded market applications. From the closing of our initialpublic offering on July 6, 1998, until June 20, 2000, we were a majority ownedsubsidiary of Silicon Graphics.  On June20, 2000, Silicon Graphics distributed all of its remaining interest in MIPS inthe form of a stock dividend of Class B common stock to its stockholders.

 

***Basis of Presentation.***  Theunaudited results of operations for the interim periods shown in thesefinancial statements are not necessarily indicative of operating results forthe entire fiscal year.  In our opinion,the condensed consolidated financial statements include all adjustments(consisting only of normal recurring accruals) necessary to present fairly thefinancial position, results of operations and cash flows for each interimperiod shown.

 

The condensed consolidated financial statements havebeen prepared in accordance with the rules and regulations of the Securitiesand Exchange Commission (“SEC”) applicable to interim financial information.  Certain information and footnote disclosuresincluded in financial statements prepared in accordance with generally acceptedaccounting principles have been omitted in these interim statements as allowedby such SEC rules and regulations. The balance sheet at June 30, 2003 has beenderived from audited financial statements, but does not include all disclosuresrequired by generally accepted accounting principles.  However, we believe that the disclosures are adequate to make theinformation presented not misleading. The unaudited condensed consolidated financial statements included inthis Form 10-Q should be read in conjunction with the audited consolidatedfinancial statements and related notes for the fiscal year ended June 30, 2003,included in our 2003Annual Report on Form 10-K.

 

***Use of Estimates.***  Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenue and expenses during thereporting period.  Actual resultsinevitably will differ from those estimates, and such differences may bematerial to the financial statements.

 

***Revenue Recognition.***  Wederive revenue from license fees for the transfer of proven and reusableintellectual property components or engineering services.  We enter into licensing agreements thatprovide licensees the right to incorporate MIPS’ intellectual propertycomponents in their products with terms and conditions that have historicallyvaried by licensee.  Generally, thesepayments include a nonrefundable technology license fee for currently availabletechnology, which is payable upon the transfer of intellectual property, or anonrefundable engineering service fee, which generally is payable uponachievement of defined milestones. Each of these types of contracts is anonexclusive license for the underlying intellectual property. While we may berequired to perform certain services to render the intellectual propertysuitable for license under an

 

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engineering service contract, we continue to own the intellectualproperty that we develop.  The amount ofthe license fee under an engineering service agreement is primarily a functionof our determination of the underlying value of the technology rather than ourcost of completing the development of the technology required by the agreement.We also have the right to license to other licensees the intellectual propertydeveloped under engineering service agreements.  In addition, these agreements also include royalty payments,which are payable upon sale of a licensee’s product incorporating our licensedtechnology, and maintenance and limited support fees.  We classify all revenue that involves the sale of a licensee’sproducts as royalty revenue.  Royaltyrevenue is recognized in the quarter in which a report is received from alicensee detailing the shipments of products incorporating our intellectualproperty components, which is in the quarter following the sale of thelicensee’s product to its customer.  Weclassify all revenue that does not involve the sale of a licensee’s products,primarily technology license fees, engineering service fees and maintenance andsupport fees, as contract revenue. Consistent with Staff Accounting Bulletin No. 101 - *Revenue Recognition in Financial Statements*,license fees are recorded as revenue upon the execution of the licenseagreement when there is persuasive evidence of an arrangement, fees are fixedor determinable, delivery has occurred and collectibility is probable. The onlyundelivered element of the contract is our separate obligation to providesupport and maintenance for a specified period of time, if purchased by thecustomer.  Fees related to engineeringservices contracts for technology under development, which contracts areperformed on a best efforts basis and for which we receive periodic milestonepayments, are recognized as revenue over the estimated development period,using a cost-based percentage of completion method limited to the amount ofmilestone payments attained under each agreement. Upon the execution of eachengineering services contract, we estimate the engineering resources requiredto complete the development effort.  Weregularly review and if necessary, revise, the estimated cost of development,as the development effort is subject to change due to changes in engineeringschedules, resource availability and in some instances deliverable requirementsfrom the licensee or third parties.  Tothe extent the revised estimated costs of development are less than the originalestimate, the engineering service fee recognized would be accelerated to therevised percentage of completion in the period in which the adjustmentoccurred.  Conversely, if the revisedestimated costs of development are more than the original estimate, theengineering service fee recognized would be adjusted to the revised percentageof completion in the period in which the adjustment occurred.  To date, changes in the estimated costs ofdevelopment have not been significant and the impact of these changes to ourrevenue have been immaterial.

 

Under our support and maintenance arrangements, weprovide unspecified upgrades, bug fixes and technical support.  No other upgrades, products or otherpost-contract support are provided. These arrangements are renewable annually by the customer.  Support and maintenance revenue isrecognized at its fair value ratably over the period during which theobligation exists, typically 12 months. The fair value of any support and maintenanceobligation is established based on the specified renewal rate for such supportand maintenance.   Revenue from thesearrangements was $760,000 for the three-month period ending September 30, 2003and $1.1 million for the three-month period ending September 30, 2002.   When we provide a combination of productsand services to customers, in addition to the considerations noted above, weevaluate the arrangements under EITF 00-21, *Revenue Arrangements with Multiple Deliverables*,which is effective for transactions entered into after July 1, 2003.  EITF 00-21 addresses certain aspects ofaccounting for arrangements under which we will perform multiple revenuegenerating activities.  Application ofEITF 00-21 did not have a material effect on our consolidated financialposition or results of operations.

 

***Cash and Cash Equivalents and Short-term Investments. ***Cash and cashequivalents consists mainly of financial instruments that are readilyconvertible into cash and have original maturities of three months or less atthe time of acquisition.  Short-terminvestments consist mainly of financial instruments that have originalmaturities of one year or less.  Thefair values of cash and cash equivalents and short-term investmentsapproximates their recorded value at September 30, 2003 and June 30, 2003.

 

***Goodwill and Purchased Intangible Assets***.  We make estimates when we acquire businessesor acquire groups of assets for a single aggregate price. The purchase methodof accounting for acquisitions requires extensive use of accounting estimatesand judgments to allocate the purchase price to the fair value of the tangibleand intangible assets acquired, including in-process research and development,or IPR&D.  Goodwill is recorded asthe difference, if any, between the aggregate consideration paid for anacquisition of a business and the fair value of the net tangible and intangibleassets acquired.  Goodwill is notamortized but is subject to annual impairment tests.  The amounts and useful lives, generally 3 to 10 years, assignedto tangible and intangible assets, other than IPR&D, impact futureamortization expense; the amount assigned to IPR&D is expensed

 

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immediately.

 

***Impairment of Long-Lived Assets****. *We evaluate our long-livedassets, including purchased intangible assets, whenever certain events orchanges in circumstances indicate that the carrying value of assets may not berecoverable or that the estimated useful life of the asset has changed.  In order to judge the carrying value of anasset or the remaining useful life of an asset, we make various assumptionsabout the value of the asset in the future. This may include assumptions about future prospects for the products towhich the asset relates and typically involves computations of the estimatedfuture cash flows to be generated by these products.  If such assets are deemed impaired, an impairment loss equal tothe amount by which the carrying amount exceeds the fair value of the assets isrecognized.  Judgments and assumptionsabout future values and remaining useful lives are complex and oftensubjective.  They can be affected by avariety of factors, including external factors such as industry and economictrends, and internal factors such as changes in business strategy and ourinternal forecasts.

 

***Stock-Based Compensation.***  We have adopted the disclosure requirements of Statement on AccountingStandards (SFAS) No. 123, *Accounting for Stock-based Compensation*,as amended by SFAS No. 148 - *Accounting for Stock-Based Compensation - Transitionand Disclosure*.  As allowedby SFAS No. 123, we account for stock-based employee compensation arrangementsunder the intrinsic value method prescribed by Accounting Principles BoardOpinion No. 25, *Accounting for Stock Issued to Employees* (APB 25).  As a result, no expense was recognized foroptions to purchase our common stock that were granted with an exercise priceequal to fair market value at the date of grants and no expense was recognizedin connection with purchases under our employee stock purchase plan.  For restricted common stock issued atdiscounted prices, we recognize compensation expense over the vesting periodfor the difference between the exercise or purchase price and the fair marketvalue on the measurement date.  Totalcompensation expense recognized in our financial statements for stock-basedawards under APB 25 was $160,000 for the three-month period ending September30, 2003 and  $107,000 for thethree-month period ending September 30, 2002.

 

Pro forma information regarding net loss and net lossper share has been determined as if we had accounted for our employee stockoptions and employee stock purchase plans under the fair value methodprescribed by SFAS 123.  For purposes ofpro forma disclosures, the estimated fair value of the stock awards isamortized to expense over the vesting periods of such awards.

 

Our pro forma information is as follows for thethree-month period ending September 30, 2003 and 2002 (in thousands, except pershare data):

 
|                                                                                                                          |   | **Three Months Ended  September 30,** |   |
|-------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                                                          |   | **2003**                              |   | **2002** |   |
| Net  loss, as reported                                                                                                        |   | $                                     | (5,763 | ) | $ | (3,878 | ) |
| Add:  Stock-based employee compensation expense  included in reported net loss, net of related tax effects               |   | 160                                   |   | 107 |   |
| Deduct:  Total stock-based employee compensation  expense determined under fair value method, net of tax related effects |   | 2,365                                 |   | 6,380 |   |
| Proforma  net loss                                                                                                            |   | $                                     | (7,968 | ) | $ | (10,151 | ) |
| Basic  and diluted net loss per share:                                                                                        |   |                                  |   |   |   |
| As  reported                                                                                                                  |   | $                                     | (0.14  | ) | $ | (0.10 | ) |
| Pro  forma                                                                                                                    |   | $                                     | (0.20  | ) | $ | (0.26 | ) |

 

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#### **Note 2.  Computation of Earnings Per Share**

 

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

 
|                                                           |   | **Three Months Ended  September 30,** |   |
|----------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                           |   | **2003**                              |   | **2002** |   |
| Numerator:                                                     |   |                                  |   |   |   |
| Net  loss                                                      |   | $                                     | (5,763 | ) | $ | (3,878 | ) |
| Denominator:                                                   |   |                                  |   |   |   |
| Weighted-average  shares of common stock outstanding           |   | 40,558                                |   | 39,628 |   |
| Less:  Weighted-average shares subject to  repurchase     |   | (386                                  | )      | (9 | ) |
| Shares  used in computing net loss per basic and diluted share |   | 40,172                                |   | 39,619 |   |
| Net  loss per basic and diluted share                          |   | $                                     | (0.14  | ) | $ | (0.10 | ) |

#### ** **

#### **Note 3.  Comprehensive Loss**

 

Totalcomprehensive loss includes net loss and other comprehensive income, which forus primarily comprises unrealized gains and losses from foreign currencyadjustments.  Total comprehensive lossfor the first three months of fiscal 2004 was $5.8 million and totalcomprehensive loss for the comparable period in the prior year was $3.8million.

 

#### **Note 4.  Acquisition**

 

*Acquisition of Algorithmics, Limited*

 

In July 2002, we acquired Algorithmics,Limited, a United Kingdom-based tool chain company, and an affiliated company,DFS3 Limited.  The total purchaseconsideration for both companies was approximately $3.1 million and consistedof $800,000 in cash, the issuance of approximately 520,000 shares of our commonstock valued at approximately $1.9 million, and acquisition-related costs ofapproximately $485,000.

 

The 520,000 shares of our common stockthat were granted to the Algorithmics shareholder-employees vest over athree-year period beginning on the purchase agreement consummation date.  Vesting of these shares depends upon eachemployee’s continued employment with us and any unvested shares are forfeitedupon such employee’s termination of employment with us.  Therefore, we did not include the value ofthese shares in the purchase price allocation calculation, but rather allocatedtheir value to unearned compensation. The fair value of our shares of $1.9 million was determined based on thequoted closing price of such shares on the agreement consummation date.   As of September 30, 2003, approximately$749,000 of the deferred compensation related to these stock shares had beenexpensed.

 

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We recorded net tangible assets of$330,000, intangible assets of $238,000 and goodwill of $248,000 uponcompletion of the acquisition. Additionally, a charge of $394,000 for purchased in-process research anddevelopment expenses was recorded upon completion of the acquisition of thetechnology because technological feasibility of the acquired technology had notbeen established and no future alternative uses existed.  The value of the projects was determined byestimating the present value of the net cash flows we believed would resultfrom the acquired technology.

 

**Note5.  Purchased Intangible Assets**

 

All of our purchased intangible assets,except goodwill, are subject to amortization. Purchased intangible assets subject to amortization consisted of thefollowing as of September 30, 2003 and June 30, 2003 (in thousands):

 
|                         |   | **September  30, 2003**    |   | **June 30,  2003**            |   |
|------------------------------|--------|----------------------------|--------|-------------------------------|--------|
|                         |   | **Gross  Carrying  Value** |   | **Accumulated  Amortization** |   | **Net   Carrying  Value** |   | **Gross  Carrying  Value** |   | **Accumulated  Amortization** |   | **Net  Carrying  Value** |   |
| Developed technology         |   | $                          | 86     |                          | $      | (50 | ) | $ | 36 |   | $ | 86 |   | $ | (39 | ) | $ | 47 |   |
| Core/patent  technology      |   | 4,176                      |   | (839                          | )      | 3,337 |   | 4,176 |   | (702 | ) | 3,474 |   |
| Purchased  intangible assets |   | $                          | 4,262  |                          | $      | (889 | ) | $ | 3,373 |   | $ | 4,262 |   | $ | (741 | ) | $ | 3,521 |   |

 

Goodwill, recorded in fiscal year 2003 asa result of the acquisition of Algorithmics, Limited as discussed in Note 4,was $248,000 as of September 30, 2003 and June 30, 2003.

 

The estimated future amortization expenseof purchased intangible assets as of September 30, 2003 is approximately $444,000,$553,000, $549,000, $549,000 and $549,000 for the remaining nine months offiscal 2004 and for fiscal years 2005, 2006, 2007 and 2008, respectively, andapproximately $727,000 for years following fiscal 2008.  Amortization expense for purchased intangibleassets was $148,000 in the first quarter of fiscal 2004 and $258,000 in thefirst quarter of fiscal 2003.

 

**Note6.  Restructuring Charge**

 

We recorded restructuring charges infiscal 2003 and the first quarter of fiscal 2004 related to two actions takenin fiscal 2003.

 

*October 2002 Restructuring Activities*.** **In the second quarter of fiscal2003, we closed our Denmark design center to consolidate our research anddevelopment activities in our headquarters in California and in our recentlyacquired design center in the United Kingdom. We implemented plans to eliminate 67 regular positions or about 30% ofour workforce at that time across all functions with the objective of reducingour operating expenses.  These actionsresulted in a restructuring charge in fiscal 2003 of approximately $7.7million. The restructuring charge included approximately $3.2 million ofemployee severance and related benefits, $1.7 million of facilities exit costs,primarily related to lease expenses net of anticipated sublease income, $2.5million in asset write-offs and $299,000 in legal and other costs.  The severance and facility related chargeswere accounted for under EITF Issue 94-3, *Liability Recognition for Certain EmployeeTermination Benefits and other Costs to Exit an Activity. *The charges associated with thewrite-off of assets were accounted for under**SFAS 144, *Accounting for the Impairment orDisposal of Long-Lived Assets*. All employees had been terminated as of June 30, 2003.

 

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A summary of the October 2002restructuring activities as of September 30, 2003 follows below (in thousands):

 
|                                             |   | **Severance** |   | **Facilities** |   | **Intangible  asset write-off** |   | **Other asset write-off** |   | **Other costs** |   | **Total** |   |
|--------------------------------------------------|--------|---------------|--------|----------------|--------|---------------------------------|--------|---------------------------|--------|-----------------|--------|-----------|--------|
| Initial charge in  second quarter of fiscal 2003 |   | $             | 3,329  |           | $      | 1,653                           |   | $                         | 1,191  |            | $      | 1,287     |   | $ | 174 |   | $ | 7,634 |   |
| Additional charges                               |   | (85           | )      | —         |   | —                          |   | 34                        |   | 125             |   | 74        |   |
| Cash payments                                    |   | (3,338        | )      | (263           | )      | —                          |   | —                    |   | (276            | )      | (3,877    | )      |
| Non-cash write-offs                              |   | 94            |   | (185           | )      | (1,191                          | )      | (1,321                    | )      | 6               |   | (2,597    | )      |
|                                             |   |          |   |           |   |                            |   |                      |   |            |   |      |   |
| Balance at June 30,  2003                        |   | —        |   | 1,205          |   | —                          |   | —                    |   | 29              |   | 1,234     |   |
| Additional charges                               |   | —        |   | 1,408          |   | —                          |   | —                    |   | —          |   | 1,408     |   |
| Cash payments                                    |   | —        |   | (22            | )      | —                          |   | —                    |   | (10             | )      | (32       | )      |
| Non-cash write-offs                              |   | —        |   | (174           | )      | —                          |   | —                    |   | —          |   | (174      | )      |
|                                             |   |          |   |           |   |                            |   |                      |   |            |   |      |   |
| Balance at September  30, 2003                   |   | $             | — |           | $      | 2,417                           |   | $                         | — |            | $      | —    |   | $ | 19 |   | $ | 2,436 |   |

 

The $1.7 million charge, recorded in thesecond quarter of fiscal 2003, for vacating our Denmark design center consistedof our future obligations of $6.4 million under the facility operating leaseexpiring in March 2010, partially offset by estimated sublease income ofapproximately  $4.7 million.  We had engaged two external local realestate professionals to provide an assessment of comparable commercialproperties in the Copenhagen, Denmark real estate market.  Based on the input from these real estateprofessionals, we estimated that a period of 15 months would elapse before wewould be able to sublease the facility, entailing a cost of facilities of $1.2million during this period.  We alsoestimated that we would generate sublease income of $4.7 million over theremaining 7.25 years of the term of the lease with total contractual obligationunder the facilities lease of $5.2 million.  During the first quarter of fiscal 2004, we revised our estimate ofsublease income based upon updated information from real estate professionalson market conditions in Denmark, received subsequent to the first quarter offiscal 2004.  We estimate that anadditional 18 months from March 2004 will elapse before we may be able tosublease the facility, and that the amount of sublease income during theremainder of the lease term will be $3.4 million.  These revised estimates resulted in a charge to restructuringduring the first quarter of fiscal 2004 of $1.4 million.  The sublease income estimate and theestimated period to sublease the facility entail a high level of managementjudgment.  These market conditions havefluctuated greatly due to such factors as changes in property occupancy ratesand the rental prices charged for comparable properties.  We expect that market conditions willcontinue to fluctuate in the future, and we assess these conditions on aquarterly basis. We may be required to record significant additional charges infuture periods if we revise our assumptions or if our actual experience insubleasing our Denmark facility is not consistent with our assumptions.

 

As part of our restructuring plan, wedecided to reduce our investment in research and development, and revised ourproduct development plans.  Givenconstraints on our resources, we determined that we would not seek to integrateinto our product plans the developed technology we acquired from Lexra, Inc. inDecember 2001 and determined that such developed technology had no value andrecorded an impairment charge of  $1.2million for the remaining value of this intangible asset in the second quarterof fiscal 2003.

 

Other assets written off in fiscal 2003as a part of the October 2002 restructuring action included leasehold improvementsand computer aided design software related to the Denmark facilities.  Other costs are composed primarily of legalfees and other restructuring costs.  Theasset impairments that resulted from these exit activities were accounted forunder SFAS 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*.

 

*May 2003 Restructuring Activities. *In the fourth quarter of fiscal 2003, weannounced a restructuring plan intended to

 

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reduceour operating expenses consistent with our revenue projections.  The plan included the termination ofapproximately 57 regular employees and contractors or approximately one-thirdof our workforce at that time including plans to cease further internaldevelopment of custom processor cores at the end of the first quarter of fiscal2004.  These activities resulted in arestructuring charge of approximately $2.6 million in fiscal 2003, which mainlyconsisted of employee severance costs. These costs and activities were accounted for under FAS No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities. *As of June 30, 2003, 23 employeeshad been terminated under this activity and the remaining 34 employees andcontractors were terminated during the first quarter of fiscal 2004.

 

A summary of the May 2003 restructuringactivities as of September 30, 2003 follows below (in thousands):

 
|                                             |   | **Severance** |   | **Facilities** |   | **Other asset write-off** |   | **Other costs** |   | **Total** |   |
|--------------------------------------------------|--------|---------------|--------|----------------|--------|---------------------------|--------|-----------------|--------|-----------|--------|
| Initial charge in  fourth quarter of fiscal 2003 |   | $             | 2,508  |           | $      | 51                        |   | $               | 12     |      | $      | 2 |   | $ | 2,573 |   |
| Cash payments                                    |   | (329          | )      | (11            | )      | —                    |   | (2              | )      | (342      | )      |
| Non-cash write-offs                              |   | —        |   | —         |   | (12                       | )      | —          |   | (12       | )      |
|                                             |   |          |   |           |   |                      |   |            |   |      |   |
| Balance at June 30,  2003                        |   | 2,179         |   | 40             |   | —                    |   | —          |   | 2,219     |   |
| Additional charges                               |   | 1,803         |   | —         |   | —                    |   | 21              |   | 1,824     |   |
| Cash payments                                    |   | (3,952        | )      | (40            | )      | —                    |   | (3              | )      | (3,995    | )      |
|                                             |   |          |   |           |   |                      |   |            |   |      |   |
| Balance at September  30, 2003                   |   | $             | 30     |           | $      | —                    |   | $               | — |      | $      | 18 |   | $ | 48 |   |

 

The restructuring charge recorded duringthe first quarter of fiscal 2004 of approximately $1.8 million consistedprimarily of employee severance costs, the substantial majority of which werepaid during the quarter.  The remainingpayments under this plan are expected to be made by December 31, 2003.

 

**Note7.  Interest Income**

 

Interest income reported under Otherincome, net was $201,000 in the first quarter of fiscal 2004 and $571,000 inthe first quarter of fiscal 2003.

 

**Note8.  Contingencies**

 

On April 30, 2003, our Swiss subsidiary,MIPS Technologies International AG, or MIPS AG, through which we conducted ouroperations in Denmark, terminated the employment of 55 employees in connectionwith the closure of our Denmark design center. Of these, 45 employees filedclaims against MIPS AG in the County Court of Ballerup, Denmark. Subsequently,13 of these employees agreed to withdraw their claims. On the termination date,the remaining 32 employees of MIPS AG held options to purchase an aggregate of724,830 shares of our Class A common stock, of which options to purchase413,552 shares were vested and options to purchase 311,278 shares wereunvested. The exercise price of these options ranged from $2.94 to $27.16 pershare. Under our stock option plans, unvested options expire upon terminationof employment and vested options expire three months after the termination ofemployment.

 

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The terminated employees are seeking,primarily, the right to exercise, regardless of the termination of theiremployment, the options they held as of the date of their termination, whichexpired on or within three months of the termination date.  As such, they are claiming, under allegedprinciples of Danish employment law, the right to exercise such options, or inthe alternative, money damages equal to the difference between the excess ofthe trading price of our Class A common stock shares over the exercise price ofthe options on whatever future date the employee designates as an effectiveexercise date of the option. The employees further claim that these effectiverights to exercise should continue for the same period as the respective termsof the options on which they were based, that is, 10 years from the respectivegrant date of the underlying option.

 

Our Swiss subsidiary intends to defenditself vigorously in these matters. Presently, we are unable to assess theprobability that this suit will result in a material loss to MIPS AG or us.There is considerable uncertainty in Danish law about the legal issues indispute.  Further, the amount of anyloss would presumably depend on the future price of shares of our Class Acommon stock.

 

From time to time, we receivecommunications from third parties asserting patent or other rights covering ourproducts and technologies.  Based uponour evaluation, we may take no action or we may seek to obtain a license.  There can be no assurance in any given casethat a license will be available on terms we consider reasonable, or thatlitigation will not ensue.

 

**Note9.  Recent Accounting Pronouncements**

 

In November 2002, the FinancialAccounting Standards Board issued Emerging Issues Task Force (referred to asEITF) Issue 00-21, *Revenue Arrangements with Multiple Deliverables*.  EITF Issue 00-21 addresses certain aspectsof the accounting by a company for arrangements under which it will performmultiple revenue-generating activities. EITF Issue 00-21 addresses when and how an arrangement involvingmultiple deliverables should be divided into separate units of accounting andprovides guidance with respect to the effect of certain customer rights due tocompany nonperformance on the recognition of revenue allocated to deliveredunits of accounting.  EITF Issue 00-21also addresses the impact on the measurement and/or allocation of arrangementconsideration of customer cancellation provisions and consideration that variesas a result of future actions of the customer or the company.  Finally, EITF Issue 00-21 provides guidancewith respect to the recognition of the cost of certain deliverables that areexcluded from the revenue accounting for an arrangement.  The provisions of EITF Issue 00-21 appliesto revenue arrangements entered into in fiscal periods beginning after June 15,2003.  Adoption of EITF Issue 00-21 didnot have a material impact on our results of operation or financial position.

 

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**ITEM2.    MANAGEMENT’S DISCUSSION ANDANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION**

 

*You should read the following discussion and analysistogether with our unaudited condensed consolidated financial statements and thenotes to those statements included elsewhere in this report.* Thisdiscussion may contain forward-looking statements that involve risks anduncertainties. These forward-looking statements within this Quarterly Report onForm 10-Q that address our expectations for future levels of operating expensesas well as other expenses are identified by words such as “believes,”“anticipates,” “expects,” “intends,” “may” and other similar expressions. Ouractual results could differ materially from those indicated in theseforward-looking statements as a result of certain factors, including thosedescribed under “Factors That May Affect Our Business”, and other risksaffecting our business. We undertake no obligation to update anyforward-looking statements included in this discussion.

 

**CriticalAccounting Polices and Estimates**

 

We prepare our financial statements inconformity with accounting principles generally accepted in the United States,which require us to make estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the financial statements and thereported amounts of revenue and expenses during the reporting period. Weregularly evaluate our accounting estimates and assumptions.  We base our estimates and assumptions onhistorical experience and on various other factors that we believe to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying value of assets and liabilities that arenot readily apparent from other sources. Actual results inevitably will differfrom the estimates, and such differences may require material adjustments toour financial statements.

 

For a discussion of our criticalaccounting policies, please see “Critical Accounting Policies and Estimates” inItem 7 of our Annual Report on Form 10-K for the year ended June 30, 2003.

 

**Resultsof Operations**

** **

*Revenue.* Our revenue consists of royalties andcontract revenue earned under contracts with our licensees. Our contracts withour licensees are typically subject to periodic renewal or extension and expireat various dates through June 2018. Although the precise terms of our contractsvary, they typically provide for royalties, technology license fees forcurrently available technology or engineering service fees for technology underdevelopment, and maintenance fees.

 

We generate royalties from the sale byour licensees of products incorporating our technology. Royalty revenue isrecognized in the quarter in which a report is received from a licenseedetailing the shipments of products incorporating our intellectual property,which is in the quarter following the sale of the licensee’s product to itscustomer. Royalties are calculated either as a percentage of the revenuereceived by the seller on sales of such products or on a per unit basis.

 

We generate contract revenue fromtechnology license fees for currently available technology and engineeringservice fees for technology under development. Each of these types of contractsis a nonexclusive license for the underlying intellectual property. While wemay be required to perform certain services to render the intellectual propertysuitable for license under an engineering service contract, we continue to ownthe intellectual property that we develop. The amount of the license fee under an engineering service agreement isprimarily a function of our determination of the underlying value of thetechnology rather than our cost of completing the development of the technologyrequired by the agreement. We also have the right to license to other licenseesthe intellectual property developed under engineering service agreements.  Consistent with Staff Accounting BulletinNo. 101– *RevenueRecognition in Financial Statements*, technology license fees arerecorded as revenue upon the execution of the license agreement when there ispersuasive evidence of an arrangement, fees are fixed and determinable,delivery has occurred and collectibility is probable. Technology license feesvary based on, among other things, whether a particular technology is licensedfor a single application or for multiple or unlimited applications, and whetherthe license granted covers a particular design or a broader architecture.Engineering service fees are related to engineering services contracts, whichare performed on a best efforts basis and for which we receive periodicmilestone payments.  Engineering servicefees are recognized as revenue over the estimated development period using acost-based percentage of completion

 

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method.In most instances, the technology under development, including underengineering services contracts, can be licensed to multiple customers.

 

Total revenue for the first quarter offiscal 2004 was $10.4 million compared to $9.4 million for the comparableperiod in fiscal 2003.  Royalties forthe first quarter of fiscal 2004 were $5.1 million compared to $3.5 million forthe comparable period in fiscal 2003. The increase in royalties in the first quarter was due primarily to anincrease of $1.0 million in royalties from new customers, since our initialpublic offering in June 1998, shipping products incorporating ourtechnology.   In addition, we recognized$500,000 in royalties related to a technology license agreement that expired inthe first fiscal quarter of 2004 that included a prepaid royalty balance.Contract revenues for the first quarter of fiscal 2004 were $5.3 millioncompared to $5.9 million for the same period in fiscal 2003. The decrease in contractrevenues was primarily due to a decline of $1.0 million in fees generated fromengineering services contracts for technology under development offset in partby an increase of $450,000 in fees generated from new and existing licenseagreements for developed technology. Engineering service fees decreased becausewe had fewer agreements in place for the development of products than in theprior period.  The increase in fees fordeveloped technology was primarily due to subsequent per use fees generatedfrom existing license agreements.

 

*Cost of Contract Revenue.*Our cost ofcontract revenue consists of sublicense fees, which we become obligated to paywhen we sublicense to our customers technology that we have licensed from thirdparties.  Sublicense fees are recognizedas cost of contract revenue when the obligation is incurred, which is typicallythe same period in which the related revenue is recognized.

 

Cost of contract revenue for the firstquarter of both fiscal 2004 and fiscal 2003 was zero.  We expect that in future periods cost of contract revenue willcontinue to be immaterial.

 

*Research and Development*.  Costs incurred with respect to internallydeveloped technology and engineering services which are not directly related toany particular licensee, license agreement or license fee are included inresearch and development as they are incurred.

 

Research and development expenses for thefirst quarter of fiscal 2004 were $8.1 million compared with research anddevelopment expenses of $8.5 million for the comparable period in fiscal2003.  The decrease in research anddevelopment expenses was primarily due to a decrease of $1.6 million as aresult of the closure of our Denmark design center in December 2002 and theconsolidation of our research and development activities into our Californiaand United Kingdom locations, offset in part by (i) a net increase of $1.1million in computer aided design tool costs, primarily related to theaccelerated amortization and depreciation of certain computer aided designtools and software assets whose estimated useful lives were reduced because ofour restructuring plans announced in the fourth quarter of fiscal 2003 and (ii)an increase of $140,000 in spending on outside testing services related to thefinal tapeout of cores under development. We expect our research and development expenses to decline by a total of25% to 30% over the next few quarters beginning in our second fiscal quarter asa result of the termination of our custom core development effort completed atthe end of September 2003, pursuant to our May 2003 restructuring activities.

 

*Sales and Marketing*.  Sales and marketing expenses for the firstquarter of fiscal 2004 were $2.8 million compared to $3.2 million for thecomparable period in fiscal 2003. The decrease in sales and marketing expenseswas primarily due to a reduction in salary expense of $625,000 as a result ofthe restructuring actions implemented in fiscal 2003, offset in part by anincrease of $202,000 due to higher spending on third party software developmenttools.  We expect that our sales andmarketing expenses will remain relatively constant over the next few quarters.

 

*General and Administrative*.  General and administrative expenses for thefirst quarter of fiscal 2004 were $1.6 million compared to $1.8 million for thecomparable period in fiscal 2003. The decrease in general and administrativeexpenses was primarily due to a reversal of a bad debt allowance of $177,000 aswe were able to collect an outstanding receivable that had previously beendetermined to be uncollectable, and a reduction in salary expense of $100,000which reflects a savings from the restructuring action implemented in thefourth quarter of fiscal 2003, offset by an increase in expenses for outsidelegal fees

 

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of$80,000.  We expect that our general andadministrative expenses will remain relatively constant over the next fewquarters.

 

*Acquired In-Process Research and Development.*  In July 2002, we completed the acquisitionof Algorithmics Limited, a United Kingdom-based tool chain company, and anaffiliated company, DFS3 Limited, for cash and stock consideration.   We recorded a charge in the first quarterof fiscal 2003 of $394,000 for purchased in-process research and developmentexpenses upon completion of the acquisition because technological feasibilityof the acquired technology had not been established and no future alternativeuses existed.  The fair value of theprojects was determined by estimating the present value of the net cash flowswe believed would result from the acquired technology.

 

*Restructuring.*****We recorded restructuring charges infiscal 2003 and the first quarter of fiscal 2004 related to two actions takenin fiscal 2003.

 

*October 2002 Restructuring Activities*.  In the second quarter of fiscal 2003, weclosed our Denmark design center to consolidate our research and developmentactivities in our headquarters in California and in our recently acquireddesign center in the United Kingdom.  Weimplemented plans to eliminate 67 regular positions or about 30% of ourworkforce at that time across all functions with the objective of reducing ouroperating expenses.  These actionsresulted in a restructuring charge in fiscal 2003 of approximately $7.7million. The restructuring charge included approximately $3.2 million ofemployee severance and related benefits, $1.7 million of facilities exit costs,primarily related to lease expenses net of anticipated sublease income, $2.5million in asset write-offs and $299,000 in legal and other costs.  The severance and facility related chargeswere accounted for under EITF Issue 94-3, *Liability Recognition for Certain EmployeeTermination Benefits and other Costs to Exit an Activity. *The charges associated with thewrite-off of assets were accounted for under**SFAS 144, *Accounting for the Impairment orDisposal of Long-Lived Assets*. All employees had been terminated as of June 30, 2003.

 

A summary of the October 2002restructuring activities as of September 30, 2003 follows below (in thousands):

 
|                                             |   | **Severance** |   | **Facilities** |   | **Intangible   asset write-off** |   | **Other asset write-off** |   | **Other costs** |   | **Total** |   |
|--------------------------------------------------|--------|---------------|--------|----------------|--------|----------------------------------|--------|---------------------------|--------|-----------------|--------|-----------|--------|
| Initial charge in  second quarter of fiscal 2003 |   | $             | 3,329  |           | $      | 1,653                            |   | $                         | 1,191  |            | $      | 1,287     |   | $ | 174 |   | $ | 7,634 |   |
| Additional charges                               |   | (85           | )      | —         |   | —                           |   | 34                        |   | 125             |   | 74        |   |
| Cash payments                                    |   | (3,338        | )      | (263           | )      | —                           |   | —                    |   | (276            | )      | (3,877    | )      |
| Non-cash write-offs                              |   | 94            |   | (185           | )      | (1,191                           | )      | (1,321                    | )      | 6               |   | (2,597    | )      |
|                                             |   |          |   |           |   |                             |   |                      |   |            |   |      |   |
| Balance at June 30,  2003                        |   | —        |   | 1,205          |   | —                           |   | —                    |   | 29              |   | 1,234     |   |
| Additional charges                               |   | —        |   | 1,408          |   | —                           |   | —                    |   | —          |   | 1,408     |   |
| Cash payments                                    |   | —        |   | (22            | )      | —                           |   | —                    |   | (10             | )      | (32       | )      |
| Non-cash write-offs                              |   | —        |   | (174           | )      | —                           |   | —                    |   | —          |   | (174      | )      |
|                                             |   |          |   |           |   |                             |   |                      |   |            |   |      |   |
| Balance at September  30, 2003                   |   | $             | — |           | $      | 2,417                            |   | $                         | — |            | $      | —    |   | $ | 19 |   | $ | 2,436 |   |

 

The $1.7 million charge, recorded in thesecond quarter of fiscal 2003, for vacating our Denmark design center consisted

 

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ofour future obligations of $6.4 million under the facility operating leaseexpiring in March 2010, partially offset by estimated sublease income ofapproximately  $4.7 million.  We had engaged two external local realestate professionals to provide an assessment of comparable commercialproperties in the Copenhagen, Denmark real estate market.  Based on the input from these real estateprofessionals, we estimated that a period of 15 months would elapse before wewould be able to sublease the facility, entailing a cost of facilities of $1.2million during this period.  We alsoestimated that we would generate sublease income of $4.7 million over theremaining 7.25 years of the term of the lease with total contractual obligationunder the facilities lease of $5.2 million.  During the first quarter of fiscal 2004, we revised our estimate ofsublease income based upon updated information from real estate professionalson market conditions in Denmark, received subsequent to the first quarter offiscal 2004.  We estimate that anadditional 18 months from March 2004 will elapse before we may be able to subleasethe facility and that the amount of sublease income during the remainder of thelease term will be $3.4 million.  Theserevised estimates resulted in a charge to restructuring during the firstquarter of fiscal 2004 of $1.4 million. The sublease income estimate and the estimated period to sublease thefacility entail a high level of management judgment. These market conditionshave fluctuated greatly due to such factors as changes in property occupancyrates and the rental prices charged for comparable properties.  We expect that market conditions willcontinue to fluctuate in the future, and we assess these conditions on aquarterly basis. We may be required to record significant additional charges infuture periods if we revised our assumptions or if our actual experience insubleasing our Denmark facility is not consistent with our assumptions.

 

As part of our restructuring plan, wedecided to reduce our investment in research and development, and revised ourproduct development plans.  Givenconstraints on our resources, we determined that we would not seek to integrateinto our product plans the developed technology we acquired from Lexra, Inc. inDecember 2001 and determined that such developed technology had no value andrecorded an impairment charge of  $1.2million for the remaining value of this intangible asset in the second quarterof fiscal 2003.

 

Other assets written off in fiscal 2003as a part of the October 2002 restructuring action included leaseholdimprovements and computer aided design software related to the Denmarkfacilities.  Other costs are composedprimarily of legal fees and other restructuring costs.  The asset impairments that resulted fromthese exit activities were accounted for under SFAS 144, *Accounting for the Impairment orDisposal of Long-Lived Assets*.

 

*May 2003 Restructuring Activities*.  In the fourth quarter of fiscal 2003, weannounced a restructuring plan intended to reduce our operating expensesconsistent with our revenue projections. The plan included the termination of approximately 57 regular employeesand contractors or approximately one-third of our workforce at that timeincluding plans to cease further internal development of custom processor coresat the end of the first quarter of fiscal 2004.  These activities resulted in a restructuring charge in fiscal2003 of approximately $2.6 million, which mainly consisted of employeeseverance costs.  These costs andactivities were accounted for under FAS No. 146, *Accounting for Costs Associated withExit or Disposal Activities. *Asof June 30, 2003, 23 employees had been terminated under this activity and theremaining 34 employees and contractors were terminated during the first quarterof fiscal 2004.

 

A summary of the May 2003 restructuringactivities as of September 30, 2003 follows below (in thousands):

 
|                                                            |   | **Severance** |   | **Facilities** |   | **Other asset write-off** |   | **Other costs** |   | **Total** |   |
|-----------------------------------------------------------------|--------|---------------|--------|----------------|--------|---------------------------|--------|-----------------|--------|-----------|--------|
| Initial restructuring  charges in fourth quarter of fiscal 2003 |   | $             | 2,508  |           | $      | 51                        |   | $               | 12     |      | $      | 2 |   | $ | 2,573 |   |
| Cash payments                                                   |   | (329          | )      | (11            | )      | —                    |   | (2              | )      | (342      | )      |
| Non-cash write-offs                                             |   | —        |   | —         |   | (12                       | )      | —          |   | (12       | )      |
|                                                            |   |          |   |           |   |                      |   |            |   |      |   |
| Balance at June 30,  2003                                       |   | 2,179         |   | 40             |   | —                    |   | —          |   | 2,219     |   |
| Additional charges                                              |   | 1,803         |   | —         |   | —                    |   | 21              |   | 1,824     |   |
| Cash payments                                                   |   | (3,952        | )      | (40            | )      | —                    |   | (3              | )      | (3,995    | )      |
|                                                            |   |          |   |           |   |                      |   |            |   |      |   |
| Balance at September  30, 2003                                  |   | $             | 30     |           | $      | —                    |   | $               | — |      | $      | 18 |   | $ | 48 |   |

 

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The restructuring charge recorded duringthe first quarter of fiscal 2004 of approximately $1.8 million consistedprimarily of employee severance costs, the substantial majority of which werepaid during the quarter.  The remainingpayments under this plan are expected to be made by December 31, 2003.

 

*Other Income, Net*.  Other income, net, for the first quarter offiscal 2004 was $208,000 compared to $655,000 for the comparable period infiscal 2003. The decrease in other income was primarily due to a decline ininterest income resulting from lower interest rates and lower investmentbalances.

 

*Income Taxes*.  We recorded an income tax provision of $567,000for the first quarter of fiscal 2004 consisting of foreign income taxes andforeign withholding taxes. No income taxes were recorded for the first quarterof fiscal 2003. The tax provision for the first quarter of fiscal 2004 differsfrom the expected benefit at the applicable statutory rate due to our inabilityto benefit our current operating losses. The estimated annual effective tax rate for the first quarter of fiscal2003 differs from the applicable statutory rate primarily due to losses for whichwe can claim benefit offset by current year foreign income taxes.

 

**Financial Condition**

 

At September 30, 2003, we had cash andcash equivalents of $73.7 million and total working capital of $73.5 million.

 

Our operating activities used net cash of$2.8 million for the three months ended September 30, 2003 compared to net cashprovided of $1.3 million for the comparable period in the prior year.  For the three-month period ended September30, 2003, the amount of our net loss of $5.8 million was partially offset bynon-cash charges, primarily depreciation of $1.0 million and amortization ofintangibles of $308,000 and by decreases in accounts receivable, prepaid andother assets and accrued liabilities. The decrease in accounts receivable of $752,000 was due to collection ofa large receivable outstanding at June 30, 2003 offset in part by receivablesfrom new agreements during the quarter. The decrease in prepaids and other assets of $2.6 million was due to thereceipt of an income tax receivable, annual amortization of prepaid insurance,and amortization of our time-based computer-aided design tool licenses.  The decrease in accruals of $1.7 million wasprimarily due to payment of our annual business insurance policy of $1.3million, lower employee compensation accruals due to fewer employees at the endof the quarter, and payment of accrued restructuring costs due to thetermination of employees during the quarter, partially offset by an additionalaccrual of $1.4 million related to the closure of our Denmark facility.  Restructuring charges are expected to befunded by available cash, and could result in cash expenditures through March2010, the termination of our Denmark facility lease.

 

During the three-month period endedSeptember 30, 2002, net cash provided by operating activities consisted mainlyof our net loss of $3.9 million, offset by decreases in accounts receivable of$3.3 million, and prepaid and other assets of $1.7 million, accruals of $1.7million and by non-cash depreciation and amortization charges of $1.2 millionand $651,000 in amortization of intangibles. The decrease in accounts receivable was a result of completing fewerlicensing agreements during the quarter. Prepaid and other assets decreased due to amortization of our annual businessinsurance in addition to amortization on our computer-aided design time-basedlicenses.  The decrease in accruals wasprimarily due to payment of our annual business insurance policy of $1.4million.

 

Net cash used in investing activities was$7.4 million for the three months ended September 30, 2003 compared to $7.5million for the comparable period in the prior year.  Net cash used in investing activities during the three-monthperiod ended

 

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September30, 2003 included purchases of short-term investments of $5.0 million as wellas $2.4 million in purchases of equipment and computer-aided design tools usedin our development activities.   Netcash used in investing activities for the three-month period ended September30, 2002 included purchases of $5.0 million in short-term investments as wellas $1.3 million used in the acquisition of Algorithmics, Limited, and a$900,000 payment related to the purchase of intangible assets in a priorperiod, along with $334,000 in purchases of equipment and computer-aided designtools used in development.  Capitalexpenditures have been, and future expenditures are anticipated to be,primarily for facilities and equipment to support our operations and licensingof computer-aided design tools used in development.

 

Net cash provided by financing activitieswas $15,000 for the three months ended September 30, 2003 compared to net cashused of $302,000 for the comparable period in the prior year.  Net cash provided by financing activitiesduring the three-month period ended September 30, 2003 was attributable topurchases under our employee stock plans.  Net cash used in the three-month period ended September 30, 2002resulted from the repayment of a loan, which was assumed in connection with theAlgorithmics Limited acquisition.

 

Our future liquidity and capitalrequirements could vary significantly from quarter to quarter, depending onnumerous factors, including, among others:

 

•                        the cost,timing and success of product development efforts;

 

•                        the leveland timing of contract revenues and royalties;

 

•                        the cost ofmaintaining and enforcing patent claims and other intellectual property rightsand other litigation;

 

•                        level andtiming of restructuring activities; and

 

•                        whether wecomplete any acquisitions.

 

We believe that we have sufficient cashto meet our projected operating and capital requirements for the foreseeablefuture. However, we may in the future be required to raise additional fundsthrough public or private financing, strategic relationships or otherarrangements. Additional equity financing may be dilutive to holders of ourcommon stock, and debt financing, if available, may involve restrictivecovenants. Moreover, strategic relationships, if necessary to raise additionalfunds, may require that we relinquish our rights to certain of ourtechnologies. Our failure to raise capital when needed could have a materialadverse effect on our business, results of operations and financial condition.

 

**FactorsThat May Affect Our Business**

** **

*Oursuccess is subject to numerous risk and uncertainties, including thosediscussed below.  These factors couldhinder our growth, cause us to sustain losses or have other adverse effects onus, all of which could cause our stock price to decline.*

** **

**Our quarterly financial results are subject to significantfluctuations that could adversely affect our stock price.**  Our quarterly financial results may varysignificantly due to a number of factors, many of which are outside of ourcontrol.  In addition, our revenuecomponents are difficult to predict and may fluctuate significantly from periodto period.  Because our expenses arelargely independent of our revenue in any particular period, it is difficult toaccurately forecast our operating results. Our operating expenses are based, in part, on anticipated future revenueand a high percentage of our expenses are fixed in the short term.  As a result, if our revenue is belowexpectations in any quarter, the adverse effect may be magnified by ourinability to adjust spending in a timely manner to compensate for the revenueshortfall.  Therefore, we believe thatquarter-to-quarter comparisons of our revenue and operating results may not bea good indication of our future performance. It is possible that in some futureperiods our results of operations may be below the expectations of securitiesanalysts and investors.  In that event,the price of our common stock may fall.

 

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

 

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•                       our abilityto identify attractive licensing opportunities and then enter into newlicensing agreements on terms that are acceptable to us;

 

•                       thefinancial terms and delivery schedules of our contractual arrangements with ourlicensees, which may provide for significant up-front payments, payments basedon the achievement of certain milestones or extended payment terms;

 

•                       the relativemix of contract revenue and royalties;

 

•                       the demandfor and average selling prices of products that incorporate our technology;

 

•                       competitivepressures resulting in lower contract revenue or royalty rates;

 

•                       our abilityto develop, introduce and market new processor intellectual property;

 

•                       theestablishment or loss of licensing relationships with semiconductor companiesor digital consumer and business product manufacturers;

 

•                       the timingof new products and product enhancements by us and our competitors;

 

•                       changes indevelopment schedules, research and development expenditure levels and productsupport by us and semiconductor companies and digital consumer and businessproduct manufacturers; and

 

•                       uncertaineconomic and market conditions.

 

**Thesuccess of our business depends on maintaining and growing our contractrevenue.**In the past, a substantial portion of our total revenues wasgenerated by royalties from Nintendo and NEC relating to Nintendo 64 video gameplayers and related cartridges.  Asexpected, these royalties have declined substantially and are nowinsignificant.  We expect our futuregrowth will depend in large part on our ability to expand our contract revenue,which consists of technology license fees paid for access to our developedtechnology and engineering service fees related to technology underdevelopment.  However, contract revenuedeclined in fiscal 2002, fiscal 2003 and the first quarter of fiscal 2004.  While we expect that we will continue togrant additional licenses to new licensees and develop new products to licenseto both new and existing licensees, we cannot predict whether we can maintainour current contract revenue levels or if contract revenue will grow.  Our licensees are not obligated to licensenew or future generations of our products, so past contract revenue may not beindicative of the amount of such revenue in any future period.  If we cannot maintain or grow our contractrevenue, our results of operations will be adversely affected.

 

**If wedon’t compete effectively in the market for embedded processors, our businesswill be adversely affected.** Competition in the market for embedded processors is intense.  Our products compete with those of otherdesigners and developers of processors and cores, as well as those of semiconductormanufacturers whose product lines include processors for embedded andnon-embedded applications.  In addition,we may face competition from the producers of unauthorized MIPS-based clonesand non-RISC based technology designs. The market for embedded processors hasrecently faced downward pricing pressures on products.  We cannot assure you that we will be able tocompete successfully or that competitive pressure will not materially andadversely affect our business, results of operations and financial condition.

 

Inorder to be successful in marketing our products to semiconductor companies, wemust differentiate our processors, cores and related designs from thoseavailable or under development by the internal design groups of thesecompanies, including some of our current and prospective licensees.  Many of these internal design groups havesubstantial engineering and design resources and are part of largerorganizations with substantial financial and marketing resources.  These internal design groups may developproducts that compete with ours.

 

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Someof our existing competitors, as well as a number of potential new competitors,have longer operating histories, greater brand recognition, larger customerbases as well as greater financial and marketing resources than we do.  This may allow them to respond more quicklythan we can to new or emerging technologies and changes in customerrequirements.  It may also allow them todevote greater resources than we can to the development and promotion of theirtechnologies and products.

 

**Wedepend on design wins to expand our revenue base.** Our abilityto generate royalties is uncertain and depends in large part on whether ourprocessors and related designs are selected by our licensees and theircustomers for design, which we refer to as design wins, into a broader range ofboth digital consumer and business products. Our ability to achieve design wins is subject to several risks and uncertainties,including:

 

•                       thepotentially limited opportunities for design wins with respect to certaindigital consumer products, such as video game products or digital televisionset top boxes, due to a limited number of product manufacturers and the lengthof product life cycles; and

 

•                       the riskthat the performance, functionality, price and power characteristics of ourdesigns may not satisfy those that are critical to specific digital consumerand business product applications.

 

Evenif our technology is incorporated into new products, we cannot be certain thatany such products will ultimately be brought to market, achieve commercialacceptance or generate meaningful royalties for us.

 

**Wedepend on royalties from the sale of products incorporating our technology, andwe have limited visibility as to the timing and amount of such sales. **Our successin achieving design wins with our customers does not assure us of futurerevenue, as our revenue from these customers depends on our receipt ofroyalties from the sales of products that use our technology.  Frequently, these sales are based on thesales of products incorporating the semiconductors or other products of ourlicensees, and as a result we do not have direct access to information thatwill help us anticipate the timing and amount of future royalties.  Our success is linked to the success of ourlicensees and, in the case of our semiconductor company licensees, the successof their customers.  Factors that negativelyaffect our licensees and their customers could adversely affect our business.  The success of our direct and indirectcustomers is subject to a number of factors, including:

 

•                       thecompetition these companies face and the market acceptance of their products;

 

•                       theengineering, marketing and management capabilities of these companies andtechnical challenges unrelated to our technology that they face in developingtheir products; and

 

•                       theirfinancial and other resources.

 

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

** **

**Wedepend on the emerging markets for digital consumer and business products andcustomer acceptance of the products that integrate our technology.**  The digital consumer and business productsindustries are presently the primary market for our processor, core and relateddesigns.  The markets for digitalconsumer and business products are relatively new and emerging, and our successwill depend largely on the level of interest in digital consumer and businessproducts, many of which have only recently been introduced to the market.  For us to grow, it is necessary that a significantnumber of additional products incorporating our technology be developed andsuccessfully marketed.  Further,customer acceptance of both consumer and business products may be hamperedduring periods of general economic uncertainty, as many consumers andbusinesses might delay their purchase decisions.  We cannot assure you that any products that incorporate ourtechnology will achieve commercial acceptance or generate meaningful royaltiesfor us.  Our dependence on the digitalconsumer and business products industries involves several risks anduncertainties, including:

 

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•                       changes incustomer requirements and preferences; and

 

•                       theintroduction of products by our competitors embodying new technologies orfeatures.

 

**Wedepend on semiconductor companies and digital consumer and business productmanufacturers to adopt our technology and use it in the products they sell.**  The adoption and continued use of ourtechnology by semiconductor companies and digital consumer and business productmanufacturers is essential to our continued success.  We face numerous risks in obtaining agreements with semiconductorcompanies and digital consumer and business product manufacturers on acceptableterms, including:

 

•                       potentialcompetition with the internal design teams of semiconductor companies anddigital consumer and business product manufacturers;

 

•                       competitionfrom other semiconductor intellectual property providers;

 

•                       potentialdifficulties in persuading large semiconductor companies and digital consumerand business product manufacturers to work with us, to rely on us for criticaltechnology, and to disclose to us proprietary manufacturing technology; and

 

•                       potentialdifficulties in persuading potential licensees to bear certain development costsassociated with our technology and to produce embedded processors using ourtechnology.

 

Wecannot assure you that we will be able to maintain our current relationshipswith our licensees or establish new relationships with additional licensees,and any failure by us to do so could have a material adverse effect on ourbusiness.  In addition, we may devotesubstantial resources to the pursuit of a relationship with a potentiallicensee that ultimately is not successful.

 

**Ourability to achieve design wins may be limited unless we are able to developenhancements and new generations of our intellectual property.**  Our future success will depend, in part, onour ability to develop enhancements and new generations of our processors,cores and other intellectual property that satisfy the requirements of specificproduct applications and introduce these new technologies to the marketplace ina timely manner.  If our developmentefforts are not successful or are significantly delayed, or if thecharacteristics of our processor, core and related designs are not compatiblewith the requirements of specific product applications, our ability to achievedesign wins may be limited.  Our failureto achieve a significant number of design wins would adversely affect our business,results of operations and financial condition.

 

Technicalinnovations of the type critical to our success are inherently complex andinvolve several risks, including:

 

•                       our abilityto anticipate and timely respond to changes in the requirements of semiconductorcompanies, and original equipment manufacturers, or OEMs, of digital consumerand business products;

 

•                       our abilityto anticipate and timely respond to changes in semiconductor manufacturingprocesses;

 

•                       changingcustomer preferences in the digital consumer and business products markets;

 

•                       theemergence of new standards in the semiconductor industry and for digitalconsumer and business products;

 

•                       thesignificant investment in a potential product that is often required beforecommercial viability is determined; and

 

•                       theintroduction by our competitors of products embodying new technologies orfeatures.

 

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Ourfailure to adequately address these risks could render our existing processor,core and related designs obsolete and adversely affect our business, results ofoperations and financial condition.  Inaddition, we cannot assure you that we will have the financial and otherresources necessary to develop processor, core and related designs in thefuture, or that any enhancements or new generations of the technology that wedevelop will generate revenue sufficient to cover or exceed the costs ofdevelopment.

 

**We mayencounter difficulties with future acquisitions, which could harm our business.**   As part of our business strategy, in thefuture we may seek to acquire or invest in businesses or technologies that webelieve can complement or expand our business, enhance our technicalcapabilities or that may otherwise offer growth opportunities. Any futureacquisitions may require debt or equity financing, or the issuance of shares inthe transaction, any of which could increase our leverage or be dilutive to ourexisting stockholders.  We may not beable to complete acquisitions or strategic customer transactions on terms thatare acceptable, or at all.  We may incurcharges related to acquisitions or investments that are completed.  For instance, we recorded an in-processresearch and development charge in the first quarter of fiscal 2003 and thesecond quarter of fiscal 2002 as a result of our acquisition of certaintechnology.  We will also facechallenges integrating acquired businesses and operations and assimilating andmanaging the personnel of the acquired operations.  Geographic distances may further complicate the difficulties ofthis integration.  The integration ofacquired businesses may not be successful and could result in disruption toother parts of our business.  Acquisitions involve a number of other risks and challenges, including:

 

•                       diversion ofmanagement’s attention;

 

•                       potentialloss of key employees and customers of the acquired companies;

 

•                       exposure tounanticipated contingent liabilities of acquired companies; and

 

•                       use ofsubstantial portions of our available cash to consummate the acquisition and/oroperate the acquired business.

 

Anyof these and other factors could harm our ability to realize the anticipatedbenefits of an acquisition.

 

Wemay also make investments in other companies, particularly private companies,such as the investment we made in Lexra, Inc. in the second quarter of fiscal2002, where we feel these investments offer strategic opportunities.  These investments tend to be inherentlyrisky because the companies are frequently in the development stage and dependon future third party investments to finance their operations.  If the companies in which we invest do notsecure the requisite financing or secure it at a lower enterprise valuationthan was in effect when we invested, we may be required to take an impairmentcharge to reduce the carrying value of our investment, such as the impairmentcharge of $1.4 million we recorded in the second quarter of fiscal 2003 for thetotal value of our investment in Lexra, Inc.

 

**We haverecorded long-lived assets, and our results of operations would be adverselyaffected if their value becomes impaired.**  In both the first and second quarters offiscal 2003 and the second quarter of fiscal 2002, we acquired certain core anddeveloped technologies and patent and patent applications, and the purchaseprice of these long-lived assets is being amortized over schedules based ontheir useful lives. If we complete additional acquisitions in the future, ourpurchased intangible assets amortization charge could increase, and we may berequired to record substantial amounts of goodwill.   We evaluate our long-lived assets, including purchased assets,for impairment on an annual basis or whenever events or changes incircumstances indicate that the carrying amount may not be recoverable from itsestimated future cash flows.  In thesecond quarter of fiscal 2003, we recorded an impairment charge of $1.2 millionfor purchased developed technology acquired in December 2001.  We recorded additional research anddevelopment expenses of $696,000 in the fourth quarter of fiscal 2003 and $1.3million in the first quarter of fiscal 2004 related to the acceleratedamortization and depreciation of certain computer aided design tool andsoftware assets whose estimated useful lives were reduced because of therestructuring actions announced in the fourth quarter of fiscal 2003.

 

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Inthe future, if we determine that our long-lived assets are impaired, we willhave to recognize additional charges for this impairment.  We cannot be sure that we will not berequired to record additional long-lived asset impairment charges in thefuture.

 

**We mayincur additional restructuring charges in the future, which could harm ourresults of operations. **Duringfiscal 2003, we completed a restructuring plan and announced anotherrestructuring plan. In the second quarter of fiscal 2003, we announced theclosure of our Denmark design center and reorganized our sales and marketingfunctions, which resulted in our recording of a restructuring charge of  $7.6 million. Included in this restructuringcharge was an accrual for an estimated charge for vacating our Denmarkfacilities.** **Rental propertymarket conditions have fluctuated greatly in the past, and we expect that thesewill continue to fluctuate in the future, due to such factors as changes inproperty occupancy rates and the rental prices charged for comparableproperties.  If as a result of changesin these conditions, we determine that the facilities restructuring accrual isinsufficient, we would be required to take an additional charge, such as therestructuring charge of $1.4 million we recorded in the first quarter of fiscal2004 for a reduction in the estimated amount of sublease income.   In addition, in the fourth quarter offiscal 2003, we announced a plan intended to reduce our operating expenses,including terminating approximately one-third of our workforce.** **These activities resulted in acharge of approximately $2.6 million in fiscal 2003.  An additional charge of $1.8 million was incurred during thefirst quarter of fiscal 2004 upon termination of our custom core developmenteffort at the end of September 2003.** ** These restructuring activities may not besufficient to appropriately align our operating expenses with our revenueexpectations.  If we have notsufficiently reduced operating expenses or if revenues are below ourexpectations, we may be required to engage in additional restructuringactivities, which could result in additional restructuring charges. Anyrestructuring charges could harm our results of operations.

 

**Ourintellectual property may be misappropriated or subject to claims ofinfringement.** Policing the unauthorized use of our intellectual property is difficult,and we cannot be certain that the steps we have taken will prevent themisappropriation or unauthorized use of our technologies, particularly inforeign countries where the laws may not protect our proprietary rights asfully as in the United States.  Inaddition, we cannot be certain that we will be able to prevent other partiesfrom designing and marketing unauthorized MIPS-based products or that otherswill not independently develop or otherwise acquire the same or substantiallyequivalent technologies as ours. Moreover, cross licensing arrangements, in which we license certain ofour patents but do not generally transfer know-how or other proprietaryinformation, may facilitate the ability of cross-licensees, either alone or inconjunction with others, to develop competitive products and designs.

 

**We cannot assure you that any of our patent applicationswill be approved or that any of the patents or other intellectual propertyrights that we own or use will not be challenged, invalidated or circumventedby others or be of sufficient scope or strength to provide us with anymeaningful protection or commercial advantage. Significant litigation regarding intellectual property rights exists inour industry.  We cannot be certain thatthird 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, couldbe time consuming to defend, result in costly litigation and/or require us toenter into royalty or licensing agreements. These royalty or licensing agreements, if required, may not be availableto us on acceptable terms or at all.  Asuccessful claim of infringement against us or one of our licensees inconnection with its use of our technology could adversely affect our business.**

** **

**Wedepend on our key personnel to succeed.**  Our success depends to a significant extenton the continued contributions of our key management, technical, sales andmarketing personnel, many of whom are highly skilled and difficult toreplace.   We cannot assure you that wewill retain our key officers and employees.  Competition for qualified personnel, particularly those with significantexperience in the semiconductor and processor design industries, remainsintense.  The loss of the services ofany of our key personnel or our inability to attract and retain qualifiedpersonnel in the future could make it difficult to meet key objectives, such astimely and effective project milestones and product introductions which couldadversely affect our business, results of operations and financialcondition.  In addition, ourrestructurings and the effects on our business of the ongoing economic slowdownmay have an adverse effect on employee morale and creates concern amongexisting employees about job security and, as a result, key employees may bemore likely to seek other employment opportunities.

 

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### **ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

Weare exposed to interest rate risk on investments of our excess cash.  The primary objective of our investmentactivities is to preserve capital.  Toachieve this objective and minimize the exposure due to adverse shifts ininterest rates, we invest in high quality short-term maturity commercial paper,municipal bonds, and money market funds operated by reputable financialinstitutions in the United States.  Dueto the nature of our investments, we believe that we do not have a materialinterest rate risk exposure.

 

Weare exposed to fluctuations in currency exchange rates because a substantialportion of our revenue has been, and is expected to continue to be, derivedfrom customers located outside the United States.  To date, substantially all of our revenue from internationalcustomers has been denominated in U.S. dollars.  Because we cannot predict the amount of non-U.S. dollardenominated revenue earned by our licensees, we have not historically attemptedto mitigate the effect that currency fluctuations may have on our revenue, andwe do not presently intend to do so in the future.

 

### **ITEM 4.  CONTROLS AND PROCEDURES**

 

(a.)  The Securities and Exchange Commissiondefines the term “disclosure controls and procedures” to mean a company’scontrols and other procedures that are designed to ensure that informationrequired to be disclosed in the reports that it files or submits under theSecurities Exchange Act of 1934 is recorded, processed, summarized andreported, within the time periods specified in the Commission’s rules andforms. Our chief executive officer and our chief financial officer haveconcluded, based on the evaluation of the effectiveness of our disclosurecontrols and procedures by our management, with the participation of our chiefexecutive officer and our chief financial officer, as of the end of the periodcovered by this report, that our disclosure controls and procedures wereeffective for this purpose.

 

(b.)  During the quarter ended September 30, 2003,there were no changes in our internal control over financial reporting thathave materially affected or are reasonably likely to materially affect ourinternal control over financial reporting.

 

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## **PARTII - OTHER INFORMATION**

 

### **ITEM6.  EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)                Exhibits

 

31.1                                             Certificationof Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 

31.2                                             Certificationof Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 

32.1                                             Certificationof Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

 

32.2               Certification of Chief FinancialOfficer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

(b)               Reports on Form 8-K

                                                      None

 

ITEMS 1,2, 3, 4,AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                            | MIPS Technologies, Inc.  a Delaware corporation                                                                                                                   |
|---------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                            |                                                                                                                                                              |
|                            |                                                                                                                                                              |   |   |
|                            | By:                                                                                                                                                               |        /s/ KEVIN  C. EICHLER |   |
|                            |                         Kevin  C. Eichler |   |
|                            |                                                                                                                                                              | Vice President and Chief Financial Officer |   |
|                            |                                                                                                                                                              | (Principal Financial and Accounting Officer) |   |
| Dated:   November 11, 2003 |                                                                                                                                                              |   |   |   |
|                                 |                                                                                                                                                                   |  |  |  |  |  |  |

 

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