UNITED STATES


SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C.
20549







FORM 10-Q




(Mark
One)


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




FOR THE QUARTERLY PERIOD
ENDED March 31, 2008




OR




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




For the transition period from
             to
            .




Commission file number
000-24487







MIPS TECHNOLOGIES,
INC.


(Exact
name of registrant as specified in its charter)






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




1225 CHARLESTON ROAD, MOUNTAIN VIEW,
CA 94043-1353


(Address
of principal executive offices)




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





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




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




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




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




As
of April 30, 2008, the number of outstanding shares of the registrant’s
common stock, $0.001 par value, was 44,289,891.














PART I – FINANCIAL
      INFORMATIONItem 1.
              Financial Statements
      (Unaudited):Condensed
      Consolidated Balance SheetsCondensed Consolidated Statements of
      OperationsCondensed
      Consolidated Statements of Cash FlowsNotes
      to Condensed Consolidated Financial
  StatementsItem 2.
              Management’s
      Discussion and Analysis of Results of Operations and Financial
      ConditionItem 3.
              Quantitative and Qualitative Disclosures About Market
      RiskItem 4.
              Controls and
      ProceduresPART II – OTHER
      INFORMATIONItem 1.
              Legal
      ProceedingsItem 1A
              Risk
      FactorsItem 6.
              ExhibitsSignatures
  
   Table of Contents
  PART I – FINANCIAL INFORMATION
  ITEM 1.  FINANCIAL
STATEMENTS
  MIPS
TECHNOLOGIES, INC.
  CONDENSED CONSOLIDATED BALANCE SHEETS
 (In
thousands)
  March 31, 2008
                
                
                June 30,
      2007(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                15,180
                
                
                $
                119,039Marketable
      investments
                
                
                —
                
                
                
                25,845Accounts
      receivable, net
                
                
                12,190
                
                
                
                5,212Unbilled
      receivables
                
                
                4,525
                
                
                
                —Prepaid
      expenses and other current assets
                
                
                18,090
                
                
                
                2,472Total
      current assets
                
                
                49,985
                
                
                
                152,568Equipment,
      furniture and property, net
                
                
                16,627
                
                
                
                5,781Goodwill
                
                
                123,978
                
                
                
                565Intangible
      assets, net
                
                
                35,482
                
                
                
                3,369Other
      assets
                
                
                35,545
                
                
                
                12,579$
                261,617
                
                
                $
                174,862LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                
                $
                4,064
                
                
                $
                503Accrued
      liabilities
                
                
                53,949
                
                
                
                16,118Short-term
      debt
                
                
                21,261
                
                
                
                —Deferred
      revenue
                
                
                4,553
                
                
                
                2,633Total
      current liabilities
                
                
                83,827
                
                
                
                19,254Long-term
      liabilities
                
                
                27,720
                
                
                
                5,726111,547
                
                
                
                24,980Stockholders’
      equity:Common
      stock
                
                
                44
                
                
                
                43Preferred
      stock
                
                
                —
                
                
                
                —Additional
      paid-in capital
                
                
                249,285
                
                
                
                240,444Accumulated
      other comprehensive income
                
                
                14,891
                
                
                
                435Accumulated
      deficit
                
                
                (114,150
                )
                
                
                (91,040
                )Total
      stockholders’ equity
                
                
                150,070
                
                
                
                149,882$
                261,617
                
                
                $
                174,862
 See
accompanying notes.
   1
 Table of Contents
  MIPS
TECHNOLOGIES, INC.
  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 (In
thousands, except per share data)
 
 Three
      Months Ended
              
              
              Nine
      Months EndedMarch 31,
              
              
              March 31,2008
              
              
              2007
              
              
              2008
              
              
              2007Revenue:Royalties
              
              $
              12,556
              
              
              $
              10,733
              
              
              $
              35,590
              
              
              $
              33,128License
      and Contract revenue
              
              
              14,767
              
              
              
              8,342
              
              
              
              40,336
              
              
              
              26,502Total
      revenue
              
              
              27,323
              
              
              
              19,075
              
              
              
              75,926
              
              
              
              59,630Costs
      and expenses:Costs
      of contract revenue
              
              
              9,407
              
              
              
              492
              
              
              
              22,110
              
              
              
              1,261Research
      and development
              
              
              9,315
              
              
              
              8,159
              
              
              
              27,821
              
              
              
              24,185Sales
      and marketing
              
              
              6,056
              
              
              
              5,345
              
              
              
              17,796
              
              
              
              15,314General
      and administrative
              
              
              6,559
              
              
              
              4,978
              
              
              
              21,437
              
              
              
              13,867Acquired
      in-process research and development
              
              
              —
              
              
              
              —
              
              
              
              6,350
              
              
              
              —Restructuring
              
              
              1,279
              
              
              
              —
              
              
              
              1,279
              
              
              
              —Total
      costs and expenses
              
              
              32,616
              
              
              
              18,974
              
              
              
              96,793
              
              
              
              54,627Operating
      income (loss)
              
              
              (5,293
              )
              
              
              101
              
              
              
              (20,867
              )
              
              
              5,003Other
      income (expense), net
              
              
              (762
              )
              
              
              1,844
              
              
              
              (1,488
              )
              
              
              4,817Income
      (loss) before income taxes
              
              
              (6,055
              )
              
              
              1,945
              
              
              
              (22,355
              )
              
              
              9,820Provision
      for (benefit from) income taxes
              
              
              (1,798
              )
              
              
              708
              
              
              
              1,018
              
              
              
              3,672Net
      income (loss)
              
              $
              (4,257
              )
              
              $
              1,237
              
              
              $
              (23,373
              )
              
              $
              6,148Net
      income (loss) per basic share
              
              $
              (0.10
              )
              
              $
              0.03
              
              
              $
              (0.53
              )
              
              $
              0.14Net
      income (loss) per diluted share
              
              $
              (0.10
              )
              
              $
              0.03
              
              
              $
              (0.53
              )
              
              $
              0.13Shares
      used in computing net income (loss) per basic share
              
              
              43,992
              
              
              
              43,535
              
              
              
              43,887
              
              
              
              43,510Shares
      used in computing net income (loss) per diluted share
              
              
              43,992
              
              
              
              46,384
              
              
              
              43,887
              
              
              
              45,729
 
  See
accompanying notes.
   2
 Table of Contents
  MIPS
TECHNOLOGIES, INC.
  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 (In
thousands)
  Nine
      Months Ended
                  March 31,2008
                
                
                2007Operating
      activities:Net income (loss)
                
                $
                (23,373
                )
                
                $
                6,148Adjustments to reconcile net income (loss) to net cash provided by (used
      in) operating activities:Depreciation
                
                
                2,692
                
                
                
                1,596Stock-based
      compensation
                
                
                6,142
                
                
                
                6,081Acquired in-process research and development
                
                
                6,350
                
                
                
                —Amortization of intangibles
                
                
                6,527
                
                
                
                1,020Other
      non-cash charges
                
                
                538
                
                
                
                (781
                )Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                4,216
                
                
                
                (1,379
                )Prepaid
      expenses and other current assets
                
                
                1,138
                
                
                
                930Other
      assets
                
                
                769
                
                
                
                (2,483
                )Accounts
      payable
                
                
                317
                
                
                
                (1,057
                )Accrued
      compensation
                
                
                54
                
                
                
                1,406Other
      current accrued liabilities
                
                
                (2,791
                )
                
                
                2,183Income
      tax payable
                
                
                (3,533
                )
                
                
                1,528Deferred
      revenue
                
                
                (307
                )
                
                
                444Long-term
      liabilities
                
                
                664
                
                
                
                2,083Net
      cash provided by (used in) operating activities
                
                
                (597
                )
                
                
                17,719Investing
      activities:Purchases
      of marketable investments
                
                
                —
                
                
                
                (57,190
                )Proceeds
      from sales of marketable investments
                
                
                25,940
                
                
                
                35,000Capital
      expenditures
                
                
                (2,053
                )
                
                
                (3,856
                )Acquisition
      of Chipidea Microelectronica, S.A., net of cash acquired
                
                
                (120,944
                )
                
                
                —Restricted
      cash
                
                
                (27,163
                )
                
                
                —Net
      cash used in investing activities
                
                
                (124,220
                )
                
                
                (26,046
                )Financing
      activities:Net
      proceeds from issuance of common stock
                
                
                2,360
                
                
                
                386Proceeds
      from short-term debt, net
                
                
                19,222
                
                
                
                —Repayments
      of short-term debt
                
                
                (1,021
                )
                
                
                —Borrowings under capital lease obligations
                
                
                546
                
                
                
                —Repayments
      of capital lease obligations
                
                
                (115
                )
                
                
                —Net
      cash provided by financing activities
                
                
                20,992
                
                
                
                386Effect
      of exchange rate on cash
                
                
                (34
                )
                
                
                45Net decrease
      in cash and cash equivalents
                
                
                (103,859
                )
                
                
                (7,896
                )Cash
      and cash equivalents, beginning of period
                
                
                119,039
                
                
                
                101,481Cash
      and cash equivalents, end of period
                
                
                15,180
                
                
                
                93,585Supplemental
      disclosures of cash transaction:Income
      taxes paid
                
                
                3,580
                
                
                $
                2,165Interest
      paid
                
                
                1,384
                
                
                $
                —
 See
accompanying notes.
  3
 Table of Contents
  MIPS
TECHNOLOGIES, INC.
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS—UNAUDITED
  Note
1.  Description of Business and Basis of Presentation.
  MIPS
Technologies, Inc. is a leading supplier of intellectual property (IP) to the
global semiconductor industry. Our technology solutions include the
high-performance MIPS architecture and related embedded processor cores, which
are broadly used in markets such as digital entertainment, wired and wireless
communications and networking, office automation, security, microcontrollers,
and automotive. With the acquisition of Chipidea Microelectrónica S.A.
(Chipidea) on August 27, 2007, we have become the leading supplier of IP to
semiconductor companies for analog and mixed signal devices.  On April 24,
2008, we completed the transformation of Chipidea Microelectronica SA to MIPSABG
Chipidea, Lda.  We have transformed the entity from a joint stock company
to a limited liability partnership.
  Following
the acquisition of Chipidea we are organized in two business groups, the
Processor Business Group (PBG) and the Analog Business Group
(ABG).  The PBG provides industry-standard processor architectures and
cores for digital consumer and business applications.  The ABG
includes the Chipidea operation and provides analog and mixed-signal IP that
produces cost-efficient System-on Chip (SOC) applications and turnkey
solutions.
  Basis of
Presentation.
  The
condensed consolidated financial statements have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission (SEC)
applicable to interim financial information. Certain information and footnote
disclosures that would be in financial statements prepared in accordance with
generally accepted accounting principles have been omitted in these interim
statements as allowed by such SEC rules and regulations. The balance sheet at
June 30, 2007 has been derived from audited financial statements, but does
not include all disclosures required by generally accepted accounting
principles. However, we believe that the disclosures are adequate to make the
information presented not misleading. The unaudited condensed consolidated
financial statements included in this Form 10-Q should be read in conjunction
with the audited consolidated financial statements and related notes for the
fiscal year ended June 30, 2007, included in our 2007 Annual Report on Form
10-K.
 
 The
unaudited results of operations for the interim periods shown in these financial
statements are not necessarily indicative of operating results for the entire
fiscal year. In our opinion, the condensed consolidated financial statements
include all normal recurring adjustments necessary to present fairly the
financial position, results of operations and cash flows for each interim period
shown.
  Use of
Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires us
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results inevitably will differ from those
estimates, and such differences may be material to the financial
statements.
  Revenue
Recognition.
  Royalty
Revenue
  We
classify all revenue that involves the sale of a licensee’s products as royalty
revenue. Royalty revenue is recognized in the quarter in which a report is
received from a licensee detailing the shipments of products incorporating
our IP components, which is generally in the quarter following the sale of
the licensee’s product to its customer. Royalties are calculated either as a
percentage of the revenue received by the seller on sales of such products or on
a per unit basis. We periodically engage a third party to perform royalty audits
of our licensees, and if these audits indicate any over- or under-reported
royalties, we account for the results when they are identified.
   4
 Table of Contents
  License
and Contract Revenue
  Processor
Business Group
  We
derive revenue from license fees for the transfer of proven and reusable IP
components or from engineering services. We enter into licensing agreements that
provide licensees the right to incorporate our IP components in their
products with terms and conditions that have historically varied by licensee.
Revenue earned under contracts with our licensees is classified as either
contract revenue or royalties. We recognize revenue in accordance with Staff
Accounting Bulletin (SAB) No. 104, Revenue Recognition(SAB
104), and for multiple deliverable arrangements we follow the guidance in EITF
00-21, Revenue Arrangements
with Multiple Deliverables, to determine whether there is more than one
unit of accounting. To the extent that the deliverables are separable into
multiple units of accounting, we then allocate the total fee on such
arrangements to the individual units of accounting using the residual method. We
then recognize revenue for each unit of accounting depending on the nature of
the deliverable(s) comprising the unit of accounting (following SAB
No. 104).
  We derive
revenue from license fees for currently available technology or from engineering
services for technology under development. Each of these types of contracts
includes a nonexclusive license for the underlying IP. Fees for contracts for
currently available technology include:  license fees relating to
our IP, including processor designs; maintenance and support, typically for
one year; and royalties payable following the sale by our licensees of products
incorporating the licensed technology. Generally, our customers pay us a single
upfront fee that covers the license and first year maintenance and support. Our
deliverables in these arrangements include (a) processor designs and
related IP and (b) maintenance and support. The license for our IP, which
includes processor designs, has standalone value and can be used by the licensee
without maintenance and support. Further, objective and reliable evidence of
fair value exists for maintenance and support based on specified renewal rates.
Accordingly, (a) license fees and (b) maintenance and support fees are
each treated as separate units of accounting. Total upfront fees are allocated
to the license of processor designs and related IP and maintenance and support
using the residual method. Designs and related IP are initially delivered
followed by maintenance and support. Objective and reliable evidence of the fair
value exists for maintenance and support. However, no such evidence of fair
value exists for processor designs and related IP. Consistent with the residual
method, the amount of consideration allocated to processor designs and related
IP equals the total arrangement consideration less the fair value of maintenance
and support, which is based on specified renewal rates. Following the guidance
in SAB No. 104, fees for or allocated to licenses to currently available
technology are recorded as revenue upon the execution of the license agreement
when there is persuasive evidence of an arrangement, fees are fixed or
determinable, delivery has occurred and collectibility is reasonably assured. We
assess the credit worthiness of each customer when a transaction under the
agreement occurs. If collectibility is not considered reasonably assured,
revenue is recognized when the fee is collected. Other than maintenance and
support, there is no continuing obligation under these arrangements after
delivery of the IP.
  Contracts
relating to technology under development also can involve delivery of a license
to IP, including processor designs. However, in these arrangements we undertake
best-efforts engineering services intended to further the development of certain
technology that has yet to be developed into a final processor design. Rather
than paying an upfront fee to license completed technology, customers in these
arrangements pay us milestone fees as we perform the engineering services. If
the development work results in completed technology in the form of a processor
design and related IP, the customer is granted a license to such completed
technology at no additional fee. These contracts typically include the purchase
of first year maintenance and support commencing upon the completion of a
processor design and related IP for an additional fee, which fee is equal to the
renewal rate specified in the arrangement. The licensee is also obligated to pay
us royalties following the sale by our licensee of products incorporating the
licensed technology. We continue to own the IP that we develop and we retain the
fees for engineering services regardless of whether the work performed results
in a completed processor design.  We develop IP with intent to license
it to multiple customers.  Our cost of development of such IP
significantly exceeds the license revenue from a particular customer
arrangement.  Costs incurred with respect to internally developed
technology and engineering services are included in research and development
expenses, as they are not directly related to any particular licensee, license
agreement, or license fees. Fees for engineering services in contracts for
technology under development, which contracts are performed on a best efforts
basis, are recognized as revenue as services are performed subsequent to the
execution of the arrangement; however, we limit the amount of revenue recognized
to the aggregate amount received or currently due pursuant to the milestone
terms. As engineering activities are best-efforts and at-risk and because the
customer must pay an additional fee for the first year of maintenance and
support if the activities are successful, the maintenance and support is a
contingent deliverable that is not accounted for upfront under contracts
relating to technology under development.
   5
 Table of Contents
  Analog
Business Group
  License
agreements provide for the performance of engineering services involving design
and development of customized analog and mixed signal IP from basic building
blocks to complete subsystems, including the development of new IP or
configuring existing IP to customer’s specifications.  Fees are
determined based on a number of factors including direct cost and the value of
the underlying technology.  We expect to earn gross margins for each
agreement.  We recognize revenue from these arrangements under
Statement of Position (SOP) No. 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts(SOP 81-1), for
licensing of new IP development or configuration of existing IP to a customer’s
specification.  Revenue is recognized on a percentage of completion
basis from the signing of the license and design agreement through silicon
validation for new IP development and through the completion of all outstanding
obligations for configuration of existing IP.  The amount of revenue
recognized is based on the total license fees under the license agreement and
the percentage of completion is measured by the actual costs incurred to date on
the project compared to the total estimated project cost. Revenue is recognized
only when collectibility is probable. The estimates of project costs are based
on the IP specifications and prior experience of the same or similar IP
development and are reviewed and updated regularly by
management.  Under the percentage of completion method, provisions for
estimated losses on uncompleted contracts are recognized in the period in which
the likelihood of such losses is determined.  Licensing of existing IP
that does not require any configuration is recognized upon delivery of the IP
and when all other revenue recognition criteria under SAB 104 have been
met.  Direct costs incurred in the design and development of the IP
under these arrangements is included in cost of contract revenue.
  Maintenance
and Support
  Certain
arrangements in the PBG and ABG also include maintenance and support obligation.
Under such arrangements, we provide unspecified upgrades, bug fixes and
technical support. No other upgrades, products or other post-contract support
are provided. These arrangements are renewable annually by the customer.
Maintenance and support revenue is recognized at its fair value ratably over the
period during which the obligation exists, typically 12 months. The fair value
of any maintenance and support obligation is established based on the specified
renewal rate for such support and maintenance. Maintenance and support revenue
is included in contract revenue in the statement of operations.
 
 Accounts
Receivable.  Accounts receivable includes amounts billed and
currently due from customers, net of the allowance for doubtful accounts. The
allowance for doubtful accounts was $2.1 million and $4,000 at March 31, 2008
and June 30, 2007.
 
 Unbilled
Receivables.Unbilled receivables are
primarily related to revenues on contracts that have been recognized for
accounting purposes under the percentage of completion method but have not yet
been invoiced to customers.  We invoice the customer upon completion
of the contractual milestone.
 
 Equipment,
Furniture and Property.    Equipment, furniture and
property are stated at cost and depreciation, which includes the amortization of
assets under capital leases, is computed using the straight-line method. Useful
lives of generally three years are used for equipment and furniture, and
useful lives of up to fifty years are used for buildings. Leasehold improvements
are depreciated over the shorter of the remaining life of the improvement or the
terms of the related leases.
 
 Reclassifications.  Certain
balances in our fiscal 2007 consolidated financial statements have been
reclassified to conform to the presentation in fiscal 2008.
 
 Restructuring.  We
account for restructuring activities in accordance with SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities  (SFAS 146) and SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144).  Restructuring costs include
severance costs, asset write-offs and facilities closure costs.
   6
 Table of Contents
  Stock-Based
Compensation. We account for stock-based compensation in accordance with
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004)
Share-Based Payment
(SFAS 123R). Compensation cost recognized during the three and nine-month
periods ended March 31, 2008 and 2007, includes: (a) compensation cost for
all share-based payments granted prior to, but not yet vested as of July 1,
2005, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123 amortized on an accelerated basis over the
options’ vesting period, and (b) compensation cost for all share-based
payments granted subsequent to July 1, 2005, based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123R amortized on a
straight-line basis over the options’ vesting period.
  The following
table shows total stock-based employee compensation expense (see Note 13,
“Stock-Based Compensation” for types of stock-based employee arrangements)
included in the condensed consolidated statement of operations for the three and
nine-month periods ended March 31, 2008 and 2007 (in thousands):
 
 Three Months
                Ended
                March 31,
                2008
              
              
              Three Months
                Ended
                March 31,
                2007
              
              
              Nine
      Months
                Ended
                March 31,
                2008
              
              
              Nine
      Months
                Ended
                March 31,
                2007Costs
      and expenses:Research
      and development
              
              $
              605
              
              
              $
              871
              
              
              $
              2,263
              
              
              $
              2,374Sales
      and marketing
              
              
              576
              
              
              
              721
              
              
              
              1,874
              
              
              
              1,821General
      and administrative
              
              
              618
              
              
              
              659
              
              
              
              2,135
              
              
              
              1,887Total
      stock-based compensation expense
              
              $
              1,799
              
              
              $
              2,251
              
              
              $
              6,272
              
              
              $
              6,082
 
 There was
no capitalized stock-based employee compensation cost as of March 31, 2008 or
2007. There were no material recognized tax benefits during the third quarter of
either fiscal 2008 or fiscal 2007.
  For
restricted common stock issued at discounted prices, we recognize compensation
expense over the vesting period for the difference between the exercise or
purchase price and the fair market value on the measurement date. Total
compensation expense recognized in our financial statements for restricted stock
awards was $22,000 and $84,000 for the three- and nine-month periods ended March
31, 2008 and $35,000 and $106,000 for the three-month and nine-month periods
ended March 31, 2007.
  Note
2.  Computation of Earnings Per Share
 
 Earnings per
Share. We follow the provisions of SFAS No. 128, Earnings per Share(SFAS 128). SFAS 128 requires the presentation of basic and fully
diluted earnings per share. Basic earnings per share is computed by dividing
income available to common stockholders by the weighted average number of common
shares that were outstanding during the period. Diluted earnings per share is
computed giving effect to all dilutive potential common shares that were
outstanding for any periods presented in these financial
statements.
  The
following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
 
 Three
      Months Ended
                March 31,
              
              
              Nine
      Months Ended
                March 31,2008
              
              
              2007
              
              
              2008
              
              
              2007Numerator:Net
      income (loss)
              
              $
              (4,257
              )
              
              $
              1,237
              
              
              $
              (23,373
              )
              
              $
              6,148Denominator:Weighted-average
      shares of common stock outstanding
              
              
              44,017
              
              
              
              43,595
              
              
              
              43,914
              
              
              
              43,570Less:
      Weighted-average shares subject to repurchase
              
              
              (25
              )
              
              
              (60
              )
              
              
              (27
              )
              
              
              (60
              )Shares
      used in computing net income (loss) per basic share
              
              
              43,992
              
              
              
              43,535
              
              
              
              43,887
              
              
              
              43,510Net
      income (loss) per basic share
              
              $
              (0.10
              )
              
              $
              0.03
              
              
              $
              (0.53
              )
              
              $
              0.14Shares
      used in computing net income (loss) per diluted share
              
              
              43,992
              
              
              
              46,384
              
              
              
              43,887
              
              
              
              45,729Net
      income (loss) per diluted share
              
              $
              (0.10
              )
              
              $
              0.03
              
              
              $
              (0.53
              )
              
              $
              0.13Potentially
      dilutive securities excluded from net income (loss) per diluted share
      because they are anti-dilutive
              
              
              13,764
              
              
              
              5,163
              
              
              
              10,812
              
              
              
              7,904
   7
 Table of Contents
 
 Note
3.  Comprehensive Income (Loss)
 
 Total
comprehensive income (loss) includes net income (loss) and other comprehensive
income, which primarily comprises unrealized gains and losses from foreign
currency adjustments.  Total comprehensive income for the third
quarter of fiscal 2008 was $3.6 million and total comprehensive loss for the
first nine months of fiscal 2008 was $8.9 million compared to total
comprehensive income of $1.3 million and $6.4 million for the comparable periods
in the prior year.
 Note
4.  Acquisition
 
 On
August 27, 2007, we completed the acquisition of Chipidea Microelectronica
S.A., a privately held supplier of analog and mixed signal intellectual property
based in Lisbon, Portugal.  We acquired all of the outstanding stock
of Chipidea for $147 million in cash, of which $14.7 million is held
in escrow to satisfy indemnification claims that may arise. Payment of $12.5
million of the total consideration, which is due to certain former
shareholders of Chipidea, is contingent upon their continued employment with us
for the two year period after our acquisition of Chipidea.  Therefore,
this consideration will be recorded as compensation expense over the period
during which it is earned.  In addition, we have agreed to
issue up to 610,687 shares of common stock of MIPS (or, at MIPS’ election,
cash in an amount equal to the value of such shares at the time such shares are
required to be issued) in February 2009, if certain revenue targets are achieved
for the two year period through December 31, 2008. The value of the shares, if
issued, will be added to the purchase price of the acquisition and recorded as
goodwill. Furthermore, we have agreed to pay to the former shareholders of
Chipidea up to 1.2 million Euro in cash (approximately $1.9 million at
March 31, 2008), if Chipidea receives a certain grant from the Portuguese
government on or before June 30, 2008. In the event that the grant from the
Portuguese government is received, we will record the payment as
goodwill.
 
 We
acquired Chipidea to position ourselves as a leading independent supplier of
analog and mixed signal IP for wireless, digital consumer and connectivity
markets. The acquisition allows us to utilize our existing business model while
growing the base of products we offer to the same set of customers. In addition,
with the acquisition of Chipidea, we gain a strong team of analog and mixed
signal designers for the development of commercial analog and mixed signal
IP.
  Preliminary
Purchase Price Allocation.The
transaction was accounted for as a purchase in accordance with Statement of
Financial Accounting Standards No. 141, Business Combinations (SFAS
141); therefore, Chipidea’s tangible assets and identifiable intangible assets
have been valued based on their estimated fair value on the acquisition date as
set forth below. The estimates and assumptions that we made are subject to
change upon the finalization of the valuation of certain liabilities, intangible
assets, property, and estimated useful lives of certain intangible
assets. The preliminary purchase price of $137.2 million includes the cash
paid of $147 million and the acquisition costs of $2.7 million less the
contingent payment to employees of $12.5 million, and was allocated as follows
(in thousands):
 
 Cash
      and Investments
              
              $
              1,566Accounts
      receivable
              
              
              14,124Fixed
      Assets
              
              
              9,841Other
      current assets
              
              
              1,401Intangible
      assets
              
              
              33,760In-process
      research and development
              
              
              6,350Goodwill
              
              
              106,499Other
      long term assets
              
              
              8,303Short
      term debt
              
              
              (968
              )Accounts
      payable and other current liabilities
              
              
              (27,991
              )Deferred
      revenue
              
              
              (2,240
              )Deferred
      taxes
              
              
              (12,033
              )Long
      term liabilities
              
              
              (1,402
              )Total
      purchase price
              
              $
              137,210
   8
 Table of Contents
  The above
purchase price allocation reflects adjustments recorded during the second and
third quarters of fiscal 2008 based upon the valuation as of the date of
acquisition of accounts receivables, accrued liabilities, deferred taxes and
long-term liabilities and the determination of acquisition. As a result of these
adjustments, goodwill decreased by $0.7 million, accounts receivable decreased
by $1.3 million, intangible assets increased by $3.3 million, in process
research and development increased by $0.9 million, accrued liabilities
decreased by $0.7 million, deferred taxes increased by $3.3 million, long-term
liabilities decreased by $1.0 million and acquisition costs increased by $0.4
million.
 
 Intangible
Assets.In performing our purchase price allocation in order
to determine the valuation of the purchased intangible assets, we considered,
among other factors, our intention for future use of acquired assets, analyses
of historical financial performance and estimates of the future performance of
Chipidea’s products.  The fair value of intangible assets was
determined by using an income approach which was based on estimates and
assumptions determined by management. The rates utilized to discount net cash
flows to their present values were based on our weighted average cost of capital
and ranged from 14% to 20%. These discount rates were determined after
consideration of our rate of return on debt capital and equity and the weighted
average return on invested capital.
 
 The
following table sets forth the components of intangible assets and related
useful lives (in thousands):
 
 Fair
      Value
              
              
              Useful
      lifeDeveloped
      and core technology
              
              $
              19,110
              
              
              5
      to 15 yearsCustomer
      relationships and backlog
              
              
              12,110
              
              
              1
      to 7 yearsOther
              
              
              2,540
              
              
              3
      to 5 yearsTotal
      intangible assets
              
              $
              33,760
  Developed and
core technology, which comprise products that have reached technological
feasibility, includes products in most of Chipidea’s product lines. The
amortization of developed and core technology assets is recorded as cost of
contract revenue.  Customer relationships and backlog represent the
underlying relationships with Chipidea’s installed customer base and open
customer purchase orders at the date of acquisition.  The amortization
of customer relationships and backlog is recorded as cost of contract
revenue.  The weighted average amortization period of the intangible
assets is approximately 5.2 years.
 
 Acquired
In-Process Research and Development.We expensed acquired
in-process research and development (IPR&D) upon acquisition as it
represents incomplete Chipidea research and development projects that had not
reached technological feasibility and had no alternative future use as of the
date of our acquisition. Technological feasibility is established when an
enterprise has completed all planning, designing, coding, and testing activities
that are necessary to establish that a product can be produced to meet its
design specifications including functions, features, and technical performance
requirements.The value
assigned to IPR&D was $6.4 million and determined based on an analysis
of data concerning developmental products, their stage of development, the time
and resources needed to complete them, target markets, their expected income and
net cash flow generating ability and associated risks.  In the first
quarter of fiscal 2008 we recorded a charge of $5.4 million based on preliminary
valuation analysis.  In the second quarter of fiscal 2008 we finalized
the purchase price allocation as of the date of acquisition and recorded an
additional charge of $910,000.
 
 The
principal projects at acquisition date were extensions of existing technologies
for several analog IP cores. We incurred post-acquisition cost of approximately
$3.2 million during the first nine months of fiscal 2008 for these projects and
estimate that an additional investment of approximately $300,000 in research and
development will be required during the remainder of fiscal 2008 and 2009 to
complete them.
   9
 Table of Contents
  Goodwill.  Goodwill
of $106.5 million represented the excess of the purchase price over the fair
value of the net tangible and intangible assets acquired. The acquisition allows
us to utilize our existing business model while growing the base of products we
offer to the same set of customers. In addition, with the acquisition of
Chipidea, we gain a strong team of analog and mixed signal designers for the
development of commercial analog and mixed signal IP.  These factors
significantly contributed to the determination of the purchase price and the
recognition of goodwill.  Goodwill is not being amortized but will be
reviewed annually for impairment or more frequently if impairment indicators
arise, in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets. Goodwill has been assigned to the ABG and is not expected to be
deductible for tax purposes.  Additionally, goodwill is subject to
foreign exchange translation adjustments as the functional currency of Chipidea
is the Euro.
 
 Deferred
Revenue.In connection with the purchase price allocation, we
have estimated the fair value of deferred revenue related to development and
support obligations assumed from Chipidea in connection with the acquisition.
The estimated fair value of the obligations was determined utilizing a cost
build-up approach. The cost build-up approach determines fair value by
estimating the costs relating to fulfilling the obligations plus a normal profit
margin. As a result, in allocating the purchase price, we recorded an adjustment
to reduce the carrying value of Chipidea’s deferred revenue to $2.2 million,
which represents our estimate of the fair value of the obligation
assumed.
 
 Contingent
Consideration.In connection with the acquisition, Chipidea
made certain representations and warranties to us, and Chipidea’s former
shareholders agreed to indemnify us against damages which might arise from a
breach of those representations and warranties. Under the terms of the
acquisition, the former Chipidea shareholders set aside $14.7 million of cash
consideration for payment of possible indemnification claims made by us.
Accordingly, a liability for this contingent cash consideration has been
recorded in accrued liabilities and this amount has been considered in the
purchase price.  Under the terms of the acquisition, this amount has
been set aside in an escrow account and is recorded in prepaid and other current
assets and is scheduled to be released on the one year anniversary of the
acquisition date.
  Deferred Compensation.  Payment of approximately $12.5 million
to certain shareholders is contingent upon their continued employment with
us.  These payments are due 12 months and 24 months from the
acquisition date.  This consideration will be recorded as compensation
expense as earned, and the liability will be recorded in accrued
compensation.  A restricted cash account has been established for the
funding of this payment and is recorded in other assets.
  Proforma
financial information.The results of operations of Chipidea have been
included in our consolidated financial statements subsequent to the date of
acquisition. The financial information in the table below summarizes the
combined results of operations of MIPS and Chipidea, on a pro forma basis, as
though the companies had been combined as of the beginning of each of the
periods presented (in thousands, except per share data):
 
 Three
      months ended March
31,
              
              
              Nine
      months ended March 31,2008
              
              
              2007
              
              
              2008
              
              
              2007Total
      pro forma revenues
              
              $
              27,323
              
              
              $
              27,008
              
              
              $
              82,808
              
              
              $
              80,869Pro
      forma net income (loss)
              
              $
              (4,257
              )
              
              $
              (5,048
              )
              
              $
              (24,241
              )
              
              $
              (6,961
              )Pro
      forma net income (loss) per share - basic and diluted
              
              $
              (0.10
              )
              
              $
              (0.12
              )
              
              $
              (0.55
              )
              
              $
              (0.16
              )Reported
      net income (loss)
              
              $
              (4,257
              )
              
              $
              1,237
              
              
              $
              (23,373
              )
              
              $
              6,148Reported
      net income (loss) per share - basic
              
              $
              (0.10
              )
              
              $
              0.03
              
              
              $
              (0.53
              )
              
              $
              0.14Reported
      net income (loss) per share - diluted
              
              $
              (0.10
              )
              
              $
              0.03
              
              
              $
              (0.53
              )
              
              $
              0.13
 
 The pro
forma financial information is presented for informational purposes only and is
not indicative of the results of operations that would have been achieved if the
merger had taken place at the beginning of each of the periods presented. The
pro forma financial information for fiscal 2008 includes merger related expenses
of $126,000 recorded by Chipidea and a charge of $6.4 million for
IPR&D.  Chipidea’s functional currency is the Euro and its
financial statements have been translated into dollars in each period
presented.
   10
 Table of Contents
 
 Note
5.  Purchased Intangible Assets and Goodwill
  Purchased Intangible
Assets.All of our purchased intangible assets, except
goodwill, are subject to amortization. Purchased intangible assets subject to
amortization consisted of the following as of March 31, 2008 and June 30,
2007 (in thousands):
 
 March 31,
      2008
              
              
              June 30,
      2007Gross
                Carrying
                Value
              
              
              Accumulated
                Amortization
              
              
              Net
                Carrying
                Value
              
              
              Gross
                Carrying
                Value
              
              
              Accumulated
                Amortization
              
              
              Net
                Carrying
                ValueDeveloped
      and core technology
              
              $
              28,192
              
              
              
              (6,758
              )
              
              
              21,434
              
              
              $
              6,062
              
              
              $
              (3,645
              )
              
              $
              2,417Customer
      relationships and backlog
              
              
              15,334
              
              
              
              (3,907
              )
              
              
              11,427
              
              
              
              1,310
              
              
              
              (400
              )
              
              
              910Other
              
              
              3,052
              
              
              
              (431
              )
              
              
              2,621
              
              
              
              110
              
              
              
              (68
              )
              
              
              42Purchased
      intangible assets
              
              $
              46,578
              
              
              
              (11,096)
              
              
              
              35,482
              
              
              $
              7,482
              
              
              $
              (4,113
              )
              
              $
              3,369
  The
estimated future amortization expense of purchased intangible assets as of March
31, 2008 is approximately $2.9 million, $8.1 million, $7.3 million, $6.5 million
and $5.7 million for the remaining three months of fiscal 2008 and for fiscal
years 2009, 2010, 2011 and 2012 respectively, and approximately $5.0 million for
years following fiscal 2012.  The future amortization expense will be
subject to foreign currency fluctuations as the Chipidea intangible assets are
recorded in Euro. Amortization expense for purchased intangible assets was $6.5
million for the first nine months of fiscal 2008 and $873,000 for the first nine
months of fiscal 2007.
  The
balance at March 31, 2008, included $19.7 million, $10.7 million, and $2.6
million of developed and core technology, customer relationships and backlog,
and other intangibles, respectively, from the acquisition of Chipidea, with
estimated useful lives of 5 to 15 years, 1 to 7 years, and 3 to 5 years,
respectively.
  Goodwill.
  Goodwill
as allocated to our segments as of March 31, 2008, consisted of the following
(in thousands):
  Processor
      Business Group
              
              
              Analog
      Business Group
              
              
              TotalBalance
      at June 30, 2007
              
              $
              565
              
              
              
              —
              
              
              $
              565Additions
      (Chipidea)
              
              
              —
              
              
              
              106,499
              
              
              
              106,499Currency
      translation adjustment
              
              
              —
              
              
              
              16,914
              
              
              
              16,914Balance
      at March 31, 2008
              
              $
              565
              
              
              $
              123,413
              
              
              $
              123,978
   11
 Table of Contents
 
 Note
6.  Debt
 
 The
components of short-term debt are as follows (in thousands):
 
 March
      31, 2008Credit
      agreement
              
              
              19,000Bank
      lines of credit
              
              
              2,134Other
              
              
              127$
              21,261
 
 We had no
short-term debt outstanding at June 30, 2007.
 
 Revolving Credit
Agreement. On August 24, 2007, we entered into a $35
million Revolving Credit Agreement (Credit Agreement) with a syndicate of
several banks and other financial institutions, and Jefferies Finance, LLC, as
the administrative agent. Funds available under the
Credit Agreement were used to fund the acquisition of Chipidea, as
well as for general corporate and working capital purposes. In connection with
the Credit Agreement, we incurred $1.6 million of underwriting
fees, expenses and administration fees. We accounted for these fees as
deferred loan origination fees and they will be amortized over the estimated
life of the Credit Agreement and recorded as other expense.
  On February
22, 2008 we amended certain terms and definitions of the Credit Agreement
(Amended Credit Agreement) in order to update certain covenant
requirements.   The amendment provided  for, among
other things, revisions to certain covenants, increased interest rates, a
reduction in the revolving commitment amount to $20 million (with additional
$1.0 million reductions to occur each month beginning on March 31, 2008) and
certain limitations on the use of loan proceeds.  The remaining
principal balance is due in full on August 22, 2008.  In connection with
the Amended Credit Agreement we incurred $200,000 of amendment
fees.  We accounted for these fees as deferred loan origination fees
and they will be amortized over the estimated life of the Amended Credit
Agreement and recorded as other expense.
 
 On March
31, 2008, borrowings of $19 million were outstanding under the Amended Credit
Agreement. Borrowings under the Amended Credit Agreement bear interest at a rate
equal to an applicable margin plus, at our option, either (a) a base rate
determined by reference to the higher of (1) the United States prime rate
and (2) the federal funds rate plus 0.5% or (b) a LIBOR rate, for a
term period of one, two, three or six months, determined by reference to the
costs of funds for deposits for the interest period relevant to such borrowing,
adjusted for certain additional costs.  We can elect to convert an
existing interest calculation method at our discretion.  The
applicable margin for borrowings under the Amended Credit Agreement is 3.00%
with respect to base rate borrowings and 4.00% with respect to LIBOR borrowings.
As of March 31, 2008, the base rate was 5.25% and the LIBOR rate was 2.63%. We
elected the LIBOR method for determining the interest rate for the outstanding
$19 million.  Therefore, the interest rate on our borrowings as of
March 31, 2008 was 6.63%.  Interest is payable on a monthly
basis.
  We are
required to pay a commitment fee to the lenders with respect to any unutilized
commitments under the Amended Credit Agreement. The commitment fee on the
Amended Credit Agreement is 0.375% per annum and is due quarterly. We may
voluntarily reduce the amount committed under the Amended Credit Agreement on a
permanent basis. Principal amounts outstanding under the Amended Credit
Agreement are due and payable in full on August 22, 2008.
  The Amended
Credit Agreement contains certain customary representations and warranties,
affirmative and negative covenants, and events of default, including the
requirement that we maintain, and report on a quarterly basis, for the
trailing twelve months, a leverage ratio (as defined in the Amended Credit
Agreement) of no greater than 3.5 to 1.0. All obligations under the Amended
Credit Agreement, and the guarantees of those obligations, are secured by
substantially all our assets, subject to certain exceptions. Our report to the
lenders for the quarter ended March 31, 2008 is not yet due, but we believe we
are in compliance with all covenants relating to the Amended Credit Agreement as
of that date.
   12
 Table of Contents
 
 Bank Lines of
Credit. We have bank line of credit agreements with
several Portuguese banks with a total aggregate available credit of
approximately $2.6 million as of March 31, 2008.  The interest rates on
these agreements range from 5.7% to 7.1% and the agreements have expiration
dates ranging from April 15, 2008 to June 28, 2008, with automatic renewal
provisions for additional 90-day or 6-month periods.  As of March 31, 2008,
we have outstanding borrowings of $2.1 million and available credit of $508,000
under these agreements.
  Other. 
We have a non-interest bearing loan with a Portuguese governmental
agency.  The short-term portion of this loan is approximately $124,000
at March 31, 2008.  The long-term portion of this loan is approximately
$140,000 at March 31, 2008 and is classified under long-term liabilities on the
balance sheet.
 
 As of March
31, 2008, we have entered into letters of credit for approximately $2.8 million
with various financial institutions in Portugal, Belgium, France and Norway in
association with certain building leases and government grants.
 
 
 Note
7.  Restructuring
  In January
2008 we announced plans to reduce operating costs in our processor business
group by terminating the employment of certain employees in our United States
locations and by closing our research and development center in the United
Kingdom.  In total, 28 employees were terminated during the third
quarter of fiscal 2008, resulting in approximately $900,000 of severance and
benefits costs recorded as restructuring expense. All of the impacted employees
were terminated by March 31, 2008.  In addition, asset disposal and
transfer costs of approximately $250,000 and facilities costs of approximately
$100,000 were recorded as restructuring expense in the third quarter of fiscal
2008 related to contract cancellation costs and other closure costs from the
United Kingdom research and development center.
  We recorded
the restructuring activities in accordance with SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities (SFAS 146) and SFAS No. 144,  Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS
144).  The total charge to restructuring expense in the
third quarter of fiscal 2008 was approximately $1.3 million.  All
costs were paid as of March 31, 2008, except for approximately $80,000 related
to facilities closure costs which was accrued as of March 31, 2008 and is
recorded on our consolidated balance sheet.  We expect to incur
additional expense of $200,000 in the fourth quarter of 2008 as we exit our
United Kingdom facilities.  This restructuring action will be fully
implemented by December 2008.
 
 Note
8.  Other Income (Expense), Net
  The
components of other income (expense), net are as follows (in
thousands):
  Three
      months ended March
31,
              
              
              Nine
      months ended March
31,2008
              
              
              2007
              
              
              2008
              
              
              2007Interest
      income
              
              $
              89
              
              
              $
              1,866
              
              
              $
              1,266
              
              
              $
              4,994Interest
      expense
              
              
              (585
              )
              
              
              (1
              )
              
              
              (1,417
              )
              
              
              (1
              )Other
              
              
              (266
              )
              
              
              (21
              )
              
              
              (1,337
              )
              
              
              (176
              )Total
      other income (expense), net
              
              $
              (762
              )
              
              $
              1,844
              
              
              $
              (1,488
              )
              
              $
              4,817
   13
 Table of Contents
  Note
9.  Equipment, Furniture and Property
 
 The
components of equipment, furniture and property are as follows (in
thousands):
  March
      31, 2008
              
              
              June
      30, 2007Equipment
              
              $
              17,237
              
              
              $
              15,473Land
      and buildings
              
              
              8,692
              
              
              
              —Furniture
      and fixtures
              
              
              4,635
              
              
              
              2,67830,564
              
              
              
              18,151Accumulated
      depreciation and amortization
              
              
              (13,937
              )
              
              
              (12,370
              )Equipment,
      furniture and property, net
              
              $
              16,627
              
              
              $
              5,781
  Note
10.  Prepaid Expenses and Other Current and Long-Term
Assets
 
 The
components of prepaid expenses and other current assets are as follows (in
thousands):
  March
      31, 2008
              
              
              June
      30, 2007Short-term
      restricted cash
              
              $
              14,955
              
              
              $
              —Other
      prepaid expenses and other assets
              
              
              3,135
              
              
              
              2,472$
              18,090
              
              
              $
              2,472
 
 The
components of other long-term assets are as follows (in thousands):
  March
      31, 2008
              
              
              June
      30, 2007Long-term
      restricted cash
              
              $
              15,855
              
              
              $
              264Investments
      in other companies
              
              
              4,436
              
              
              
              4,463Long-term
      computer aided design licenses
              
              
              12,566
              
              
              
              4,474Cash
      surrender value of insurance contracts tied to our deferred compensation
      plan
              
              
              2,108
              
              
              
              2,310Other
      long-term assets
              
              
              580
              
              
              
              1,068$
              35,545
              
              
              $
              12,579
   14
 Table of Contents
  Note
11.  Accrued and Long-Term Liabilities
 
 The
components of accrued liabilities are as follows (in thousands):
  March
      31, 2008
              
              
              June
      30, 2007Accrued
      compensation and employee-related expenses
              
              $
              13,311
              
              
              $
              6,848Income
      taxes payable
              
              
              594
              
              
              
              2,195Payable
      to Chipidea shareholders
              
              
              14,955
              
              
              
              —Capital
      lease obligations
              
              
              8,083
              
              
              
              —Other
      accrued liabilities
              
              
              17,006
              
              
              
              7,075$
              53,949
              
              
              $
              16,118
  The
components of long-term liabilities are as follows (in thousands):
  March
      31, 2008
              
              
              June
      30, 2007Deferred
      compensation
              
              $
              2,619
              
              
              $
              2,298Long-term
      deferred tax liability
              
              
              14,052
              
              
              
              —Long-term
      income tax liability
              
              
              2,548
              
              
              
              —Long-term
      accounts payable
              
              
              5,894
              
              
              
              2,363Other
      long-term liabilities
              
              
              2,607
              
              
              
              1,065$
              27,720
              
              
              $
              5,726
  Note
12.  Commitments and Contingencies
 
 Purchase
Commitments with Suppliers
 
 We have
outstanding purchase orders for ongoing operations of approximately $12.1
million as of March 31, 2008. Payments of these obligations are subject to the
provision of services or products.
  Litigation
  A derivative action entitled In re MIPS Technologies, Inc.
Derivative Litigation, Case No. C-06-06699-RMW, which was filed on
October 27, 2006, is pending in the United States District Court,
Northern District of California, against certain current and former MIPS
officers and directors and MIPS as a nominal defendant.  The complaint in
the action alleges that the individual defendants breached their
fiduciary duties and violated California and federal securities laws as a result
of, among other things, purported backdating of stock option grants,
insider trading and the dissemination of false financial statements.
Plaintiff seeks to recover purportedly on behalf of MIPS, unspecified
monetary damages, corporate governance changes, equitable and injunctive relief,
and fees and costs.  The court granted MIPS' motion to dismiss the
consolidated complaint and granted plaintiff leave to file an amended
complaint.  Plaintiff subsequently filed an amended complaint and MIPS
has filed another motion to dismiss.  It is not known when or on what
basis the action will be resolved.
 
 From time
to time, we receive communications from third parties asserting patent or other
rights allegedly covering our products and technologies. Based upon our
evaluation, we may take no action or we may seek to obtain a license, redesign
an accused product or technology, initiate a formal proceeding with the
appropriate agency (e.g., the U.S. Patent and Trademark Office) and/or initiate
litigation. There can be no assurance in any given case that a license will be
available on terms we consider reasonable or that litigation can be avoided if
we desire to do so. If litigation does ensue, the adverse third party will
likely seek damages (potentially including treble damages) and may seek an
injunction against the sale of our products that incorporate allegedly infringed
intellectual property or against the operation of our business as presently
conducted, which could result in our having to stop the sale of some of our
products or to increase the costs of selling some of our products. Such lawsuits
could also damage our reputation. The award of damages, including material
royalty payments, or the entry of an injunction against the sale of some or all
of our products, could have a material adverse affect on us. Even if we were to
initiate litigation, such action could be extremely expensive and time-consuming
and could have a material adverse effect on us. We cannot assure you that
litigation related to our intellectual property rights or the intellectual
property rights of others can always be avoided or successfully
concluded.
   15
 Table of Contents
  Even if
we were to prevail, any litigation could be costly and time-consuming and would
divert the attention of our management and key personnel from our business
operations, which could have a material adverse effect on us.
  Note 13. 
Stock-Based Compensation
 
 Activity
under our Stock Option Plans for the nine months ended March 31, 2008 is
summarized as follows:
  Number
      of
                Shares
              
              
              Weighted
                Average
                Exercise Price
              
              
              Weighted
                Average
                Remaining
                Contractual
                Life
              
              
              Aggregate
                Intrinsic Value(in thousands)Outstanding
      at July 1, 2007
              
              
              13,830,478
              
              
              $
              7.39Options
      granted
              
              
              2,773,463
              
              
              $
              6.55Options
      exercised
              
              
              (434,194
              )
              
              $
              5.50Options
      cancelled
              
              
              (1,110,364
              )
              
              $
              8.24Outstanding
      at March 31, 2008
              
              
              15,059,383
              
              
              $
              7.24
              
              
              
              4.35
              
              
              $
              1,847Exercisable
      at March 31, 2008
              
              
              11,536,680
              
              
              $
              7.47
              
              
              
              3.87
              
              
              $
              1,826
  Aggregate
intrinsic value represents the value of our closing stock price on the last
trading day of the period in excess of the exercise price multiplied by the
number of options outstanding or exercisable. The intrinsic value of options
exercised represents the value of our closing stock price on the exercise date
in excess of the exercise price multiplied by the number of options exercised.
The total intrinsic value of options exercised for the nine months ended March
31, 2008 and 2007 was $1.1million and $200,000.
  Nonvested
share activity under our Stock Options Plans for the nine months ended March 31,
2008 is summarized as follows:
  Non-vested
                Number of
                Shares
              
              
              Weighted Average
                Grant-Date
                Fair
      ValueNonvested
      balance at July 1, 2007
              
              
              60,000
              
              
              $
              4.72Vested
              
              
              (30,000
              )
              
              $
              4.72Cancelled
              
              
              (5,000
              )
              
              $
              4.52Nonvested
      balance at March 31, 2008
              
              
              25,000
              
              
              $
              4.76
  As of
March 31, 2008, $41,000 of total unrecognized compensation costs related to
nonvested awards is expected to be recognized over a weighted average period of
0.41 years. The fair value of shares vested during the first nine months of
fiscal 2008 was $235,000.
   16
 Table of Contents
  Grant Date Fair
Values. The weighted average fair value has been estimated at the
date of grant using a Black-Scholes option-pricing model. The following are
significant weighted average assumptions used for estimating the fair value of
the activity under our stock option plans:
 
 Employee Stock Options
              
              
              Employee Stock Purchase PlanNine Months Ended March 31,
              
              
              Nine Months Ended March 31,2008
              
              
              2007
              
              
              2008
              
              
              2007Expected
      life (in years)
              
              
              4.20
              
              
              
              4.20
              
              
              
              0.73
              
              
              
              —Risk-free
      interest rate
              
              
              3.66
              %
              
              
              4.83
              %
              
              
              4.07
              %
              
              
              —Expected
      volatility
              
              
              .51
              
              
              
              .63
              
              
              
              .36
              
              
              
              —Dividend
      yield
              
              
              0.00
              %
              
              
              0.00
              %
              
              
              0.00
              %
              
              
              —Grant
      date fair value
              
              $
              2.93
              
              
              $
              3.68
              
              
              $
              2.26
              
              
              $
              —
 
 There
were no shares granted under our stock purchase plan during the first nine
months of fiscal 2008.  Our current purchase period began on August 6,
2007 and will end on April 30, 2008.  There were no employee stock
purchases in fiscal 2007.
  Note
14.  Income Taxes
  We
recorded an income tax benefit of $1.8 million for the three-month period ended
March 31, 2008 and a provision of $0.7 million for the comparable period in
fiscal 2007. For the nine-month period ended March 31, 2008, we have recorded an
income tax provision of $1.0 million and a tax provision of $3.7 million for the
comparable period in fiscal 2007.  At the third quarter, we
have revised our annual forecast related to the Analog Business Group
which has resulted in a true-up of the effective rate in the quarter by
recognizing a current period tax benefit in Portugal. For the Processor Business
Group, we continued to recognize a valuation allowance against the deferred tax
assets in U.S. as we believe that it is more likely than not that the
deferred tax assets will not be recognized and expire unutilized.
  Our
estimated annual income tax before discrete items for fiscal 2008 primarily
consists of U.S. state minimum taxes and foreign taxes on income earned in
certain foreign jurisdictions and withholding taxes. The actual tax provision
for the nine-month period ended March 31, 2008 differs from the estimated annual
tax due to differentials between US and foreign country tax rates, inclusion in
US income of certain foreign subsidiary income, write-off of in process research
and development from the Chipidea acquisition, foreign withholding taxes,
foreign tax credits generated, a change in estimate related to tax reserves,
increase in the valuation allowance in the US and discrete items recorded during
the period.  The annual effective tax rate of 38% for fiscal 2007 for
the nine-month period ended March 31, 2007 primarily consisted of US federal and
state taxes and foreign taxes on income earned in certain foreign jurisdictions
and withholding taxes, offset in part by the availability of certain foreign tax
credits and general business tax credits.
 
 In June
2006, the Financial Accounting Standards Board (FASB) issued Interpretation No.
48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with Statement of Financial Accounting
Standards 109, Accounting for Income Taxes (SFAS 109). This interpretation
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on de-recognition of tax
benefits, classification on the balance sheet, interest and penalties,
accounting in interim periods, disclosure, and transition. This interpretation
is effective for fiscal years beginning after December 15, 2006.
   17
 Table of Contents
 
 We
adopted the provisions of FIN 48 on July 1, 2007. The cumulative effect of
adopting FIN 48 on July 1, 2007 is recognized as a change in accounting
principle, recorded as an adjustment to the opening balance of accumulated
deficit on the adoption date. As a result of the implementation of FIN 48, we
recognized a decrease of approximately $264,000 in the liability for
unrecognized tax benefits related to tax positions taken in prior periods, which
resulted in a decrease of $264,000 in accumulated deficit. The total
amount of gross unrecognized tax benefits was $3.7 million as of July 1, 2007
(the date of adoption of FIN 48) and $4.3 million as of March 31, 2008. The
increase in the gross unrecognized tax benefits from July 1, 2007 to March 31,
2008 was primarily related to amounts assumed in the Chipidea acquisition. Also,
the total amount of unrecognized tax benefits that, if recognized, would affect
the effective tax rate was $817,000 as of July 1, 2007 and $835,000 as of March
31, 2008.
 
 We
recognize interest and penalties related to uncertain tax positions as a
component of provision for income taxes. Accrued interest and penalties relating
to the income tax on the unrecognized tax benefits was approximately $150,000 as
of July 1, 2007 and approximately $479,000 as of March 31, 2008, with
approximately $78,000 being included as a component of provision for income
taxes in the nine-month period ended March 31, 2008. The increase in interest
and penalties from July 1, 2007 to March 31, 2008 was primarily related to
amounts assumed in the Chipidea acquisition.
 
 Although
we file U.S. federal, U.S. state, and foreign tax returns, our major tax
jurisdictions are the United States and Portugal. Our fiscal 2004 and subsequent
tax years remain subject to examination by the IRS for U.S. federal tax
purposes, and our calendar 2004 and subsequent tax years remain subject to
examination by the appropriate governmental agencies for Portuguese tax
purposes.
  Note 15. Operating Segments and Geographic
information
  We evaluate
our reportable segments in accordance with SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information (SFAS 131). Our Chief Executive
Officer has been identified as our Chief Operating Decision Maker (CODM). The
CODM allocates resources to the segments based on their business prospects,
competitive factors, net revenue and operating results.
  Prior to
fiscal year 2008, we determined that we operated in one reportable business
group. In the first quarter of fiscal 2008, following the acquisition of
Chipidea, we organized into two business groups, the Processor Business
Group (PBG) and the Analog Business Group (ABG). These segments were determined
based upon our internal organization and management structure and are the
primary way in which the CODM is provided with financial information. The CODM
evaluates segment performance based on net revenues and operating
income, excluding certain items. These costs are certain corporate expenses
such as general and administrative expenses, selling costs, the amortization of
purchased intangible assets associated with the Chipidea acquisition, employee
share-based compensation expense, and certain acquisition costs related to the
purchase of Chipidea.  Our costs, operating results and balance sheets
are analyzed in the two reportable business groups. The results of each segment
have been prepared using consistent accounting policies with those of MIPS as a
whole. Segment information is presented based upon our management’s
organizational structure as of March 31, 2008. Future changes to the internal
financial structure may result in changes to the reportable segments
disclosed.
   18
 Table of Contents
  We are a
leading provider of industry-standard microprocessor 32- and 64-bit
architectures and cores and a leading supplier of analog and mixed-signal
semiconductor intellectual property. The major segments we serve are as
follows:
  (i)           Processor
Business Group:
  The
PBG provides industry-standard processor architectures and cores for digital
consumer and business applications. This group designs and licenses high
performance 32- and 64-bit architectures and cores, which offer smaller
dimensions and greater energy efficiency in embedded processors. Markets served
by the PBG segment include digital set-top boxes, digital televisions, DVD
recordable devices, broadband access devices, digital cameras, laser printers,
portable media players, microcontrollers and network routers.
  (ii)           Analog
Business Group:
  The
ABG includes the Chipidea operation and provides analog and mixed-signal IP that
produces cost-efficient System-on-Chip (SoC) applications and turnkey solutions.
The ABG IP portfolio covers all fundamental functions in the analog and
mixed-signal electronic space, including data conversion, clock management,
power management, radio connectivity, physical connectivity, and voice audio and
video processing. Market segments served by the ABG segment are wireless
communications, power line communications, data communications, video, audio and
voice signal processing, xDSL modems, set-top boxes, multimedia and digital
consumer electronics.
  The following
tables show revenue, depreciation and amortization expense, segment operating
loss and total assets and expenditures for long-lived assets of each segment (in
thousands):
 
 Three
months ended March 31, 2008
 
 Processor
      Business Group
              
              
              Analog
      Business Group
              
              
              Corporate
                Unallocated
      Amounts (1)
              
              
              TotalRevenue
              
              $
              18,110
              
              
              $
              9,213
              
              
              
              —
              
              
              $
              27,323Gross
      margin
              
              
              17,665
              
              
              
              2,555
              
              
              
              (2,304
              )
              
              
              17,916Depreciation
      expense
              
              
              376
              
              
              
              169
              
              
              
              346
              
              
              
              891Amortization
      expense
              
              
              1,262
              
              
              
              —
              
              
              
              2,528
              
              
              
              3,790Allocated
      operating expense
              
              
              7,822
              
              
              
              465
              
              
              
              14,922
              
              
              
              23,209Segment
      contribution margin (loss)
              
              
              9,843
              
              
              
              2,090
              
              
              
              (17,226
              )
              
              
              (5,293
              )Other
      income (expense), net
              
              
              —
              
              
              
              —
              
              
              
              (762
              )
              
              
              (762
              )Loss
      before taxes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (6,055
              )Total
      assets
              
              
              87,651
              
              
              
              173,966
              
              
              
              —
              
              
              
              261,617Total
      expenditures for additions to long-lived assets
              
              
              —
              
              
              
              1,587
              
              
              
              —
              
              
              
              1,587
 
 (1)
              The
      unallocated corporate items primarily include general and administrative
      expenses of $6.3 million, selling expenses of $3.7
      million, restructuring costs of $1.3 million, certain
      acquisition costs related to the purchase of Chipidea of $1.7 million and
      employee share-based compensation expense of $1.8 million.Management
      does not allocate long-lived assets to the corporate function when
      evaluating the performance of the business
  groups.
   19
 Table of Contents
 
 Nine
months ended March 31, 2008
  Processor
      Business Group
                
                
                Analog
      Business Group
                
                
                Corporate
                  Unallocated
      Amounts (2)
                
                
                TotalRevenue
                
                $
                54,665
                
                
                $
                21,261
                
                
                
                —
                
                
                $
                75,926Gross
      margin
                
                
                53,373
                
                
                
                5,775
                
                
                
                (5,332
                )
                
                
                53,816Depreciation
      expense
                
                
                1,306
                
                
                
                390
                
                
                
                996
                
                
                
                2,692Amortization
      expense
                
                
                3,620
                
                
                
                —
                
                
                
                5,890
                
                
                
                9,510Allocated
      operating expense
                
                
                24,079
                
                
                
                1,450
                
                
                
                49,154
                
                
                
                74,683Segment
      contribution margin (loss)
                
                
                29,294
                
                
                
                4,325
                
                
                
                (54,486
                )
                
                
                (20,867
                )Other
      income (expense), net
                
                
                —
                
                
                
                —
                
                
                
                (1,488
                )
                
                
                (1,488
                )Loss
      before taxes
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (22,355
                )Total
      assets
                
                
                87,650
                
                
                
                173,967
                
                
                
                —
                
                
                
                261,617Total
      expenditures for additions to long-lived assets
                
                
                6,241
                
                
                
                7,196
                
                
                
                —
                
                
                
                13,437
 (2)
              The
      unallocated corporate items primarily include general and administrative
      expenses of $20.5 million, selling expense of $10.4
      million, restructuring costs of $1.3 million, IPR&D expense of
      $6.4 million, certain acquisition costs related to the purchase of
      Chipidea of $4.0 million and employee share-based compensation expense of
      $6.3 million.  Management does not
      allocate long-lived assets to the corporate function when evaluating the
      performance of the business
groups.
  Note
16.  Recent Accounting Pronouncements
  In February
2007, the FASB SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities - Including an amendment of FASB No.115
(SFAS 159). SFAS 159 permits companies to choose to measure many financial
instruments and certain other items at fair value in order to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS 159 is effective for fiscal years beginning November 15, 2007,
and interim periods within those fiscal years. We are currently assessing the
potential effect, if any, of implementing this standard.
 
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements(SFAS
157), which defines fair value, establishes a framework for measuring fair value
and expands disclosure, about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. We are currently assessing the potential
effect, if any, of implementing this standard.
 
 In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS
141R). SFAS 141R retains the fundamental requirements in SFAS 141 that the
acquisition method of accounting (which SFAS 141 called the purchase method) be used for
all business combinations and for an acquirer to be identified for each business
combination. SFAS 141R also establishes principles and requirements for how the
acquirer: (a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree; (b) recognizes and measures the goodwill acquired
in the business combination or a gain from a bargain purchase; and
(c) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. SFAS 141R applies prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. This statement
will have no impact on our financial condition or results of operations unless
we enter into a business combination after June 30, 2009.
 
 In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements (SFAS 160). SFAS 160 amends ARB 51 to
establish accounting and reporting standards for the non-controlling
(minority) interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a non-controlling interest in a subsidiary is
an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements and establishes a single method
of accounting for changes in a parent’s ownership interest in a subsidiary that
does not result in deconsolidation. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008. We have not yet determined the
impact, if any, that SFAS 160 will have on our financial
statements.
   20
 Table of Contents
 
 ITEM 2. 
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
  You should
read the following discussion and analysis together with our unaudited condensed
consolidated financial statements and the notes to those statements included
elsewhere in this report. This discussion may contain forward-looking statements
that involve risks and uncertainties. Forward-looking statements within this
Quarterly Report on Form 10-Q include our expectations for future levels of
operating expenses as well as other expenses and are identified by words such as
“believes,” “anticipates,” “expects,” “intends,” “may” and other similar
expressions. Our actual results could differ materially from those indicated in
these forward-looking statements as a result of certain factors, including those
described under “Risk Factors”, and other risks affecting our business. We
undertake no obligation to update any forward-looking statements included in
this discussion.
 
 Overview
 
 We are a
leading supplier of intellectual property (IP) to the global semiconductor
industry. Our technology solutions include the high-performance MIPS
architecture and related embedded processor cores, which are broadly used in
markets such as digital entertainment, wired and wireless communications and
networking, office automation, security, microcontrollers, and
automotive. With the acquisition of Chipidea Microelectrónica S.A.
(Chipidea) on August 27, 2007, we have become the leading supplier of IP to
semiconductor companies for analog and mixed signal devices. Our customers
include global semiconductor companies, and the annual unit volumes of
products incorporating our technologies exceeded 350 million in fiscal year
2007.
  Following
the acquisition of Chipidea we are organized in two business groups, the
Processor Business Group (PBG) and the Analog Business Group
(ABG).  The PBG provides industry-standard processor architectures and
cores for digital consumer and business applications.  The ABG
includes the Chipidea operation and provides analog and mixed-signal IP that
produces cost-efficient System-on Chip (SOC) applications and turnkey
solutions.
 
 Revenue
in the third quarter of fiscal 2008 increased 43% over the comparable period in
fiscal 2007 due to an increase in both royalties and license and contract
revenue.  The increase in royalties of $1.8 million was primarily due
to a 15% increase in PBG royalties.  Our licensees reported shipments
of approximately 115 million units during the quarter, an increase of 31% over
the comparable period in fiscal 2007.
  License
and contract revenue increased by 77% over the comparable period in fiscal 2007
due to the revenue contribution from ABG of $9.0 million for which there is no
comparable fiscal 2007 contribution.  The ABG contribution was offset
in part by a 30% decline in PBG license revenue.
  Our gross margin was $17.9million compared to $18.6million in the same quarter of the
prior year.  Our blended gross margin for the two business units
combined was 66%for the
quarter, which is a
significant decrease from our gross margin percentage before the Chipidea
acquisition.  .  This decrease in gross margin percentage
reflects the increase in the proportion of license and contact revenue to total
revenue.  Revenue from ABG contracts is directly tied to development
projects related to customer and project specific requirements, therefore such
development costs are recorded as costs of revenue, whereas the majority of
revenue from PBG contains a lower percentage of engineering services and a
higher percentage of IP which leads to a higher average gross
margin.
  Total
costs and operating expense in the third quarter of fiscal 2008 increased by
$13.6 million or 72% over the comparable period in fiscal 2007. The increase was
primarily due to the ABG costs and expenses of $7.1 million, not including
certain corporate unallocated costs such as general and administrative expenses,
selling expenses and the amortization of purchased intangible assets
associated with the acquisition of Chipidea. In addition, operating expense
included amortization of $1.7 million recorded as compensation expense
associated with the Chipidea purchase agreement for the continued employment of
certain Chipidea employees. In addition, in the third quarter of fiscal 2008 we
recorded approximately $1.3 million in restructuring costs associated with the
cost reducing actions implemented in January 2008.   We expect
our operating expenses for the remainder of fiscal 2008 to be higher than the
comparable periods in fiscal 2007 as they now include Chipidea
expenses.
   21
 Table of Contents
  Net loss
before income tax provision for the third quarter of fiscal 2008 was $6.1
million compared to net income before income tax of $1.9 million in the third
quarter of fiscal 2007.
  Our cash,
cash equivalents and marketable securities remained flat at approximately $15.2
million at March 31, 2008 as we generated cash from operations during the
quarter but also paid down certain debts during the quarter.
  Results
of Operations
  Revenue.Total revenue
consists of royalties and license and contract revenue. Royalties are based upon
sales by licensees of products incorporating our technology. License and
contract revenue consists of technology license fees generated from new and
existing license agreements for developed technology and engineering service
fees generated from contracts for technology under development or configuration
of existing IP. Technology license fees vary based on, among other things,
whether a particular technology is licensed for a single application or for
multiple or unlimited applications during a specified period, and whether the
license granted covers a particular design or a broader
architecture.
  Our
revenue in the three-month and nine-month periods ended March 31, 2008 and March
31, 2007 was as follows (in thousands):
 
 Three Months Ended March
      31,
              
              
              Nine Months
      Ended March 31,2008
              
              
              2007
              
              
              Change in
                Percent
              
              
              2008
              
              
              2007
              
              
              Change in
                PercentRevenueRoyalties
              
              $
              12,556
              
              
              $
              10,733
              
              
              
              17
              %
              
              $
              35,590
              
              
              $
              33,128
              
              
              
              7
              %Percentage
      of Total Revenue
              
              
              46
              %
              
              
              56
              %
              
              
              
              
              
              
              47
              %
              
              
              56
              %License
      and Contract Revenue
              
              $
              14,767
              
              
              $
              8,342
              
              
              
              77
              %
              
              $
              40,336
              
              
              $
              26,502
              
              
              
              52
              %Percentage
      of Total Revenue
              
              
              54
              %
              
              
              44
              %
              
              
              
              
              
              
              53
              %
              
              
              44
              %Total
      Revenue
              
              $
              27,323
              
              
              $
              19,075
              
              
              
              43
              %
              
              $
              75,926
              
              
              $
              59,630
              
              
              
              27
              %
 
 Royalties.   The
increase in royalties in the third quarter of fiscal 2008 from the comparable
period in fiscal 2007 is primarily due to a 31% increase in unit volumes shipped
by our royalty paying licensees offset in part by a decline in the average
selling price of chips sold by our licensees, which leads to lower royalties as
many of our royalty contracts are based on royalties as a percentage of licensee
net revenue.
 
 Royalties
in the first nine months of fiscal 2008 increased from the comparable period in
fiscal 2007.  The increase is due to the addition of royalties from
the ABG of $737,000 following the acquisition of Chipidea in August 2007 and an
18% increase in PBG unit shipments offset in part by a decline in the average
selling price of chips sold by our licensees, which leads to lower royalties as
many of our royalty contracts are based on royalties as a percentage of licensee
net revenue.
  License and Contract
Revenue.  The increase in license and contract revenue in both
periods presented is due to the addition of contract revenues from the ABG
following the Chipidea acquisition in August 2007.  In the third
quarter of fiscal 2008, contract revenues from the ABG were $9.0
million.  The ABG entered into 26 new contracts in the third fiscal
quarter of 2008. Revenue from ABG contracts is generally recognized on a
percentage of completion basis over the period of contract
performance.  The ABG revenue increase was offset in part by a
decrease in license revenue generated by the PBG of $2.5 million even though
there were two more contracts signed in the quarter compared to the same period
in the prior year.  There were six new license agreements completed by
the PBG in the third quarter of fiscal 2008 compared to four in the third
quarter of fiscal 2007.  License fees generated by the MIPS 24K core
product family decreased $1.4 million,  fees generated by the MIPS
architecture family decreased $1.0 million and fees generated by the MIPS 4K
core family decreased $1.1 million compared to the corresponding period in
fiscal 2007.   These decreases were partially offset by an
increase in fees generated by the MIPS 34K and 74K core product families of $1.4
million.
   22
 Table of Contents
 
 The
increase in license and contract revenues in the first nine months of fiscal
2008 over the comparable period in fiscal 2007 is due to contract revenues from
the ABG of $20.5 million.  There were 77 new contracts completed by
the ABG in the first nine months of 2008 subsequent to our acquisition of
Chipidea, and 214 contracts generating ABG revenue as of March 31,
2008     This increase was offset in part by a decrease
in license revenue generated by the PBG of $6.7 million.   There
were seventeen new license agreements completed by the PBG in the first nine
months of fiscal 2008 compared to twenty-one in the comparable period of fiscal
2007.  Fees generated by the MIPS 24K core product family decreased
$5.6 million, fees generated by the MIPS architecture family decreased by $1.4
million and fees generated by the MIPS 4K core product family decreased by $1.1
million in the first nine months of fiscal 2008 over the comparable period in
fiscal 2007, offset somewhat by an increase in fees from the MIPS 34K and 74K
core product families of $3.0 million.
  Cost and Expenses.Our
cost and expenses for the three-month and nine-month periods ended March 31,
2008 and March 31, 2007 was as follows (in thousands):
 
 Three Months
      Ended March 31,
              
              
              Nine Months
      Ended March 31,2008
              
              
              2007
              
              
              Change in
                Percent
              
              
              2008
              
              
              2007
              
              
              Change in
                PercentCost
      and ExpensesCost
      of Contract Revenue
              
              $
              9,407
              
              
              $
              492
              
              
              
              1,812
              %
              
              $
              22,110
              
              
              $
              1,261
              
              
              
              1,653
              %Research
      and Development
              
              $
              9,315
              
              
              $
              8,159
              
              
              
              14
              %
              
              $
              27,821
              
              
              $
              24,185
              
              
              
              15
              %Sales
      and Marketing
              
              $
              6,056
              
              
              $
              5,345
              
              
              
              13
              %
              
              $
              17,796
              
              
              $
              15,314
              
              
              
              16
              %General
      and Administrative
              
              $
              6,559
              
              
              $
              4,978
              
              
              
              32
              %
              
              $
              21,437
              
              
              $
              13,867
              
              
              
              55
              %
  Cost of Contract Revenue.Cost of contract revenue includes salaries, depreciation, and the
amortization of intangible assets primarily associated with the
ABG.  The increase in cost of contract revenue in the third quarter of
fiscal 2008 and the first nine months of fiscal 2008 over the comparable periods
in fiscal 2007 is due to the additional cost of revenue associated with
Chipidea’s analog processor products.  The ABG’s revenue is generated
by projects which include the development of technology that is directly
related to the requirements of particular licensees and license
agreements.  As such, the cost of revenue for the ABG is substantially
higher than is the case for the PBG.
  Research and
Development.  Research and development expenses include salaries and
contractor and consultant fees, as well as costs related to workstations,
software, computer aided design tools, and stock-based compensation expense. The
costs we incur with respect to internally developed technology and engineering
services for the PBG are included in research and development expenses as they
are incurred and are not directly related to any particular licensee, license
agreement or license fee.  Because of the nature of these expenses,
the research and development expenses for the PBG are substantially higher than
the research and development expenses of the ABG, where more of the expense
incurred for the development of technology is directly related to the
requirements of particular licensees and license agreements.
  The
increase in research and development expenses in the third quarter of fiscal
2008 over the comparable period in fiscal 2007 was primarily due to an increase
in compensation expense of $966,000  due to the accrual of payments to
be made in association with the Chipidea purchase agreement.  These
payments are to certain founders of Chipidea and are subject to the continued
employment of these employees.  The increase was offset in part by a
decrease in stock-based compensation expense because of decreases in headcount
due to the restructuring actions taken in the third quarter of fiscal 2008 as
well as decreases in the valuation of new grants.
 
 The
increase in research and development expenses in the first nine months of fiscal
2008 over the comparable period in fiscal 2007 was primarily due to an increase
in salary expense of $1.3 million related to the annual merit increase in the
processor business group, as well as the addition of $755,000 of salary expense
related to the research and development employees in the ABG.  Compensation
expense further increased by $1.6 million primarily due to the accrual of
payments to be made in association with the Chipidea purchase
agreement.  These payments are to certain founders of Chipidea and are
subject to the continued employment of these employees.  This increase
was somewhat offset by decreases in bonus earned under our PBG bonus plans as we
did not meet plan targets in the PBG in the first nine months of fiscal
2008.  In addition, depreciation expense increased by $432,000 due to an
increase in our computer-aided design tool base and IT infrastructure to support
our engineering efforts.
   23
 Table of Contents
 
 Sales and Marketing. Sales
and marketing expenses include salaries, commissions and costs associated with
third party independent software development tools, direct marketing, other
marketing efforts and stock-based compensation expense. Our sales and marketing
efforts are directed at establishing and supporting our licensing
relationships.
  The increase
in sales and marketing expense for the third quarter of fiscal 2008 over the
comparable period in fiscal 2007 was primarily due to an increase in salary
expense of $703,000 related to the annual merit increase in the processor
business group as well as the addition of $343,000 of expense related to the
sales and marketing employees in the ABG.  In addition, travel expense
increased by $108,000 primarily due to the increase in our worldwide sales force
from the ABG acquisition.  These increases were somewhat offset by a
decrease in consulting expense of $361,000 due to the termination of a contract
with a sales agent in Taiwan and lower spending on third party marketing
projects.
  The
increase in sales and marketing expense for first nine months of fiscal 2008
over the comparable period in fiscal 2007 was primarily due to an increase in
salary expense of $2.3 million related to the annual merit increase in the
processor business group as well as the addition of $1.2 million of expense
related to the sales and marketing employees in the ABG.  In addition,
travel expense increased by $494,000 primarily due to the increase in our
worldwide sales force from the ABG acquisition and an increase in the cost of
our annual sales conference held in the first quarter of the fiscal
year.  These increases were somewhat offset by a decrease in
commission and bonus expense of $445,000 reflecting a decrease in commissions
caused by lower revenues in the first nine months of fiscal 2008 and a decrease
in bonus earned under our PBG bonus plans as we did not meet plan targets in the
first nine months of fiscal 2008.  Additionally there was a decrease
of $794,000 in consulting expense primarily due to the termination of a contract
with a sales agent in Taiwan and lower spending on third party marketing
projects.
 
 General and Administrative.
General and administrative expenses comprise salaries, legal fees including
those associated with the establishment and protection of our patent, trademark
and other intellectual property rights which are integral to our business and
expenses related to compliance with the reporting and other requirements of a
publicly traded company including directors and officers liability insurance, in
addition to stock-based compensation expense.
  The increase
in general and administrative expenses in the third quarter of fiscal 2008 over
the comparable period in fiscal 2007 was primarily the result of an increase in
salary and benefits expense of $634,000 primarily due to expenses for the
additional administrative employees in the ABG, an increase in consulting
expense of $389,000 as we used contractors to fill resource gaps, and an
increase in compensation expense of $380,000 primarily due to the accrual of
payments to be made in association with the Chipidea purchase
agreement.  These payments are to certain founders of Chipidea and are
subject to continued employment of these employees..  These increases
were somewhat offset by decreases in bonus earned under our PBG bonus plans as
we did not meet PBG bonus plan targets in the first nine months of fiscal
2008.   In addition, travel expense increased by $210,000
primarily due to the increase in travel associated with the addition of the
ABG.  These expenses were somewhat offset by  a decrease in
outside services fees of $309,000 due to lower costs associated with the stock
option investigation which was concluded in July 2007.
  The
increase in general and administrative expenses in the first nine months of
fiscal 2008 over the comparable period in fiscal 2007 was the result of an
increase in fees related to the integration of the ABG of $2.2 million, an
increase in audit and tax fees of $1.1 million and an increase in salary and
benefits expense of $1.3 million primarily due to expenses for the additional
administrative employees in the ABG.   Compensation expense
increased by $836,000 primarily due to the accrual of payments to be made in
association with the Chipidea purchase agreement.  These payments are
to certain founders of Chipidea and are subject to continued employment of these
employees.  These increases were somewhat offset by decreases in bonus
earned under our PBG bonus plans as we did not meet plan targets in the first
nine months of fiscal 2008.  In addition, travel expense increased by
$558,000 primarily due to the increase in travel associated with the addition of
the ABG and consulting expense increased by $507,000 as we used contractors to
fill resource gaps.  Also, there was an increase in expenses related
to our board of directors of $398,000 related to stock compensation expense from
annual renewal grants. These increases were somewhat offset by a decrease of
$1.3 million in fees related to the stock option investigation which was
concluded in July 2007.
   24
 Table of Contents
  Restructuring.   In
January 2008 we announced plans to reduce operating costs in the PBG by
terminating the employment of certain employees in our United States locations
and by closing our research and development center in the United Kingdom. The
total charge to restructuring expense recorded in the third fiscal quarter of
2008 was $1.3 million. The restructuring plans will be fully implemented by
December 2008.
 
 Acquired In-process Research and
Development.In August 2007, we completed the acquisition of Chipidea, a
privately held supplier of analog and mixed signal intellectual property, for
cash consideration. The fair value of the in-process technology was determined
by estimating the present value of the net cash flows we believed would result
from the acquired technology. Because technological feasibility of certain of
the acquired technology had not been established and no future alternative use
for the in-process technology existed at the time of the acquisition, we
recorded a charge of $6.4 million in the first nine months of fiscal 2008 for
the acquired in-process research and development expense upon completion of the
acquisition.
  Other Income
(Expense), Net. Other
income (expense), net, for the third quarter of fiscal 2008 was an expense of
$762,000compared to
income of $1.8 millionfor
the comparable period in fiscal 2007. The decrease in other income was primarily
due to a decrease in interest income of $1.8million because of the decrease in our
invested balances after the Chipidea acquisition, an increase in interest
expense of $584,000primarily due to interest incurred on our short-term debt, and amortization of
$686,000 in loan origination fees related to our revolving credit
agreement.  These increases were
somewhat offset by fluctuations in realized foreign exchange gains of
$786,000.
  Other
income (expense), net, for the first nine months of fiscal 2008 was an expense
of $1.5 million compared to income of $4.8 million for the comparable period in
fiscal 2007. The decrease in other income was primarily due to a decrease in
interest income of $3.7 million because of the decrease in our invested balances
after the Chipidea acquisition, an increase in interest expense of $1.4 million
primarily due to interest incurred on our short-term debt, and amortization of
$1.5 million in loan origination fees related to our revolving credit
agreement.
  Income
Taxes.  We recorded an income tax benefit of $1.8 million for
the three-month period ended March 31, 2008 and a provision of $0.7 million for
the comparable period in fiscal 2007. For the nine-month period ended March 31,
2008, we have recorded an income tax provision of $1.0 million and a tax
provision of $3.7 million for the comparable period in fiscal
2007.  At the third quarter, we have revised our annual
forecast related to the Analog Business Group which has resulted in a true-up of
the effective rate in the quarter by recognizing a current period tax benefit in
Portugal. For the Processor Business Group, we continued to recognize a
valuation allowance against the deferred tax assets in U.S. as we believe
that it is more likely than not that the deferred tax assets will not be
recognized and expire unutilized.
  Our estimated
annual income tax before discrete items for fiscal 2008 primarily consists of
U.S. state minimum taxes and foreign taxes on income earned in certain foreign
jurisdictions and withholding taxes. The actual tax provision for the nine-month
period ended March 31, 2008 differs from the estimated annual tax due to
differentials between US and foreign country tax rates, inclusion in US income
of certain foreign subsidiary income, write-off of in process research and
development from the Chipidea acquisition, foreign withholding taxes, foreign
tax credits generated, a change in estimate related to tax reserves, increase in
the valuation allowance in the US and discrete items recorded during the
period.  The annual effective tax rate of 38% for fiscal 2007 for the
nine-month period ended March 31, 2007 primarily consisted of US federal and
state taxes and foreign taxes on income earned in certain foreign jurisdictions
and withholding taxes, offset in part by the availability of certain foreign tax
credits and general business tax credits.
  In June 2006,
the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with Statement of Financial Accounting
Standards 109, Accounting for Income Taxes (SFAS 109). This interpretation
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on de-recognition of tax
benefits, classification on the balance sheet, interest and penalties,
accounting in interim periods, disclosure, and transition. This interpretation
is effective for fiscal years beginning after December 15, 2006.
   25
 Table of Contents
 
 We adopted
the provisions of FIN 48 on July 1, 2007. The cumulative effect of adopting FIN
48 on July 1, 2007 is recognized as a change in accounting principle, recorded
as an adjustment to the opening balance of accumulated deficit on the adoption
date. As a result of the implementation of FIN 48, we recognized a decrease of
approximately $264,000 in the liability for unrecognized tax benefits related to
tax positions taken in prior periods, which resulted in a decrease of $264,000
in accumulated deficit.
 The total
amount of gross unrecognized tax benefits was $3.7 million as of July 1, 2007
(the date of adoption of FIN 48) and $4.3 million as of March 31, 2008. The
increase in the gross unrecognized tax benefits from July 1, 2007 to March 31,
2008 was primarily related to amounts assumed in the Chipidea acquisition. Also,
the total amount of unrecognized tax benefits that, if recognized, would affect
the effective tax rate was $817,000 as of July 1, 2007 and $835,000 as of March
31, 2008.
  We recognize
interest and penalties related to uncertain tax positions as a component of
provision for income taxes. Accrued interest and penalties relating to the
income tax on the unrecognized tax benefits was approximately $150,000 as of
July 1, 2007 and approximately $479,000 as of March 31, 2008, with approximately
$78,000 being included as a component of provision for income taxes in the
nine-month period ended March 31, 2008. The increase in interest and penalties
from July 1, 2007 to March 31, 2008 was primarily related to amounts assumed in
the Chipidea acquisition.
  Although we
file U.S. federal, U.S. state, and foreign tax returns, our major tax
jurisdictions are the United States and Portugal. Our fiscal 2004 and subsequent
tax years remain subject to examination by the IRS for U.S. federal tax
purposes, and our calendar 2004 and subsequent tax years remain subject to
examination by the appropriate governmental agencies for Portuguese tax
purposes.
  Financial
Condition
 
 As a
result of the acquisition of Chipidea by payment of cash, our cash, cash
equivalents and marketable securities decreased by approximately $127 million
during the first quarter of fiscal 2008.  We entered into a short-term
revolving loan agreement of $35 million to help fund the acquisition and current
operating requirements.  The amount available under the revolving loan
was reduced by an amendment in February 2008 to $19 million, all of which was
outstanding on March 31, 2008. Payments of the revolving loan in the amount of
$1 million are due monthly beginning in April 2008, and the remaining principal
amounts outstanding under this revolving loan agreement are due and payable in
full on August 22, 2008.  At March 31, 2008, we had cash, cash
equivalents and marketable investments of $15.2 million.  Our
principal requirements for cash are to fund working capital needs, and, to a
lesser extent, capital expenditures for equipment purchases, licensing of
computer aided design tools used in our development activities and acquisition
of technologies and patents. The following table summarizes selected items (in
thousands) from our statements of cash flows for the nine months ended March 31,
2008 and 2007. For complete statements of cash flows for those periods, see the
financial statements in Item 1.
 
 Nine
      Months Ended March 31,2008
              
              
              2007Net
      cash provided by (used in) operating activities
              
              $
              (597
              )
              
              $
              17,719Net
      income (loss)
              
              
              (23,373
              )
              
              
              6,148Depreciation
              
              
              2,692
              
              
              
              1,596Stock-based
      compensation
              
              
              6,142
              
              
              
              6,081Acquired
      in-process research and development
              
              
              6,350
              
              
              
              —Amortization
      of intangibles
              
              
              6,527
              
              
              
              1,020Accounts
      receivable
              
              
              4,216
              
              
              
              (1,379
              )Other
      assets
              
              
              769
              
              
              
              (2,483
              )Other
      current accrued liabilities
              
              
              (2,791
              )
              
              
              2,183Income
      tax payable
              
              
              (3,533
              )
              
              
              1,528Long-term
      liabilities
              
              
              664
              
              
              
              2,083Net
      cash used in investing activities
              
              $
              (124,220
              )
              
              $
              (26,046
              )Net
      maturities (purchases) of short-term investments
              
              
              25,940
              
              
              
              (22,190
              )Capital
      expenditures
              
              
              (2,053
              )
              
              
              (3,856
              )Acquisition
      of Chipidea Microelectronica S.A., net of cash acquired
              
              
              (120,944
              )
              
              
              —Restricted
      cash
              
              
              (27,163
              )
              
              
              —Net
      cash provided by financing activities
              
              $
              20,992
              
              
              $
              386Proceeds
      from short-term debt, net
              
              
              19,222
              
              
              
              —Repayments
      of short-term debt
              
              
              (1,021
              )Net
      proceeds from issuance of common stock
              
              
              2,360
              
              
              
              386Net
      decrease in cash and cash equivalents
              
              $
              (103,859
              )
              
              $
              (7,896
              )
 
  26
 Table of Contents
  Net cash used
in operating activities was $597,000 for the nine-month period ended March 31,
2008, primarily due to our net loss partially offset by non-cash charges
including stock-based compensation under SFAS No. 123R, depreciation,
amortization of intangible assets, and acquired in-process research and
development costs.  In addition, cash was used by a decrease in
our income taxes payable and a decrease in accrued liabilities due to the
payment of accrued invoices for acquisition and integration
costs.   These uses of cash were partially offset by cash
provided by collections from existing Chipidea receivables acquired in
connection with the Chipidea acquisition and a decrease in our long-term
assets due to normal amortization.
  For the
nine-month period ended March 31, 2007, our operating activities provided
net cash of $17.7 million primarily reflecting our net income and non-cash
charges including stock-based compensation under SFAS No. 123R,
depreciation expense and amortization of intangibles and deferred compensation.
Reported cash flow was provided by increases in long-term liabilities due to a
$2.1 million accrual for extended payment terms on a Computer Aided Design
Time-Based License (“CAD TBL”), as well as an increase in accrued compensation
primarily due to accruals under our bonus plans, and an increase in other
current accrued liabilities due to higher accruals of legal and accounting fees
and higher accruals for CAD TBLs and maintenance contracts. In addition, cash
flow was provided by an increase in taxes payable due to our provision. The net
cash provided by these sources was partially offset by an increase in other
assets relating primarily to a $3.1 million purchase of a CAD TBL and an
increase in accounts receivable due to new license agreements signed near the
end of the quarter.
  Net cash used
in investing activities was $124.2 million for the nine month period ended March
31, 2008 which was primarily due to cash used for our acquisition of Chipidea
and the establishment of restricted cash accounts for the amounts held in escrow
related to the Chipidea acquisition.  This use of cash was offset
in part by $25.9 million of cash provided from the proceeds of the sale of our
marketable investments.  Net cash used in investing activities was
$26.0 million for the nine months ended March 31, 2007 which was primarily due
to purchases of equipment and computer-aided design tools used in our
development activities as well as purchases of short-term
investments.
  Net cash
provided by financing activities was $21.0 million for the nine months ended
March 31, 2008 compared to $386,000 for the comparable period in the prior year.
Net cash provided by financing activities during the nine month period ended
March 31, 2008 was primarily attributable to the loan of $20 million under our
revolving credit agreement and activity under our employee stock plans, offset
in part by cash paid for loan origination fees and loan
repayments.   Net cash provided by financing activities during
the nine month period ended March 31, 2007 was attributable primarily to
purchases under our employee stock plans.
  Our future
liquidity and capital requirements could vary significantly from quarter to
quarter, depending on numerous factors, including, among others:
  ·
              the
      cost, timing and success of product development
efforts;·
              the
      cost, timing and success of refinancing the existing Jefferies
      debt,
 ·
              the
      level and timing of contract revenues and royalties;·
              the
      cost of maintaining and enforcing patent claims and other intellectual
      property rights and other
litigation;
 ·
              level
      and timing of restructuring activities;
and
 ·
              whether
      cash would be used to complete any
acquisitions.
  Principal
amounts outstanding under the revolving loan agreement entered into in
association with the Chipidea acquisition are due and payable in full on August
22, 2008.  We are seeking to refinance this loan [or obtain additional
financing] prior to the loan maturity date.  Also, we may in the
future be required to raise additional funds through public or private
financing, strategic relationships or other arrangements. Additional equity
financing may be dilutive to holders of our common stock, and debt financing, if
available, may involve restrictive covenants.  Our failure to raise capital
when needed, including in connection with the refinancing of the
revolving loan agreement, could have a material adverse effect on our
business, results of operations and financial condition.  Based on our
expectations of our ability to refinance the loan, we believe that we have
sufficient cash and borrowing capacity to meet our projected operating and
capital requirements for the next twelve months.
   27
 Table of Contents
  The revolving
loan agreement contains certain customary representations and warranties,
affirmative and negative covenants, and events of default, including the
requirement that we maintain, and report on a quarterly basis, for the
trailing twelve months, a leverage ratio (as defined in the Credit Agreement) of
no greater than 3.5 to 1.0. All obligations under the agreement, and the
guarantees of those obligations, are secured by substantially all our assets,
subject to certain exceptions. Our report to the lenders for the quarter ended
March 31, 2008 is not yet due, but we believe we were in compliance with all
covenants relating to the agreement as of that date.
  We
are exposed to fluctuations in currency exchange rates because the
functional currency of our international operating subsidiaries is the local
currency.  We experience foreign exchange translation exposure on our
net assets and liabilities denominated in currencies other than the U.S.
dollar.  The related foreign currency translation gains and losses
from translating these amounts into U. S. dollars are reflected in accumulated
other comprehensive income under stockholder’s equity on our balance
sheet.   For example, in the first nine months of fiscal 2008, we
recorded approximately $9.6 million in other comprehensive income, net of
deferred tax liabilities, in the equity section of our balance sheet related to
fluctuations in the Euro exchange rate, as Chipidea’s functional currency is the
Euro.
  Our
contractual obligations as of March 31, 2008 were as follows:
  Payments
      due by period (in thousands)Total
              
              
              Less than
                1
      year
              
              
              1-3
                years
              
              
              3-5
                years
              
              
              More than
                5
      yearsOperating
      lease obligations (1)
              
              $
              12,469
              
              
              $
              3,394
              
              
              $
              3,778
              
              
              $
              2,713
              
              
              $
              2,584Capital
      lease obligations (2)
              
              
              9,115
              
              
              
              8,151
              
              
              
              824
              
              
              
              140
              
              
              
              —Purchase
      obligations (3)
              
              
              12,116
              
              
              
              9,063
              
              
              
              3,053
              
              
              
              —
              
              
              
              —Debt
      (4)
              
              
              21,631
              
              
              
              21,491
              
              
              
              140
              
              
              
              —
              
              
              
              —Other
      short-term liabilities reflected on our Balance Sheet (5)
              
              
              21,274
              
              
              
              21,274
              
              
              
              —
              
              
              
              —
              
              
              
              —Other
      long-term liabilities and obligations (6)
              
              
              19,125
              
              
              
              7,348
              
              
              
              11,777
              
              
              
              —
              
              
              
              —Total
              
              $
              95,730
              
              
              $
              70,721
              
              
              $
              19,572
              
              
              $
              2,853
              
              
              $
              2,584
   (1)
              We
      lease office facilities and equipment under noncancelable operating leases
      that expire through 2016. In connection with the lease for our Mountain
      View headquarters, we have entered into a letter of credit as a security
      deposit with a financial institution for $264,000, which is guaranteed by
      a time-based certificate of deposit.  In addition, we have
      entered into letters of credit of approximately $2.8 million with
      various financial institutions in Portugal, Belgium, Norway, and France in
      association with certain building leases and government
      grants.
 
 (2)
              Commitments
      due under our capital leases for equipment and
  property.
  (3)
              Outstanding
      purchase orders for ongoing operations. Payments of these obligations are
      subject to the provision of services or products. Purchase obligations
      have increased by approximately $4.6 million since June 30, 2007
      primarily due to purchases of computer aided design licenses and
      additional purchase orders from the
ABG.
  (4)
              Debt
      includes $19 million due under a revolving credit agreement, $2.1 million
      due under various credit lines, $267,000 primarily due to a loan with a
      government agency in Portugal, and related future interest
      payments.(5)
              Short-term
      liabilities includes:  $15.0 million related to an escrow
      account related to the Chipidea acquisition completed in August 2007,
      which will be settled twelve months from the acquisition date, $2.5
      million related to a prepayment associated with the sale of a building,
      $1.6 million due to shareholders of a company acquired by Chipidea prior
      to August 2007, and $2.2 million in payables for computer aided design
      licenses not included in outstanding purchase
  orders.
  (6)
              Long-term
      liabilities and obligations include:  $2.6 million due to
      employees under a deferred compensation plan, under which
      distributions are elected by the employees, and $14.7
      million liabilities related to an escrow account for the
      consideration contingent due upon continued employment of certain
      employees related to the Chipidea acquisition, half of which will be
      settled 12 months from the acquisition date and half of which will be
      settled 24 months from the acquisition date, $726,000 due to shareholders
      of a company acquired by Chipidea prior to August 2007, and $1.1 million
      in payables for computer aided design licenses not included in outstanding
      purchase orders.
  The
      table above does not include:  (1) the potential cash earn-out
      payments of up to $1.0 million payable within 1 year related to the
      acquisition of FS2, which are contingent upon the achievement of certain
      minimum earnings thresholds and project milestone achievement; (2) the
      potential additional cash purchase payment of up to 1.2 million Euro
      payable within 1 year related to certain Portuguese government grants
      associated with the Chipidea purchase; and (3) the potential additional
      performance-based milestone payment of 610,687 shares of our common stock
      or a cash equivalent related to the Chipidea acquisition, due in February
      2009.  Also, as a result of the adoption of FIN 48 on July 1,
      2007, we reclassified unrecognized tax benefits to long-term income taxes
      payable.  As of March 31, 2008, we had $5,922,000 of income tax
      liabilities.  At this time, we are unable to make a reasonably
      reliable estimate of the timing of payments in individual years beyond 12
      months.  While these contingent payments are not fixed at
      present, they represent potential
commitments.
 
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  Critical
Accounting Polices and Estimates
  We
prepare our financial statements in conformity with U.S. generally accepted
accounting principles, which require us to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
reporting period. We regularly evaluate our accounting estimates and
assumptions. We base our estimates and assumptions on historical experience and
on various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results inevitably will differ from the estimates, and
such differences may require material adjustments to our financial statements.
We believe there have been no significant changes to the items we disclosed as
our critical accounting policies and estimates in our discussion and analysis of
financial condition and results of operations in our 2007 Form 10-K, except in
the following policy:
  Revenue
Recognition.
  Royalty
Revenue
  We
classify all revenue that involves the sale of a licensee’s products as royalty
revenue. Royalty revenue is recognized in the quarter in which a report is
received from a licensee detailing the shipments of products incorporating our
intellectual property components, which is generally in the quarter following
the sale of the licensee’s product to its customer. Royalties are calculated
either as a percentage of the revenue received by the seller on sales of such
products or on a per unit basis. We periodically engage a third party to perform
royalty audits of our licensees, and if these audits indicate any over- or
under-reported royalties, we account for the results when they are
identified.
  Contract
Revenue
  Processor
Business Group
  We derive
revenue from license fees for the transfer of proven and reusable intellectual
property components or from engineering services. We enter into licensing
agreements that provide licensees the right to incorporate our intellectual
property components in their products with terms and conditions that have
historically varied by licensee. Revenue earned under contracts with our
licensees is classified as either contract revenue or royalties. We recognize
revenue in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition(SAB
104), and for multiple deliverable arrangements we follow the guidance in EITF
00-21, Revenue Arrangements
with Multiple Deliverables, to determine whether there is more than one
unit of accounting. To the extent that the deliverables are separable into
multiple units of accounting, we then allocate the total fee on such
arrangements to the individual units of accounting using the residual method. We
then recognize revenue for each unit of accounting depending on the nature of
the deliverable(s) comprising the unit of accounting (principally following SAB
No. 104).
   29
 Table of Contents
  We derive
revenue from license fees for currently available technology or from engineering
services for technology under development. Each of these types of contracts
includes a nonexclusive license for the underlying intellectual property. Fees
for contracts for currently available technology include: license fees relating
to our intellectual property, including processor designs; maintenance and
support, typically for one year; and royalties payable following the sale by our
licensees of products incorporating the licensed technology. Generally, our
customers pay us a single upfront fee that covers the license and first year
maintenance and support. Our deliverables in these arrangements include
(a) processor designs and related intellectual property and
(b) maintenance and support. The license for our intellectual property,
which includes processor designs, has standalone value and can be used by the
licensee without maintenance and support. Further, objective and reliable
evidence of fair value exists for maintenance and support based on specified
renewal rates. Accordingly, (a) license fees and (b) maintenance and
support fees are each treated as separate units of accounting. Total upfront
fees are allocated to the license of processor designs and related intellectual
property and maintenance and support using the residual method. Designs and
related intellectual property are initially delivered followed by maintenance
and support. Objective and reliable evidence of the fair value exists for
maintenance and support. However, no such evidence of fair value exists for
processor designs and related intellectual property. Consistent with the
residual method, the amount of consideration allocated to processor designs and
related intellectual property equals the total arrangement consideration less
the fair value of maintenance and support, which is based on specified renewal
rates. Following the guidance in SAB No. 104, fees for or allocated to
licenses to currently available technology are recorded as revenue upon the
execution of the license agreement when there is persuasive evidence of an
arrangement, fees are fixed or determinable, delivery has occurred and
collectibility is reasonably assured. We assess the credit worthiness of each
customer when a transaction under the agreement occurs. If collectibility is not
considered reasonably assured, revenue is recognized when the fee is collected.
Other than maintenance and support, there is no continuing obligation under
these arrangements after delivery of the intellectual property.
  Contracts
relating to technology under development also can involve delivery of a license
to intellectual property, including processor designs. However, in these
arrangements we undertake best-efforts engineering services intended to further
the development of certain technology that has yet to be developed into a final
processor design. Rather than paying an upfront fee to license completed
technology, customers in these arrangements pay us milestone fees as we perform
the engineering services. If the development work results in completed
technology in the form of a processor design and related intellectual property,
the customer is granted a license to such completed technology at no additional
fee. These contracts typically include the purchase of first year maintenance
and support commencing upon the completion of a processor design and related
intellectual property for an additional fee, which fee is equal to the renewal
rate specified in the arrangement. The licensee is also obligated to pay us
royalties following the sale by our licensee of products incorporating the
licensed technology. We continue to own the intellectual property that we
develop and we retain the fees for engineering services regardless of whether
the work performed results in a completed processor design.  We
develop intellectual property with intent to license it to multiple
customers.  Our cost of development of such intellectual property
significantly exceeds the license revenue from a particular customer
arrangement.  Costs incurred with respect to internally developed
technology and engineering services are included in research and development
expenses, as they are not directly related to any particular licensee, license
agreement, or license fees. Fees for engineering services in contracts for
technology under development, which contracts are performed on a best efforts
basis, are recognized as revenue as services are performed subsequent to the
execution of the arrangement; however, we limit the amount of revenue recognized
to the aggregate amount received or currently due pursuant to the milestone
terms. As engineering activities are best-efforts and at-risk and because the
customer must pay an additional fee for the first year of maintenance and
support if the activities are successful, the maintenance and support is a
contingent deliverable that is not accounted for upfront under contracts
relating to technology under development.
 
 Analog
Business Group
  License
agreements provide for the performance of engineering services involving design
and development of customized analog and mixed signal intellectual property from
basic building blocks to complete subsystems, including the development of new
intellectual property or configuring existing intellectual property to
customer’s specifications.  Fees are determined based on a number of
factors including direct cost and the value of the underlying
technology.  We expect to earn gross margins for each
agreement.  We recognize revenue from these arrangements under
Statement of Position (SOP) No. 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts(SOP 81-1), for
licensing of new IP development or configuration of existing IP to a customer’s
specification.  Revenue is recognized on a percentage of completion
basis from the signing of the license and design agreement through silicon
validation for new IP development and through the completion of all outstanding
obligations for configuration of existing IP.  The amount of revenue
recognized is based on the total license fees under the license agreement and
the percentage of completion is measured by the actual costs incurred to date on
the project compared to the total estimated project cost. Revenue is recognized
only when collectibility is probable. The estimates of project costs are based
on the IP specifications and prior experience of the same or similar IP
development and are reviewed and updated regularly by
management.  Under the percentage of completion method, provisions for
estimated losses on uncompleted contracts are recognized in the period in which
the likelihood of such losses is determined.  Licensing of existing IP
that does not require any configuration is recognized upon delivery of the IP
and when all other revenue recognition criteria under SAB 104 have been
met.  Direct costs incurred in the design and development of the IP
under these arrangements is included in cost of contract revenue.
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  Maintenance
and Support
  Certain
arrangements in the Processor Business Group and Analog Business Group also
include maintenance and support obligation. Under such arrangements, we provide
unspecified upgrades, bug fixes and technical support. No other upgrades,
products or other post-contract support are provided. These arrangements are
renewable annually by the customer. Maintenance and support revenue is
recognized at its fair value ratably over the period during which the obligation
exists, typically 12 months. The fair value of any maintenance and support
obligation is established based on the specified renewal rate for such support
and maintenance. Maintenance and support revenue is included in contract revenue
in the Statement of operations.
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  ITEM 3. 
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  We are
exposed to interest rate risk on investments of our excess cash. The primary
objective of our investment activities is to preserve capital. To achieve this
objective and minimize the exposure due to adverse shifts in interest rates, we
invest in high quality short-term maturity commercial paper, municipal bonds,
and money market funds operated by reputable financial institutions in the
United States. Due to the nature of our investments, we believe that we do not
have a material interest rate risk exposure.
  In our
Processor Business Group, we are exposed to fluctuations in currency exchange
rates because a substantial portion of our revenue has been, and is expected to
continue to be, derived from customers outside the United States. To date,
substantially all of our revenue from international customers has been
denominated in U.S. dollars. Because we cannot predict the amount of non-U.S.
dollar denominated revenue earned by our licensees, we have not historically
attempted to mitigate the effect that currency fluctuations may have on our
revenue, and we do not presently intend to do so in the future.
  In our
Analog Business Group, we are exposed to fluctuations in currency exchange rates
because a substantial portion of our revenue is denominated in U.S. dollars
while our functional currency is the Euro.  In order to reduce the effect
of foreign currency fluctuations, we utilize foreign currency forward exchange
contracts to hedge certain foreign currency transaction
exposures.
  We are
also exposed to fluctuations in currency exchange rates because the functional
currency of our international operating subsidiaries is the local
currency.  We experience foreign exchange translation exposure on our
net assets and liabilities denominated in currencies other than the U.S.
dollar.  The related foreign currency translation gains and losses
from translating these amounts into U. S. dollars are reflected in accumulated
other comprehensive income under stockholder’s equity on our balance
sheet.   For example, Chipidea’s functional currency is the Euro
and fluctuations in the Euro exchange rate will impact our earnings and our
asset and liabilities.  We have not hedged against these
fluctuations.  We also carry a restricted cash balance of 9.3 million
Euro as of March 31, 2008 on our U.S. dollar balance sheet.  This
amount is remeasured each period and fluctuations are recorded in our income
statement.
  
 ITEM 4. 
CONTROLS AND
PROCEDURES
 
 Our chief
executive officer and our chief financial officer have concluded, based on the
evaluation of the effectiveness of our disclosure controls and procedures by our
management, with the participation of our chief executive officer and our chief
financial officer, as of the end of the period covered by this report, that our
disclosure controls and procedures (as such term is defined under Rule 12a-15(e)
and 15d-15(e) under the Exchange Act) were not effective as of March 31, 2008,
because of the material weakness described in Part II, Item 9A, in our 2007
Annual Report on Form 10-K. In that section, we describe a material weakness in
our internal control over financial reporting as a result of errors found during
the preparation of our financial statements with regards to the process of
accounting for income taxes. Specifically, controls relating to the oversight
and review of the tax provision by qualified personnel experienced in the
application of tax rules, regulations and related accounting, and timely
consultation with experts were ineffective. We have an on-going process of
analyzing and improving our internal controls, including those related to the
material weakness identified by management and have largely developed and are
implementing a plan to remediate the material weaknesses described above. With
regard to the process of accounting for income taxes, our remediation plan
includes: (a) consideration and implementation of additional review of tax
provision and reconciliations by qualified personnel experienced in application
of tax rules and regulations and accounting for income taxes; and
(b) consultation with tax experts in a timely
manner.   Although we are continuing to implement this plan in
order to address this material weakness, we cannot assure you that this material
weakness will not cause us to determine that our internal control over financial
reporting is not effective as of the end of our current fiscal
year.
 
 Other
than the changes as part of the remediation plan discussed above, there were no
changes in our internal control over the financial reporting (as defined in Rule
13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the third
quarter of fiscal 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.
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 Table of Contents
  PART II – OTHER INFORMATION
  ITEM 1. 
LEGAL
PROCEEDINGS
 
 A derivative action entitled In re MIPS Technologies, Inc.
Derivative Litigation, Case No. C-06-06699-RMW, which was filed on
October 27, 2006, is pending in the United States District Court,
Northern District of California, against certain current and former MIPS
officers and directors and MIPS as a nominal defendant.  The complaint in
the action alleges that the individual defendants breached their
fiduciary duties and violated California and federal securities laws as a result
of, among other things, purported backdating of stock option grants,
insider trading and the dissemination of false financial statements.
Plaintiff seeks to recover purportedly on behalf of MIPS, unspecified
monetary damages, corporate governance changes, equitable and injunctive relief,
and fees and costs.  The court granted MIPS' motion to dismiss the
consolidated complaint and granted plaintiff leave to file an amended
complaint.  Plaintiff has subsequently filed an complaint and MIPS has
filed another motion to dismiss. It is not known when or on what basis the
action will be resolved.
 
 From time
to time, we receive communications from third parties asserting patent or other
rights allegedly covering our products and technologies. Based upon our
evaluation, we may take no action or we may seek to obtain a license, redesign
an accused product or technology, initiate a formal proceeding with the
appropriate agency (e.g., the U.S. Patent and Trademark Office) and/or initiate
litigation. For additional information regarding intellectual property
litigation, see Part II, Item 1A. Risk factors – “We may be subject to claims of
infringement”.
  ITEM 1A. 
RISK
FACTORS
 
 Our
success is subject to numerous risks and uncertainties, including those
discussed below. These factors could hinder our growth, cause us to sustain
losses or have other adverse effects on us, all of which could cause our stock
price to decline.
  During the first quarter of fiscal
2008, we completed the acquisition of Chipidea, and there are numerous risks
associated with this acquisition.In August 2007,
we completed the acquisition of Chipidea, a Portuguese company that supplies
analog and mixed signal intellectual property for the digital consumer, wireless
and connectivity markets. The purchase price for this acquisition was $147
million in cash paid at closing, with contingent obligations to issue up to
610,687 shares of common stock (or to pay the cash value of such shares) based
on the performance of the Chipidea business and to pay an additional
€1.2 million in cash if Chipidea receives a certain grant from the
Portuguese government.
  This is a
substantially larger acquisition than any that we have previously completed and
involves technology and products that are largely new to us. Many of the risks
discussed below under “We may encounter difficulties with future acquisitions
that could harm our business” may be enhanced as a result of the Chipidea
acquisition. Among the many risks associated with the acquisition are the
following:
  ·
              the
      challenges associated with integrating and managing a large acquired
      business, which challenge will be enhanced by the geographical distance
      between our headquarters in California and the Chipidea headquarters in
      Portugal;
 ·
              our
      dependence on the MIPS management team to manage the Chipidea business,
      and integrate it with our existing business;·
              the
      possible adverse impact to us if we were to lose key Chipidea personnel,
      such as Jose Franca, founder and CEO, whose ongoing employment with us
      could be important to our ability to continue to advance the Chipidea
      technology and to effectively market and sell its
  products;
 ·
              diversion
      of our management team’s attention as we seek to capitalize on the
      opportunities presented by this acquisition may adversely affect our
      ability to operate our existing
business.
 
 We may not
achieve the advantages that we envisioned when we decided to complete this
acquisition. For example, supporting the licensing of analog and mixed signal IP
is relatively more labor intensive than that of our microprocessor IP business,
and we cannot be assured of our ability to achieve operating results from this
business that correspond to those that we can achieve in our existing business.
If we are not as successful as we anticipated with the Chipidea business, our
future operating results and financial condition would be adversely
affected.
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 Table of Contents
  We used all of our cash to complete
the acquisition of Chipidea.    We used all of our
available cash and short term investments to complete the acquisition of
Chipidea, and in connection with the acquisition incurred debt under the
Revolving Credit Agreement.  This use of cash dramatically reduces our
liquidity, and if we encounter difficulty in generating cash from the operation
of our business we may be required to curtail our operations or take other acts
that could adversely affect our ability to be successful over the longer term.
In addition, we have not previously incurred debt for borrowed money. Loans
under this facility are secured by virtually all of our assets, and the facility
contains affirmative and negative covenants that impose restrictions on the
operation of our business.  We amended certain terms of the Revolving
Credit Agreement in February 2008 including the payment schedule and a reduction
in the size of the line.  Payments in the amount of $1 million are
required on a monthly basis beginning in April 2008 and the remaining principal
balance is due in August 2008. We cannot be assured that we will be able to
repay this debt on or before its due date. We will be required to make
substantial interest payments for so long as this debt is outstanding,. We may
be required to take on longer term financing to replace this facility, or sell
equity securities in order to have cash to repay it and we cannot be assured of
our ability to obtain such financing or our ability to sell equity
securities.  If we can not replace the debt facility, we may be
required to curtail our operations or tak other acts that could adversely affect
our ability to be successful over the longer term.  Our incurrence of
long term debt could adversely affect our operating results and financial
condition and the sale of equity securities could be on terms that are dilutive
to our existing stockholders. Further, the covenants contained in the credit
facility, or in any future debt we incur to replace this facility, may prevent
us from taking advantage of opportunities that are otherwise available to
us.  We may not be able to obtain favorable credit terms related to
any debt that we may incur in the future.
  Our quarterly financial results are
subject to significant fluctuations that could adversely affect our stock
price.    Our quarterly financial results may vary
significantly due to a number of factors. In addition, our revenue components
are difficult to predict and may fluctuate significantly from period to period.
Because our expenses are largely independent of our revenue in any particular
period, it is difficult to accurately forecast our operating results. Our
operating expenses are based, in part, on anticipated future revenue and a high
percentage of our expenses are fixed in the short term. As a result, if our
revenue is below expectations in any quarter, the adverse effect may be
magnified by our inability to adjust spending in a timely manner to compensate
for the revenue shortfall. Therefore, we believe that quarter-to-quarter
comparisons of our revenue and operating results may not be a good indication of
our future performance. Our recent acquisition of Chipidea will increase the
challenge that we face in planning and predicting our future operating results.
It is possible that in some future periods our results of operations may be
below the expectations of securities analysts and investors. In that event, the
price of our common stock may fall.
  Factors
that could cause our revenue and operating results to vary from quarter to
quarter include:
  ·
              our
      ability to identify attractive licensing opportunities and then enter into
      new licensing agreements on terms that are acceptable to
    us;
 ·
              our
      ability to successfully conclude licensing agreements of any significant
      value in a given quarter;·
              the
      financial terms and delivery schedules of our contractual arrangements
      with our licensees, which may provide for significant up-front payments,
      payments based on the achievement of certain milestones or extended
      payment terms; ·
              the
      demand for products that incorporate our technology;·
              our
      ability to develop, introduce and market new intellectual
      property; ·
              the
      establishment or loss of licensing relationships with semiconductor
      companies or digital consumer, wireless, connectivity and business product
      manufacturers; ·
              the
      timing of new products and product enhancements by us and our
      competitors; ·
              changes
      in development schedules, research and development expenditure levels and
      product support by us and semiconductor companies and digital consumer,
      wireless, connectivity and business product manufacturers;
    and ·
              uncertain
      economic and market conditions.
 The success of our
business depends on maintaining and growing our contract
revenue.    Contract revenue consists of technology
license fees paid for access to our developed technology and engineering service
fees related to technology under development. Our ability to secure the licenses
from which our contract revenues are derived depends on our customers, including
semiconductor companies, digital consumer, wireless, connectivity and business
product manufacturers, adopting our technology and using it in the products they
sell. Our PBG contract revenue increased 28% in fiscal 2005, but declined 12% in
fiscal 2006, increased by 42% in fiscal 2007 and declined by 25% during the
first nine months of fiscal 2008 over the comparable period in fiscal 2007. We
cannot predict whether we can maintain our current contract revenue levels or if
contract revenue will grow. Our licensees are not obligated to license new or
future generations of our products, so past contract revenue may not be
indicative of the amount of such revenue in any future period. If we cannot
maintain or grow our contract revenue or if our customers do not adopt our
technology and obtain corresponding licenses, our results of operations will be
adversely affected.
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  Our ability to achieve design wins
may be limited unless we are able to develop enhancements and new generations of
our intellectual property.    Our future success will
depend, in part, on our ability to develop enhancements and new generations of
our processors, cores or other intellectual property that satisfy the
requirements of specific product applications and introduce these new
technologies to the marketplace in a timely manner. If our development efforts
are not successful or are significantly delayed, or if the characteristics of
our intellectual property cores and related designs are not compatible with the
requirements of specific product applications, our ability to achieve design
wins may be limited. Our failure to achieve a significant number of design wins
would adversely affect our business, results of operations and financial
condition.
  Technical
innovations of the type critical to our success are inherently complex and
involve several risks, including:
  ·
              our
      ability to anticipate and timely respond to changes in the requirements of
      semiconductor companies, and original equipment manufacturers, or OEMs, of
      digital consumer, wireless, connectivity and business
      products;
 ·
              our
      ability to anticipate and timely respond to changes in semiconductor
      manufacturing processes;·
              changing
      customer preferences in the digital consumer, wireless, connectivity and
      business products markets; ·
              the
      emergence of new standards in the semiconductor industry and for digital
      consumer, wireless, connectivity and business products;·
              the
      significant investment in a potential product that is often required
      before commercial viability is determined;
and ·
              the
      introduction by our competitors of products embodying new technologies or
      features.
 Our failure
to adequately address these risks could render our existing intellectual
property cores and related designs obsolete and adversely affect our business,
results of operations and financial condition. In addition, we cannot assure you
that we will have the financial and other resources necessary to develop
intellectual property cores and related designs in the future, or that any
enhancements or new generations of the technology that we develop will generate
revenue sufficient to cover or in excess of the costs of
development.
  We depend on royalties from the sale
of products incorporating our technology, and we have limited visibility as to
the timing and amount of such sales.    Our receipt
of royalties from our licenses depends on our customers incorporating our
technology into their products, their bringing these products to market, and the
success of these products. In the case of our semiconductor customers, the
amount of such sales is further dependent upon the sale of the products by their
customers into which our customers’ products are incorporated. Thus, our ability
to achieve design wins and enter into licensing agreements does not assure us of
future revenue. Any royalties that we are eligible to receive are based on the
sales of products incorporating the semiconductors or other products of our
licensees, and as a result we do not have direct access to information that will
help us anticipate the timing and amount of future royalties. Factors that
negatively affect our licensees and their customers could adversely affect our
business. The success of our direct and indirect customers is subject to a
number of factors, including:
  ·
              the
      competition these companies face and the market acceptance of their
      products;
 ·
              the
      engineering, marketing and management capabilities of these companies and
      technical challenges unrelated to our technology that they face in
      developing their products; and·
              their
      financial and other resources.
 Because we do
not control the business practices of our licensees and their customers, we have
little influence on the degree to which our licensees promote our technology and
do not set the prices at which products incorporating our technology are
sold.
  We rely
on our customers to correctly report to us the number or dollar value of
products incorporating our technology that they have sold, as these sales are
the basis for the royalty payments that they make to us. We have the right under
our licensing agreements to perform a royalty audit of the customer’s sales so
that we can verify the accuracy of their reporting, and if we determine that
there has been an over-reported or under-reported amount of royalty, we account
for the results when they are identified. By way of an example, we determined in
the second quarter of fiscal 2005, as a result of an audit, that one of our
customers had inadvertently reported a higher level of royalty than had actually
occurred, and we accrued for this event as an offset against revenue in the
quarter.
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  If we do not compete effectively in
the market for embedded intellectual property cores and related designs, our
business will be adversely affected.    Competition
in the market for embedded intellectual property and related designs is intense.
Our products compete with those of other designers and developers of
intellectual property cores, as well as those of semiconductor manufacturers
whose product lines include digital, analog and/or mixed signal designs for
embedded and non-embedded applications. In addition, we may face competition
from the producers of unauthorized clones of our processor and other technology
designs. The market for embedded processors in particular has recently faced
downward pricing pressures on products. We cannot assure you that we will be
able to compete successfully or that competitive pressure will not materially
and adversely affect our business, results of operations and financial
condition.
  In order
to be successful in marketing our products to semiconductor companies, we must
differentiate our intellectual property cores and related designs from those
available or under development by the internal design groups of these companies,
including some of our current and prospective licensees. Many of these internal
design groups have substantial engineering and design resources and are part of
larger organizations with substantial financial and marketing resources. These
internal design groups may develop products that compete with ours.
  Some of
our existing competitors, as well as a number of potential new competitors, have
longer operating histories, greater brand recognition, larger customer bases as
well as greater financial and marketing resources than we do. This may allow
them to respond more quickly than we can to new or emerging technologies and
changes in customer requirements. It may also allow them to devote greater
resources than we can to the development and promotion of their technologies and
products.
 
 We may incur restructuring charges in
the future, which could harm our results of operations.In
January 2008, we announced plans to reduce our workforce with the objective of
reducing our operating expenses.  These actions resulted in a
restructuring charge in the third quarter of fiscal 2008 of $1.3 million,
comprised of employee severance costs, facilities exit costs, and asset
write-offs.  These restructuring activities may not be sufficient to
appropriately align our operating expenses with our revenue
expectations.  If we have not sufficiently reduced operating expenses
or if revenues are below our expectations, we may be required to engage in
additional restructuring activities, which could result in additional
restructuring charges.  These restructuring charges could harm our
results of operations.
 
 Our operations in
foreign countries are subject to political and economic
risks.With the acquisition of Chipidea we have now
substantially expanded our operations outside the United States.  In
addition to the main Chipidea facilities in Portugal, we also have operations in
Belgium, China, France, Macau, Norway, Poland and the United Kingdom as well as
sales offices in China, Germany, Japan, Israel and Taiwan.  We expect
our international sales to grow, both in absolute terms and as a percentage of
sales.  Our operations in countries outside the U.S. subject us to
risks, including:
 
 ·
              changes
      in tax laws, trade protection measures and import or export licensing
      requirements;·
              potential
      difficulties in protecting our intellectual
  property;
 ·
              changes
      in foreign currency rates;·
              restrictions,
      or taxes, on transfers of funds between entities or facilities in
      different countries; and ·
              changes
      in a given country’s political or economic
  conditions.
 As a
result of one or more of these risks, our operating costs could increase
substantially, our flexibility in operating our business could be impaired, our
taxes could increase, and our sales could be adversely affected.  Any
of these items could have an adverse affect on our financial condition or
results of operations.
  We may encounter difficulties with
future acquisitions that could harm our
business.    As part of our business strategy, in the
future we may seek to acquire or invest in businesses or technologies that we
believe can complement or expand our business, enhance our technical
capabilities or that may otherwise offer growth opportunities. Any future
acquisitions may require debt or equity financing, or the issuance of shares in
the transaction, any of which could increase our leverage or be dilutive to our
existing stockholders. We may not be able to complete acquisitions or strategic
customer transactions on terms that are acceptable to us, or at all. We may
incur charges related to acquisitions or investments that are completed. For
instance, we recorded an acquired in-process research and development charge in
the first quarter of fiscal 2008 as a result of our acquisition of Chipidea. We
will also face challenges integrating acquired businesses and operations and
assimilating and managing the personnel of the acquired operations. Geographic
distances may further complicate the difficulties of this integration. The
integration of acquired businesses, an area in which we have limited experience,
may not be successful and could result in disruption to other parts of our
business. Acquisitions involve a number of other risks and challenges,
including:
  ·
              diversion
      of management’s attention;
 ·
              potential
      loss of key employees and customers of acquired
  companies;·
              exposure
      to unanticipated contingent liabilities of acquired companies;
      and ·
              use
      of substantial portions of our available cash to consummate the
      acquisition and/or operate the acquired
  business.
  Any of
these and other factors could harm our ability to realize the anticipated
benefits of an acquisition.
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  We depend on our key personnel to
succeed.    Our success depends to a significant
extent on the continued contributions of our key management, technical, sales
and marketing personnel, many of whom are highly skilled and difficult to
replace. This dependence is enhanced with our acquisition of Chipidea, as our
ability to successfully operate this business in the future will depend
significantly on our ability to retain key Chipidea management and employees. We
cannot assure that we will retain our key officers and employees. Competition
for qualified personnel, particularly those with significant experience in the
semiconductor, analog, mixed signal and processor design industries, remains
intense. The loss of the services of any of our key personnel or our inability
to attract and retain qualified personnel in the future could make it difficult
to meet key objectives, such as timely and effective project milestones and
product introductions which could adversely affect our business, results of
operations and financial condition.
  Changes in effective tax rates or
adverse outcomes from examination of our income tax returns could adversely
affect our results.    Our future effective tax rates
could be adversely affected by earnings being lower than anticipated in
countries with low statutory tax rates, by changes in the valuation of our
deferred tax assets and liabilities, or by changes in tax laws or regulations or
the interpretation of tax laws or regulations. We operate in countries other
than the United States and occasionally face inquiries and examinations
regarding tax matters in these countries. There can be no assurance that the
outcomes from examinations will not have an adverse effect on our operating
results and financial condition.
  We may be subject to litigation and
other legal claims that could adversely affect our financial
results.    From time to time, we are subject to
litigation and other legal claims incidental to our business. In addition, it is
standard practice for us to include some form of indemnification of our
licensees in our core and architecture license agreements, and from time to time
we are engaged in claims by our licensees with respect to these obligations. It
is possible that we could suffer unfavorable outcomes from litigation or other
legal claims, including those made with respect to indemnification obligations,
that are currently pending or that may arise in the future. Any such unfavorable
outcome could materially adversely affect our financial condition or results of
operations.
  We may be subject to claims of
infringement.     Significant litigation regarding
intellectual property rights exists in our industry. As we grow our business and
expand into new markets that other companies are developing in, the risk that
our technology may infringe upon the intellectual property rights of others
increases. We cannot be certain that third parties will not make a claim of
infringement against us, our licensees, or our licensees’ customers in
connection with use of our technology. For example, Technology Properties
Limited, Inc. filed a lawsuit in November 2005 against some of our licensees
based upon the alleged infringement of certain microprocessor-related patents.
Any claims, even those without merit, could be time consuming to defend, result
in costly litigation and/or require us to enter into royalty or licensing
agreements. These royalty or licensing agreements, if required, may not be
available on acceptable terms to us or at all. A successful claim of
infringement against us or one of our licensees in connection with its use of
our technology could adversely affect our business.
  From time
to time, we receive communications from third parties asserting patent or other
rights allegedly covering our products and technologies. Based upon our
evaluation, we may take no action or we may seek to obtain a license, redesign
an accused product or technology, initiate a formal proceeding with the
appropriate agency (e.g., the U.S. Patent and Trademark Office) and/or initiate
litigation. There can be no assurance in any given case that a license will be
available on terms we consider reasonable or that litigation can be avoided if
we desire to do so. If litigation does ensue, the adverse third party will
likely seek damages (potentially including treble damages) and may seek an
injunction against the sale of our products that incorporate allegedly infringed
intellectual property or against the operation of our business as presently
conducted, which could result in our having to stop the sale of some of our
products or to increase the costs of selling some of our products. Such lawsuits
could also damage our reputation. The award of damages, including material
royalty payments, or the entry of an injunction against the sale of some or all
of our products, could have a material adverse affect on us. Even if we were to
initiate litigation, such action could be extremely expensive and time-consuming
and could have a material adverse effect on us. We cannot assure you that
litigation related to our intellectual property rights or the intellectual
property rights of others can always be avoided or successfully
concluded.
  Even if we
were to prevail, any litigation could be costly and time-consuming and would
divert the attention of our management and key personnel from our business
operations, which could have a material adverse effect on us.
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  Our intellectual property may be
misappropriated or expire, and we may be unable to obtain or enforce
intellectual property rights.   We rely on a combination
of protections provided by contracts, including confidentiality and
nondisclosure agreements, copyrights, patents, trademarks, and common-law
rights, such as trade secrets, to protect our intellectual
property.  We cannot assure you that any of the patents or other
intellectual property rights that we own or use will not be challenged,
invalidated or circumvented by others or be of sufficient scope or strength to
provide us with any meaningful protection or commercial
advantage.   Policing the unauthorized use of our intellectual
property is difficult, and we cannot be certain that the steps we have taken
will prevent the misappropriation or unauthorized use of our technologies,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. As part of our business strategy, we
license our technology in multiple geographies including in countries whose laws
do not provide as much protection for our intellectual property as the laws of
the United States and where we may not be able to enforce our rights. In
addition, intellectual property rights which we have obtained in particular
geographies may and do expire from time to time. As a result, we cannot be
certain that we will be able to prevent other parties from designing and
marketing unauthorized MIPS compatible products, that others will not
independently develop or otherwise acquire the same or substantially equivalent
technologies as ours, or that others will not use information contained in our
expired patents to successfully compete against us. Moreover, cross licensing
arrangements, in which we license certain of our patents but do not generally
transfer know-how or other proprietary information, may facilitate the ability
of cross-licensees, either alone or in conjunction with others, to develop
competitive products and designs. We also cannot assure you that any of our
patent applications to protect our intellectual property will be approved, and
patents that have issued do expire over time. Recent judicial decisions and
proposed legislation in the United States may increase the cost of obtaining
patents, limit the ability to adequately protect our proprietary technology, and
have a negative impact on the enforceability of our patents. In addition,
effective trade secret protection may be unavailable or limited in certain
countries. If we are unable to protect, maintain or enforce our intellectual
property rights, our technology may be used without the payment of license fees
and royalties, which could weaken our competitive position, reduce our operating
results and increase the likelihood of costly litigation.
  We have recorded long-lived assets,
and our results of operations would be adversely affected if their value becomes
impaired.    We have recorded substantial amounts of
purchased intangible assets and goodwill as a result of the Chipidea
acquisition. If we complete additional acquisitions in the future, our purchased
intangible assets amortization charge could further increase, and we may be
required to record additional amounts of goodwill. We have made investments in
certain private companies which could become impaired if the operating results
of those companies change adversely.  We evaluate our long-lived
assets, including purchased assets and investments in private companies, for
impairment on an annual basis or whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable from its estimated
future cash flows.
  In the
future, if we determine that our long-lived assets are impaired, we will have to
recognize additional charges for the impairment. We cannot be sure that we will
not be required to record additional long-lived asset impairment charges in the
future. Goodwill is evaluated annually for impairment in the fourth quarter of
each fiscal year or more frequently if events and circumstances warrant, and our
evaluation depends to a large degree on estimates and assumptions made by our
management. Through fiscal 2007, our business was organized as one reporting
unit. Accordingly, the assessment of impairment of goodwill was based on a
comparison of the net book value to the market value of MIPS. However, beginning
in fiscal 2008, we will have multiple reporting units. Our assessment of any
impairment of goodwill will be based on a comparison of the fair value of each
of our reporting units to the carrying value of that reporting unit. Our
determination of fair value relies on management’s assumptions of our future
revenues, operating costs, and other relevant factors. If management’s estimates
of future operating results change, or if there are changes to other assumptions
such as the discount rate applied to future cash flows, the estimate of the fair
value of our reporting units could change significantly, which could result in a
goodwill impairment charge.
  The matters relating to the
investigation by the Special Committee of the Board of Directors and the
restatement of our consolidated financial statements may result in additional
litigation and government enforcement actions.On August 30, 2006,
we announced that our board of directors had formed a Special Committee
consisting of independent directors and the Special Committee had hired
independent counsel to conduct a full investigation of our historical option
grant practices from the time of our initial public offering in July 1998
through June 2006. As a result of the independent investigation, as well as our
internal review, our management has concluded, and the Audit and Corporate
Governance Committee of the Board of Directors agrees, that incorrect
measurement dates were used for financial accounting purposes for certain stock
option grants made in prior periods. While our management believes that we have
made appropriate judgments in determining the correct measurement dates for the
stock option grants, the SEC may disagree with the manner in which we have
accounted for and reported, or not reported, the financial impact of past
incorrect measurement dates. Accordingly, there is a risk that we may have to
further restate our prior financial statements, amend prior filings with the
SEC, or otherwise take other actions not currently contemplated.
  As
described in Part II, Item 1, “Legal Proceedings”, derivative complaints
have been filed in federal courts against current and former officers and
directors pertaining to allegations relating to stock option grants. Additional
litigation based on similar allegations may also be filed. We have provided the
results of our independent investigation to the SEC and we have responded to
informal requests for documents and additional information. On October 29, 2007,
we received notification from the SEC that its investigation has been terminated
and no enforcement action has been recommended to the commission. No assurance
can be given regarding the outcomes from litigation, regulatory proceedings or
government enforcement actions relating to our past stock option practices. The
resolution of these matters will be time consuming, expensive, and will distract
our management from the conduct of our business. Furthermore, if we are subject
to adverse findings in litigation, regulatory proceedings or government
enforcement actions, we could be required to pay damages or penalties or have
other remedies imposed, which could negatively impact our results of operations
and financial condition.
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  ITEM 6. 
EXHIBITS
  (a) 
Exhibits
 
 10.1
              Offer
      Letter to John Derrick (incorporated herein by reference to Exhibit 99.02
      to the Company’s Form 8-K filed on January 4,
  2008).
 
 10.2
              Amendment
      No. 1 to Credit Agreement (incorporated herein by reference to Exhibit
      99.01 to the Company’s Form 8-K filed on February 22,
    2008).
  10.3
              Offer
      Letter to Maury Austin (incorporated herein by reference to Exhibit 99.02
      to the Company’s Form 8-K filed on March 19,
  2008).
  10.4
              Offer
      Letter to Robin L. Washington (incorporated herein by reference to Exhibit
      99.01 to the Company’s Form 8-K filed on April 25,
  2008).
  31.1
              Certification of Chief Executive Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of
    2002.
  31.2
              Certification of Chief Financial Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of
    2002.
 
 32.1
              Certification of Chief Executive Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of
      2002.*
  32.2
              Certification of Chief Financial Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of
      2002.*
  
 *As
contemplated by SEC Release No. 33-8212, these exhibits are furnished with
this Quarterly Report on Form 10-Q and are not deemed filed with the Securities
and Exchange commission and are not incorporated by reference in any filing of
MIPS Technologies, Inc. under the Securities Act of 1933 or the Securities Act
of 1934, whether made before or after the date hereof and irrespective of any
general incorporation language in any such filings.
 
  PART II,
ITEMS 2, 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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SIGNATURES




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




MIPS Technologies, Inc., a
      Delaware corporationMay 9,
      2008
            By:
            /s/ MAURY
      AUSTINMaury AustinVice President and Chief
      Financial Officer(Principal Financial
      Accounting Officer)






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