---

---

UNITED STATES SECURITIES AND EXCHANGE
 COMMISSIONWashington, D.C. 20549

FORM 10-Q

(Mark One)

|[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|-----------------------------------------------------------------------------------------------

FOR THE QUARTERLY PERIOD ENDED September 30, 2005

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. EmployerIdentification 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 an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes [X ] No [ ]

Indicate
by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]

As
of October 31, 2005, the number of outstanding shares of the registrants common
stock, $0.001 par value, was 42,805,164.

---

---

---

|                                                                                  | 
|--------------------------------------------------------------------------------- | 
|PART I - FINANCIAL INFORMATION                                                    | 
|                                                                                  | 
|Item 1.  Financial Statements (Unaudited):                                        | 
|Condensed Consolidated Balance Sheets                                             | 
|Condensed Consolidated Statements of Operations                                   | 
|Condensed Consolidated Statements of Cash Flows                                   | 
|Notes to Condensed Consolidated Financial Statements                              | 
|                                                                                  | 
|Item 2.  Management's Discussion of Financial Condition and Results of Operations | 
|                                                                                  | 
|                                                                                  | 
|Item 3.  Quantitative and Qualitative Disclosures About Market Risk               | 
|                                                                                  | 
|Item 4.  Controls and Procedures                                                  | 
|                                                                                  | 
|PART II - OTHER INFORMATION                                                      
|                                                                                  | 
|Item 1.  Legal Proceedings                                                        | 
|Item 6.  Exhibits                                                                 | 
|                                                                                  | 
|Signatures                                                                        | 

2

---

# PART I - FINANCIAL
INFORMATION

ITEM 1.    FINANCIAL
STATEMENTS

MIPS TECHNOLOGIES, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(In thousands)

|                                          | September 30,
2005
(unaudited) | June 30,
2005
|----------------------------------------- | ------------------------------ | -------------
|Current assets:                           |                                |              
|Cash and cash equivalents                 |                                |              
|Short-term investments                    |                                |              
|Accounts receivable, net                  |                                |              
|Prepaid expenses and other current assets |                                |              
|                                          |                                |              
|Total current assets                      |                                |              
|Equipment, furniture and property, net    |                                |              
|Intangible assets, net                    |                                |              
|Other assets                              |                                |              
|                                          |                                |              
|                                          |                                |              
|                                          |                                |              
|LIABILITIES AND STOCKHOLDERS' EQUITY      |                                |              
|Current liabilities:                      |                                |              
|Accounts payable                          |                                |              
|Accrued liabilities                       |                                |              
|Deferred revenue                          |                                |              
|                                          |                                |              
|Total current liabilities                 |                                |              
|Long-term liabilities                     |                                |              
|                                          |                                |              
|                                          |                                |              
|Stockholders' equity:                     |                                |              
|Common stock                              |                                |              
|Preferred stock                           |                                |              
|Additional paid-in capital                |                                |              
|Accumulated other comprehensive income    |                                |              
|Deferred compensation                     |                                |              
|Accumulated deficit                       |                                |              
|                                          |                                |              
|Total stockholders' equity                |                                |              
|                                          |                                |              
|                                          |                                |              
|                                          |                                |              

See accompanying notes.

3

---

MIPS TECHNOLOGIES, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)(In thousands, except per share data)

|                                                             | Three Months Ended
September 30,
|------------------------------------------------------------ | --------------------------------
|
|Revenue:                                                     |                                 
|Royalties                                                    |                                 
|Contract revenue                                             |                                 
|                                                             |                                 
|Total revenue                                                |                                 
|Costs and expenses:                                          |                                 
|Research and development                                     |                                 
|Sales and marketing                                          |                                 
|General and administrative                                   |                                 
|Acquired in-process research and development                 |                                 
|Restructuring                                                |                                 
|                                                             |                                 
|Total costs and expenses                                     |                                 
|                                                             |                                 
|Operating income (loss)                                      |                                 
|Other income, net                                            |                                 
|                                                             |                                 
|Income (loss) before income taxes                            |                                 
|Provision (benefit) for income taxes                         |                                 
|                                                             |                                 
|Net income (loss)                                            |                                 
|                                                             |                                 
|Net income (loss) per basic share                            |                                 
|                                                             |                                 
|Net income (loss) per diluted share                          |                                 
|                                                             |                                 
|Shares used in computing net income (loss) per basic share   |                                 
|Shares used in computing net income (loss) per diluted share |                                 

See accompanying notes.

4

---

MIPS TECHNOLOGIES, INC.CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (unaudited) (In thousands)

|                                                                                                   | Three Months Ended
September 30,
|-------------------------------------------------------------------------------------------------- | --------------------------------
|
|Operating activities:                                                                              |                                 
|Net income (loss)                                                                                  |                                 
|Adjustments to reconcile net income (loss) to net cash used in (provided by) operating activities: |                                 
|Depreciation                                                                                       |                                 
|Stock-based compensation                                                                           |                                 
|Acquired in-process research and development                                                       |                                 
|Amortization of intangibles and deferred compensation                                              |                                 
|Other non-cash charges                                                                             |                                 
|Changes in operating assets and liabilities:                                                       |                                 
|Accounts receivable                                                                                |                                 
|Prepaid expenses                                                                                   |                                 
|Other assets                                                                                       |                                 
|Accounts payable                                                                                   |                                 
|Accrued compensation                                                                               |                                 
|Other current accrued liabilities                                                                  |                                 
|Income tax payable                                                                                 |                                 
|Deferred revenue                                                                                   |                                 
|Long-term liabilities                                                                              |                                 
|                                                                                                   |                                 
|Net cash provided by (used in) operating activities                                                |                                 
|Investing activities:                                                                              |                                 
|Purchases of short-term investments                                                                |                                 
|Maturities of short-term investments                                                               |                                 
|Capital expenditures                                                                               |                                 
|Acquisition of First Silicon Solutions, Inc., net of cash acquired                                 |                                 
|Restricted cash                                                                                    |                                 
|                                                                                                   |                                 
|Net cash used in investing activities                                                              |                                 
|Financing activities:                                                                              |                                 
|Net proceeds from issuance of common stock                                                         |                                 
|Repurchase of stock                                                                                |                                 
|                                                                                                   |                                 
|Net cash provided by financing activities                                                          |                                 
|Effect of exchange rate on cash                                                                    |                                 
|                                                                                                   |                                 
|Net decrease in cash and cash equivalents                                                          |                                 
|Cash and cash equivalents, beginning of period                                                     |                                 
|                                                                                                   |                                 
|Cash and cash equivalents, end of period                                                           |                                 
|                                                                                                   |                                 
|Supplemental disclosures of cash transaction:                                                      |                                 
|Income taxes paid                                                                                  |                                 

See accompanying notes.

5

---

MIPS TECHNOLOGIES, INC.

NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

Note 1.     Description of
Business and Basis of Presentation

We
are a leading provider of industry-standard processor architectures and cores for digital
consumer and business applications. We design and license high performance 32- and 64-bit
architectures and cores, which offer smaller dimensions and greater energy efficiency in
embedded processors. Our technology is utilized in many high-growth embedded markets
including digital set-top boxes, digital televisions, DVD recordable devices, broadband
access devices, digital cameras, laser printers and network routers.

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

The
condensed consolidated financial statements have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission (SEC)
applicable to interim financial information. Certain information and footnote disclosures
included in financial statements prepared in accordance with generally accepted accounting
principles have been omitted in these interim statements as allowed by such SEC rules and
regulations. The balance sheet at June 30, 2005 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, 2005, included
in our 2005 Annual Report on Form 10-K.

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.

Stock-Based
Compensation. Prior to July 1, 2005, we accounted for our stock-based employee
compensation arrangements under the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), as
allowed by SFAS No. 123, Accounting for Stock-based Compensation(SFAS No. 123), as
amended by SFAS No. 148, Accounting for Stock-Based Compensation  Transition
and Disclosure (SFAS No. 148). As a result, no expense was recognized for options to
purchase our common stock that were granted with an exercise price equal to fair market
value at the date of grant and no expense was recognized in connection with purchases
under our employee stock purchase plan for the years ended June 30, 2005 or 2004, nor in
the three-month period ended September 30, 2004. In December 2004, the Financial
Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004) Share-Based Payment
(SFAS No. 123R), which replaces SFAS No. 123 and supersedes APB No. 25. SFAS No. 123R
requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values beginning
with the first interim or annual period after June 15, 2005. Subsequent to the effective
date, the pro forma disclosures previously permitted under SFAS No. 123 are no longer an
alternative to financial statement recognition. Effective July 1, 2005, we have adopted
SFAS No. 123R using the modified prospective method. Under this method, compensation cost
recognized during the three-month period ended September 30, 2005, 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 No. 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 No. 123R amortized on a straight-line basis over the options' vesting period.
Pro forma results for prior periods have not been
restated. As a result of adopting SFAS No. 123R on July 1, 2005, our net income before
taxes and net income for the three-month period ended September 30, 2005, is $4.9 million
and $3.9 million lower than had we continued to account for stock-based employee
compensation under APB No. 25. Basic and diluted net income per share for the three-month
period ended September 30, 2005 would have been $0.01 had we not adopted SFAS No. 123R,
compared to reported basic and diluted net loss per share of $0.08. The adoption of SFAS
No. 123R had no impact on cash flows from operations or financing.

The
following table illustrates the effect on net income (loss) and net income (loss) per
share had we applied the fair value recognition provisions of SFAS No. 123 to account for
our employee stock option and employee stock purchase plans for the three-month period
ended September 30, 2004 because stock-based employee compensation was not accounted for
using the fair value recognition method during that period. For purposes of pro forma
disclosure, the estimated fair value of the stock awards, as prescribed by SFAS No. 123,
is amortized to expense over the vesting period of such awards (in thousands, except per
share data):

|                                                                                                                         | Three Months Ended
September 30,
2004 (1)
|------------------------------------------------------------------------------------------------------------------------ | -----------------------------------------
|Net income , as reported                                                                                                 |                                          
|Add:  Stock-based  employee  compensation  expense  included  in  reported  net income, net of related tax effects       |                                          
|Deduct: Total stock-based  employee  compensation expense determined under fair value method, net of tax related effects |                                          
|                                                                                                                         |                                          
|Proforma net loss                                                                                                        |                                          
|                                                                                                                         |                                          
|Basic net income (loss) per share:                                                                                       |                                          
|As reported                                                                                                              |                                          
|                                                                                                                         |                                          
|Pro forma                                                                                                                |                                          
|                                                                                                                         |                                          
|Diluted net income (loss) per share:                                                                                     |                                          
|As reported                                                                                                              |                                          
|                                                                                                                         |                                          
|Pro forma                                                                                                                |                                          
|                                                                                                                         |                                          

| | (1) | During the preparation of footnotes to
the condensed consolidated financial statements for our quarterly filings during fiscal year 2006, we
determined that the calculation of our net loss  pro forma reported under SFAS No. 123 for fiscal year
2005, as reported in that year, did not appropriately reflect the effect of SFAS No. 123 for certain options granted prior to July 1, 2005.  Accordingly, the amount of net loss  pro forma reported under
SFAS No. 123 for the first quarter of fiscal 2005 presented in the table above has been revised, resulting in
an increase in the previously reported amount of pro forma net loss of $446,000 or $0.01 per basic and
diluted share.  This revision had no effect on our previously reported condensed consolidated results of
operations or financial condition.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
historical pro forma impact of applying the fair value method prescribed by SFAS No. 123
is not representative of the impact that may be expected in the future due to changes
resulting from additional grants in future years and changes in assumptions such as
volatility, interest rates and expected life used to estimate fair value of the grants in
future years.

Note
that the above pro forma disclosure was not presented for the three-month period ended
September 30, 2005 because stock-based employee compensation has been accounted for using
the fair value recognition method under SFAS No. 123R for this period.

The
following table shows total stock-based employee compensation expense (see Note 9 for
types of stock-based employee arrangements) included in the condensed consolidated
statement of operations for the three-month period ended September 30, 2005 (in
thousands):

|                                       | Three Months Ended
September 30, 2005
|-------------------------------------- | -------------------------------------
|Costs and expenses:                    |                                      
|Research and development               |                                      
|Sales and marketing                    |                                      
|General and administrative             |                                      
|                                       |                                      
|Total stock-based compensation expense |                                      
|                                       |                                      

There
was no capitalized stock-based employee compensation cost as of September 30, 2005.
There were no recognized tax benefits during the quarter ended September 30, 2005.

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 stock-based awards under APB No. 25 was $47,000 for the
three-month period ended September 30, 2005 and $186,000 for the three-month period ended
September 30, 2004.

Note 2.   Computation
of Earnings Per Share

Earnings
per Share. We follow the provisions of SFAS No. 128, Earnings per Share (SFAS No. 128).
SFAS No. 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
September 30,
|---------------------------------------------------------------------------------------------------------- | --------------------------------
|
|Numerator:                                                                                                 |                                 
|Net income (loss)                                                                                          |                                 
|                                                                                                           |                                 
|Denominator:                                                                                               |                                 
|Weighted-average shares of common stock outstanding                                                        |                                 
|Less:  Weighted-average shares subject to repurchase                                                       |                                 
|                                                                                                           |                                 
|Shares used in computing net income (loss) per basic share                                                 |                                 
|                                                                                                           |                                 
|Effect of dilutive  securities-employee stock options and shares subject to repurchase                     |                                 
|Shares used in computing net income (loss) per diluted share                                               |                                 
|                                                                                                           |                                 
|Net income (loss) per basic share                                                                          |                                 
|Net income (loss) per diluted share                                                                        |                                 
|Potentially  dilutive securities excluded from net income per diluted share because they are anti-dilutive |                                 

Note 3.   Comprehensive
Income (Loss)

Total
comprehensive income (loss) includes net income (loss) and other comprehensive income,
which for us primarily comprises unrealized gains and losses from foreign currency
adjustments. Total comprehensive loss for the first three months of fiscal 2005 was $3.3
million and total comprehensive income for the comparable period in the prior year was
$3.1 million.

Note 4.   Investment and
Acquisition

On
September 2, 2005, we acquired First Silicon Solutions, Inc. (FS2), a design
services and development tools company based in Lake Oswego, Oregon. FS2's products
and services will provide value to our customer base by improving de-bugging capability
and accelerating time to market. We acquired all of the outstanding stock for an initial
purchase consideration of $4.5 million, including approximately $140,000 of
acquisition-related costs. The purchase consideration was paid in cash. We did not assume any of the options of FS2.
An escrow account holds 15% of the initial cash consideration to cover claims we may have under the merger
agreement for a minimum of 18 months. We may become obligated to pay an additional amount
of up to $4.0 million in contingent payments over a three year period following the
acquisition date. The contingent payments are based upon annual revenue and project
completion milestones, and any such payments will be additional purchase consideration and
will be recorded to goodwill.

The
preliminary purchase price was allocated as follows:

|                                             | 
|-------------------------------------------- | 
|Intangible assets acquired                   | 
|Acquired in-process research and development | 
|Net tangible assets                          | 
|Goodwill                                     | 
|                                             | 
|Total assets acquired                        | 
|                                             | 

The value
of the intangible assets was determined by estimating the present value of cash flows
from those assets based on the assumptions of our management, industry assumptions and
market data. The estimated useful life of the developed technology of five years was
determined based on our estimates of the product life cycles in the current and expected
market place. The estimated useful life of the customer relationships of six years was
determined based on our experience in the industry and with this customer pool. The useful
life of the tradename of three years was determined based on industry experience. These
assets are being amortized on a straight line basis over their estimated useful lives.

A
charge of $570,000 for acquired in-process research and development expense was recorded
upon completion of the acquisition of the 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. 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.

The
operating results of FS2 beginning on the acquisition date of September 2, 2005 are
included in these financial statements.

Note 5.   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
September 30, 2005 and June 30, 2005 (in thousands):

|                              | September 30, 2005 | June 30, 2005
|----------------------------- | ------------------ | -------------
|
|Developed and core technology |                    |              
|Customer relationships        |                    |              
|Tradename                     |                    |              
|                              |                    |              
|Purchased intangible assets   |                    |              
|                              |                    |              

In
the first quarter of fiscal 2006, the increase of $1.8 million in developed and core technology,
$1.3 million in customer relationships, and $110,000 in tradename assets related to the
acquisition of First Silicon Solutions, Inc. as discussed in Note 4.

The
estimated future amortization expense of purchased intangible assets as of September 30,
2005 is approximately $864,000, $1,164,000, $1,164,000, $919,000 and $690,000 for the
remaining nine months of fiscal 2006 and for fiscal years 2007, 2008, 2009 and 2010
respectively, and approximately $493,000 for years following fiscal 2010. Amortization
expense for purchased intangible assets was $198,000 in the first quarter of fiscal 2006
and $140,000 in the first quarter of fiscal 2005.

Goodwill,
as of September 30, 2005 and 2004 was (in thousands):

|         | September 30, 2005 | June 30, 2005
|-------- | ------------------ | -------------
|Goodwill |                    |              

The
increase in the carrying amount of goodwill of $252,000 was due to the purchase of First
Silicon Solutions, Inc., in the first quarter of fiscal 2006 as discussed in Note 4.

Note 6.   Restructuring
Charge

The
restructuring charge in the first quarter of fiscal 2005 of $277,000 relates to exiting a
facility lease

Note 7.   Interest Income

Interest
income reported under Other income, net was $696,000 for the three-month period ended
September 30, 2005 and $289,000 for the three-month period ended September 30, 2004.

Note 8.   Contingencies

On
April 30, 2003, our Swiss subsidiary, MIPS Technologies International AG, or MIPS AG,
through which we conducted our operations in Denmark, terminated the employment of 55
employees in connection with the closure of our Denmark design center. Of these, 45
employees filed claims against MIPS AG in the County Court of Ballerup, Denmark
(subsequently transferred to the Maritime and Commercial Court of Copenhagen, Denmark).
Subsequently, 13 of these employees agreed to withdraw their claims. On the termination
date, the remaining 32 employees of MIPS AG held options to purchase an aggregate of
724,830 shares of our common stock, of which options to purchase 413,552 shares were
vested and options to purchase 311,278 shares were unvested. The exercise price of these
options ranged from $2.94 to $25.50 per share. Under our stock option plans, unvested
options expire upon termination of employment and vested options expire three months after
the termination of employment.

In
September 2005, we reached a settlement with each of the 32 former Danish employees and
the union that represented them. Pursuant to the settlement, each of the 32 former
employees will retain a substantial portion of his or her options and relinquish claims to
the balance of the options and any other claims regarding the options. In the first
quarter of fiscal 2006, approximately $3.3 million was expensed which represents the
estimated fair value of options reinstated pursuant to the settlement. As a result of the
settlement, the Danish lawsuit was withdrawn in October 2005 and MIPS Technologies, Inc.
withdrew the lawsuit filed on April 11, 2005 in the U.S. federal court (Northern District
of California) against the terminated employees who had pending Danish claims against MIPS
AG. As a result, MIPS Technologies, Inc. and MIPS AG no longer have any litigation pending
with respect to this matter.

From
time to time, we receive communications from third parties asserting patent or other
rights covering our products and technologies. Based upon our evaluation, we may take no
action or we may seek to obtain a license. There can be no assurance in any given case
that a license will be available on terms we consider reasonable or that litigation will
not ensue.

Note 9.   Stock-Based
Compensation

1998
Long-Term Incentive Plan. The 1998 Long-Term Incentive Plan (the 1998 Plan)
was adopted by our board of directors and approved by our stockholder in May 1998 and was
amended by our board of directors in August 1998 and May 1999 with the approval of our
stockholders in October 1999 and was amended by our board of directors in January 2003.
The Compensation and Nominating Committee of our board of directors administers the 1998
Plan. The 1998 Plan authorizes the issuance of various forms of stock-based awards
including incentive and non-statutory stock options, stock appreciation rights, stock
awards and performance unit awards to officers and other key employees, consultants and
members of the board of directors. Stock options are granted at an exercise price of not
less than the fair value on the date of grant; the board of directors determines the
prices of other stock awards. In July 2005, the board of directors amended the award
documents for the stock options granted under the 1998 Plan. Options awarded prior to July
2005 expire ten years from the date of grant unless expiration occurs earlier in
connection with termination of employment. Initial stock options grants awarded prior to
July 2005 generally vest over a 50-month period, with 24% of the total shares vesting on
the first anniversary of the date of grant and 2% of the total shares vesting each month
thereafter over a 38-month period. Annual stock option grants awarded prior to fiscal 2002
vest over a 48-month period, with approximately 8.33% vesting each month over a 12-month
period beginning on the third anniversary of the date of grant. Annual grants awarded
during and after fiscal year 2002, but prior to July 2005 vest over a 50-month period from
the date of grant with 2% of the total shares vesting each month. In July 2005, the term
and vesting schedule for both the initial and annual stock option grants were adjusted,
effective immediately. Beginning in July 2005, options expire seven years from the date of
grant unless expiration occurs earlier in connection with termination of employment. Under
the new vesting schedule, initial stock option grants vest over a 36-month period with
one-third of the total shares vesting on the first anniversary of the date of grant and
approximately 2.78% of the total shares vesting each month thereafter over the remaining
24-month period. Annual stock option grants vest over a 36-month period from the date of
grant with approximately 2.78% of the total shares vesting each month. Vested options
granted under the 1998 Plan generally may be exercised for three months after termination
of the optionees service to us, except for options granted to executives or in the
case of death or disability, in which case the vested options generally may be exercised
up to 12 months following the date of death or termination of service. The number of
shares subject to any award, the exercise price and the number of shares issuable under
this plan are subject to adjustments in the event of a change relating to our capital
structure. The number of shares that may be issued under our 1998 Plan is 8 million shares
plus an automatic annual increase whereby the number of shares available for issuance
increases on July 1 of each year in an amount equal to the lesser of: (a) 4% of the total
number of shares of our common stock outstanding as of the immediately preceding June 30;
(b) 2,000,000 shares; or (c) an amount determined by our board of directors. On July 1,
2005 and 2004, the number of shares available for issuance increased by approximately 1.7
million and 1.6 million shares respectively, for a total of approximately 17.6 million
shares of common stock reserved under the 1998 Plan. At September 30, 2005, 2,981,207
shares were available for future awards under the 1998 Plan.

Directors
Stock Option Plan. The Directors Stock Option Plan (the Director Plan)
was adopted by our board of directors and our stockholder in July 1998, and was amended by
our board of directors in May 1999 and in January 2002. The Compensation and Nominating
Committee of our board of directors administers the Director Plan. Upon a non-employee
directors election or appointment to the Board, he or she will automatically receive
a non-statutory stock option to purchase 40,000 shares of common stock. Each non-employee
director who has been a director for at least six months will automatically receive a
non-statutory stock option to purchase 10,000 shares of common stock each year on the date
of the annual stockholder meeting. All stock options are granted at an exercise price
equal to the fair market value of our common stock on the date of grant. Options expire
ten years from the date of grant. Prior to January 2002, initial stock option grants
vested over a 50-month period with 24% of the total shares vesting on the first
anniversary of the grant date and 2% of the total shares vesting each month thereafter
over a 38-month period; annual stock option grants vested over a 50-month period, with 2%
of the total shares each month. The vesting schedule for both the initial and annual stock
option grants were adjusted, effective immediately in January 2002, such that, initial
stock option grants vest over a 36-month period with approximately 2.78% of the total
shares vesting each month; annual grants are fully vested on the date of grant. The change
to the vesting schedule of the initial grant was designed to align the vesting period with
the three-year period for which a director holds office. The change to the vesting
schedule of the annual grant was designed to increase the independence of the board of
directors by not making compensation contingent upon continued service. In February 2002,
the board of directors adjusted the vesting schedule of all outstanding options under the
Director Plan to be consistent with these new vesting schedules. Vested options granted
under the Director Plan generally may be exercised for three months after termination of
the directors service to us, except in the case of death or disability, in which
case the options generally may be exercised up to six months following the date of death
or termination of service. The number of shares subject to any award, the exercise price
and the number of shares issuable under this plan are subject to adjustments in the event
of a change relating to our capital structure. The number of shares that may be issued
under our Director Plan is 600,000 shares plus an automatic annual increase whereby the
number of shares available for issuance increases on July 1 of each year in an amount
equal to the lesser of: (a) 100,000 shares; (b) the number of shares subject to option
grants in the prior year ending June 30; or (c) an amount determined by our board of
directors. On July 1, 2005 and 2004, the number of shares available for issuance increased
by 90,000 and 50,000 shares respectively, for a total of 960,000 shares of common stock
reserved under the Director Plan. As of September 30, 2005, 470,000 shares were available
for future awards under the Director Plan.

Employee
Stock Purchase Plan. The Employee Stock Purchase Plan (the Purchase Plan) was
adopted by our board of directors and approved by our sole stockholder in May 1998, and
was amended by our board of directors in August 1998 and May 1999, with the approval of
our stockholders in October 1999, as amended in January 2000 and September 2005 by our
board of directors. The Compensation and Nominating Committee of our board of directors
administers the Purchase Plan. The purpose of the Purchase Plan is to provide our
employees who participate in the Purchase Plan with an opportunity to purchase our common
stock through payroll deductions. Under this Purchase Plan eligible employees may purchase
stock at 85% of the lower of the fair market value of the common stock (a) on the date of
commencement of the offering period or (b) the applicable exercise date within such
offering period. A 24-month offering period commences every six months, generally at May 1
and November 1 of each year. The offering period is divided into four six-month exercise
periods. In the event that the fair market value of our common stock is lower on the first
day of a subsequent six-month exercise period within the 24-month offering period than it
was on the first day of that 24-month offering period, all participants in the Purchase
Plan are automatically enrolled in a new 24-month offering period. Effective for offering
periods that commence after September 2005, the 24-month offering period was reduced to
one six-month exercise period. Purchases are limited to ten percent of each
employees eligible compensation. The number of shares subject to any award, the
exercise price and the number of shares issuable under this plan are subject to
adjustments in the event of a change relating to our capital structure. The number of
shares that may be reserved for sale under our Purchase Plan is 600,000 shares plus an
annual increase whereby the number of shares available for issuance automatically
increases on July 1 of each year in an amount equal to the lesser of: (a) 0.5% of the
total number of shares of our common stock outstanding on a fully diluted basis as of the
immediately preceding June 30; (b) 600,000 shares; or (c) an amount determined by our
board of directors. On July 1, 2005 and 2004, the number of shares available for issuance
increased by approximately 224,379 and 218,000 shares, respectively, for a total of
approximately 2.0 million shares of common stock reserved under the Purchase Plan. At
September 30, 2005, 1.8 million shares had been issued under the Purchase Plan and 224,420
shares were reserved for future issuance.

2002
Non-Qualified Stock Option Plan. Our board of directors adopted the 2002 Non-Qualified
Stock Option Plan (the 2002 Plan) in April 2002. The Compensation and
Nominating Committee of our board of directors administers the 2002 Plan. The 2002 Plan
authorizes the issuance of 1,000,000 shares of non-qualified stock options to employees
and consultants. Stock options are granted at an exercise price of not less than the fair
value on the date of grant. In July 2005, the board of directors amended the award
documents for the stock options granted under the 2002 Plan. Options awarded prior to July
2005 expire ten years from the date of grant unless expiration occurs earlier in
connection with termination of employment. Stock option grants awarded prior to July 2005
generally vest over a 50-month period with 2% of the total shares vesting each month. In
July 2005, the term and vesting schedule for both the initial and annual stock option
grants were adjusted, effective immediately. Beginning in July 2005, options expire seven
years from the date of grant unless expiration occurs earlier in connection with
termination of employment. Under the new vesting schedule, initial stock option grants
vest over a 36-month period with one-third of the total shares vesting on the first
anniversary of the date of grant and approximately 2.78% of the total shares vesting each
month thereafter over the remaining 24-month period. Annual stock option grants vest over
a 36-month period from the date of grant with approximately 2.78% of the total shares
vesting each month. Vested options granted under the 2002 Plan generally may be exercised
for three months after termination of the optionees service to us, except for
options granted to executives or in the case of death or disability, in which case the
vested options generally may be exercised up to 12 months following the date of death or
termination of service. The number of shares subject to any award, the exercise price and
the number of shares issuable under this plan are subject to adjustments in the event of a
change relating to our capital structure. To date, the 2002 Plan has been primarily used
for annual grants to employees. At September 30, 2005, 95,576 shares were available for
future awards under the 2002 Plan.

Supplemental
Stock Purchase Plan. The Supplemental Stock Purchase Plan (the Supplemental Purchase
Plan), formerly known as the Non-U.S. Purchase Plan, was adopted by our board of
directors in July 1998 and amended by the board in May 1999 and October 2005. The
Compensation and Nominating Committee of our board of directors administers the
Supplemental Plan. The purpose of the Supplemental Purchase Plan is to provide our
employees and consultants who do not provide services in the United States and who
participate in the Supplemental Purchase Plan with an opportunity to purchase our common
stock through periodic contributions at the same discount and subject to the same general
rules as the Purchase Plan. The Supplemental Purchase Plan, like the Purchase Plan, has
24-month offering periods commencing every six months, generally at May 1 and October 1
and each offering period is divided into four six-month exercise periods. In the event
that the fair market value of our common stock is lower on the first day of a subsequent
six-month exercise period within the 24-month offering period than it was on the first day
of that 24-month offering period, all participants in the Purchase Plan are automatically
enrolled in a new 24-month offering period. Effective for offering periods that commence
after October 2005, the 24-month offering period was reduced to one six-month exercise
period. Purchases are limited to ten percent of each employees and consultants
eligible compensation. The number of shares subject to any award, the exercise price and
the number of shares issuable under this plan are subject to adjustments in the event of a
change relating to our capital structure. The maximum number of shares reserved under the
Supplemental Plan is 60,000. At September 30, 2005, 29,482 shares had been issued under
the Supplemental Purchase Plan and 30,518 shares were reserved for future issuance.

As
of September 30, 2005, total shares reserved for future awards under all plans were
3,801,721.

Activity
under our Stock Option Plans 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, 2005       |                  |                                 |                                             | 11,497,628                              
|Options granted                   |                  |                                 |                                             | 1,862,365                               
|Options exercised                 |                  |                                 |                                             | (162,306                                
|Options canceled                  |                  |                                 |                                             | (224,368                                
|                                  |                  |                                 |                                             |                                         
|Outstanding at September 30, 2005 |                  |                                 |                                             | 12,973,319                              
|                                  |                  |                                 |                                             |                                         
|Exercisable at September 30, 2005 |                  |                                 |                                             | 7,599,777                               
|                                  |                  |                                 |                                             |                                         

Nonvested
share activity under our Stock Options Plans for the three-month period ended September
30, 2005 is summarized as follows:

|                                        | Non-vested
Number of
Shares | Weighted Average
Grant-Date
Fair Value
|--------------------------------------- | --------------------------- | --------------------------------------
|Nonvested balance at July 1, 2005       |                             |                                       
|Vested                                  |                             |                                       
|                                        |                             |                                       
|Nonvested balance at September 30, 2005 |                             |                                       
|                                        |                             |                                       

As
of September 30, 2005, $535,000 of total unrecognized compensation costs related to
nonvested awards is expected to be recognized over a weighted average period of 2.9 years. The total fair
value of shares vested during the three-month period ended September 30, 2005 was $276,000.

Grant
Date Fair Values.The weighted average estimated fair value of our employee stock options
granted at grant date market prices was $5.06 per share during the first quarter of fiscal
2006 and $3.23 per share during the first quarter of fiscal 2005. There were no shares
granted under our stock purchase plan during the first quarter of fiscal 2006 or 2005.
Included in the condensed consolidated statement of operations for the three-month period
ended September 30, 2005 is $137,000 in stock-based compensation expense related to the
amortization of previously valued shares granted under our Employee Stock Purchase and
Supplemental Stock Purchase Plans.

The
weighted average fair value has been estimated at the date of grant using a Black-Scholes
option-pricing model. During the three months ended September 30, 2005, we changed the
method of estimating the volatility of our common stock which we believe provides a more
thorough and accurate forecast. We estimated volatility by considering both the implied volatility
derived from publicly traded options to purchase our common stock and historical stock volatility. As a
result of the adjustment to our term and vesting schedule in July 2005 for stock options
awarded under our 1998 and 2002 Plans, we do not believe that we are able to rely on our
historical exercise and post-vested termination activity to provide accurate data for
estimating our expected term for use in determining the fair value of these options.
Therefore, as allowed by Staff Accounting Bulletin (SAB) No. 107,
Share-Based Payment, we have opted to use the simplified method for estimating our
expected term equal to the midpoint between the vesting period and the contractual term.
Prior to the three months ended September 30, 2005, we estimated volatility and the
expected life based solely on historical activity. The change in our assumptions did not
have a significant impact of the fair value of our stock options granted during the first
quarter of fiscal 2006. The following are significant weighted average assumptions used
for estimating the fair value of the activity under our stock option plans:

|                         | Employee Stock Options
Three Months Ended September 30,
|------------------------ | -------------------------------------------------------
|
|Expected life (in years) |                                                        
|Risk-free interest rate  |                                                        
|Expected volatility      |                                                        
|Dividend yield           |                                                        

Note 10.   Income Taxes

We
recorded an income tax benefit of $694,000 for the first quarter of fiscal 2006 due to
our net loss benefited at an estimated annual effective tax rate of 21%, offset in part
from a tax charge due to our inability to benefit from the in-process research and
development charge related to the FS2 acquisition. The estimated annual effective tax rate
of 21% in the first quarter of fiscal 2006 is lower than the applicable statutory rate
primarily due to the availability of foreign tax credit, research and development credit
and general business tax credit carryovers from prior years. We recorded an income tax
provision of $880,000 for the first quarter of fiscal 2005. The estimated annual effective
tax rate of 22% in the first quarter of fiscal 2005 is lower than the applicable statutory
rate primarily due to the availability of foreign tax credit and general business tax
credit carryovers from prior years.

The
amount of income taxes we pay is subject to ongoing audits by federal, state and foreign
tax authorities, which often result in proposed assessments. For example, the Internal
Revenue Service (IRS) has completed its examination of our fiscal year 2002
federal income tax return and has issued a notice of proposed adjustment. We do not agree
with the adjustments and have appealed the assessment. Our estimate for the potential
outcome for any uncertain tax issue is highly judgmental. We believe we have adequately
provided for any reasonably foreseeable outcome related to these and other matters.
However, our future results may include favorable or unfavorable adjustments to our
estimated tax liabilities in the period the assessments are made or resolved or when
statutes of limitation on potential assessments expire. As a result, our effective tax
rate may fluctuate significantly on a quarterly basis.

Note 11.   Recent
Accounting Pronouncements

In
June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS
No. 154), a replacement of APB Opinion No. 20, Accounting Changes, and FASB No. 3,
Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 applies to all
voluntary changes in accounting principle, and changes the requirements for accounting for
and reporting of a change in accounting principle. SFAS No. 154 requires retrospective
application to prior periods financial statements of a voluntary change in
accounting principle unless it is impracticable. It is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15, 2005. Earlier
application is permitted for accounting changes and corrections of errors made occurring
in fiscal years beginning after June 1, 2005. We do not expect the adoption of SFAS No.
154 will have material impact on our consolidated results of operations and financial
condition.

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 of the impact on future operating results of the FS2 acquisition, as well as others that address 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 Factors That May Affect Our Business, 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 provider of industry-standard processor architectures and cores for digital
consumer and business applications. We design and license high performance 32- and 64-bit
architectures and cores, which offer smaller dimensions and greater energy efficiency in
embedded processors. Our technology is utilized in many high-growth embedded markets
including digital set-top boxes, digital televisions, DVD recordable devices, broadband
access devices, digital cameras, laser printers and network routers.

Revenue
in the first quarter of fiscal 2006 declined 18% over the comparable period in fiscal 2005
due to a significant shortfall in contract revenue. Contract revenue declined by $4.0
million or 51% primarily due to fewer contracts being completed during the quarter and
fewer license agreements for the MIPS32 24K core family, which generally provide for
higher average license fees. This slowdown was due to some customers delaying their
investment decisions and due to a leaner pipeline of targeted opportunities. We are
addressing these issues through organizational changes and expect to return to more normal
historical levels of contract revenue in the second quarter of fiscal 2006. Royalty
revenues increased 20% over the comparable period in fiscal 2005 due to increases in
royalties from both pre- and post IPO agreements. Additionally, royalties grew 14% on a
sequential quarter and reversed a decline in royalties experienced in the fourth quarter
of fiscal 2005. We expect royalty revenue to continue to increase in the upcoming quarter.

Operating
expense in the first quarter of fiscal 2006 increased $5.9 million over the comparable
period in fiscal 2005 primarily due to $4.9 million in non-cash stock-based compensation
expense as a result of the adoption of SFAS No. 123R beginning on July 1, 2005. Included
in this stock-based compensation expense was a non-recurring charge of $3.3 million
related to the reinstatement of options in connection with the settlement in September 2005 of
the Denmark lawsuit. Additionally, we acquired First Silicon Solutions, Inc. (FS2), a
design service and development tools company in September 2005 for an all cash transaction
of $4.5 million and we incurred a $570,000 acquired in-process research and development
charge in the first quarter of fiscal 2006 relating to this acquisition.  FS2's products and services
will provide value to our customer base by improving de-bugging capability and accelerating time to
market.  We may become obligated to pay an additional amount of up to $4.0 million in contingent
payments over a three-year period following the acquisition date.  The contingent payments are
based upon annual revenue and project completion milestones, and any such payments will be additional
purchase consideration and will be recorded to goodwill.  We expect that FS2 should be neutral to
slightly accretive for the remainder of fiscal 2006.

Net
loss before income tax benefit for the first quarter of fiscal 2006 was $4.0 million which
includes the above mentioned stock-based compensation expense of $4.9 million and the
acquired in-process research and development charge of $570,000.

Our
management excludes the effect of stock-based compensation expense as an operating metric when comparing
operating results across reporting periods, and in our internal planning and budgeting process, as our management
believes that operating results that exclude this expense provides a significant additional analytical view of our core operating results.

The net
loss for the first quarter of fiscal 2006 is $527,000 or $0.01 per basic and diluted share lower than disclosed
in our earnings call and press release on October 20, 2005.  We determined that the calculation of stock-based
compensation expense did not appropriately reflect the effect of SFAS No. 123 (Accounting for Stock-based
Compensation) for certain options granted prior to July 1, 2005.  This reduced the amount of stock compensation
expense for the quarter-end September 30, 2005.

Results of Operations

Revenue.            Total
revenue consists of royalties and contract revenue. Royalties consisted of
          royalties from sales by licensees of products incorporating our technology.
          Contract revenue consisted of technology license fees generated from new and
          existing license agreements for developed technology and engineering service
          fees generated from engineering services contracts for technology under
          development. 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, and whether the license granted covers a particular
          design or a broader architecture.

Our
revenue in the three-month periods ended September 30, 2005 and September 30, 2004 was as
follows (in thousands):

|                            | Three Months Ended September 30,
|--------------------------- | --------------------------------
|
|Revenue                     |                                 
|Royalties                   |                                 
|Percentage of Total Revenue |                                 
|Contract Revenue            |                                 
|Percentage of Total Revenue |                                 
|Total Revenue               |                                 
|                            |                                 

Total
revenue decreased 18% for the first quarter of fiscal 2006 over the comparable period in
fiscal 2005 due to a decrease in contract revenues offset in part by an increase in
royalties. The increase in royalties in the first quarter was due to an increase of
$724,000 in royalties from license agreements signed since our initial public offering
(IPO) in June 1998 as customers under these agreements are shipping more
products incorporating our technology as well as an increase of $610,000 in royalties from
legacy agreements, which were signed prior to our IPO. Contract revenues decreased 51%
primarily due to a decrease of $5.0 million in fees generated from new and existing
license agreements for developed technology offset in part by an increase of $882,000 in
fees generated from engineering services contracts for technology under development. The
decrease in fees for developed technology was primarily due to a reduction in the number
of new license agreements to a total of six, including one new license for the MIPS32 24K
core family, in the first quarter of fiscal 2006 compared to nine new agreements in the
first quarter of fiscal 2005, which included five new licenses for the MIPS32 24K core
family. Licenses of our MIPS32 24K family generally provide a higher average license fee.
Engineering service fees increased because we had more agreements in place for the
development of products than in the prior period.

Cost
and Expenses. Our cost and expenses for the three-month periods ended September 30, 2005
and September 30, 2004 was as follows (in thousands):

|                           | Three Months Ended September 30,
|-------------------------- | --------------------------------
|
|Cost and Expenses          |                                 
|Research and Development   |                                 
|Sales and Marketing        |                                 
|General and Administrative |                                 

Research
and Development. Research and development expenses include salaries and contractor and
consultant fees, as well as costs related to workstations, software, computer aided design
tools, and stock-based compensation expense. The costs we incur with respect to internally
developed technology and engineering services are included in research and development
expenses as they are incurred and are not directly related to any particular licensee,
license agreement or license fee.

The
increase in research and development expenses for the first quarter of fiscal 2006 over
the comparable period in fiscal 2005 was primarily the result of the recognition of $4.0
million in stock-based compensation expense due to the adoption of SFAS No. 123R as well
as an increase in salary expense of $545,000 due to an increase in headcount of 24
employees, including 5 employees from the September 2, 2005 acquisition of FS2. The
stock-based compensation charge included within our research and development expense
included a non-recurring charge of $3.3 million related to the options reinstated pursuant to the
Denmark lawsuit settlement reached in September 2005.These expenses were offset in part by
a decrease in bonus and profit sharing expense of $224,000 as we did not reach plan
targets in the first fiscal quarter of fiscal 2006. Excluding the stock-based compensation
expense related to the Denmark settlement, we expect our research and development expenses
to increase at a more gradual pace during the remainder of fiscal 2006.

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.

Sales
and marketing expenses for the first quarter of fiscal 2006 increased over the comparable
period in fiscal 2005. The increase in sales and marketing expenses was primarily the
result of the recognition of $470,000 in stock-based compensation expense due to the
adoption of SFAS No. 123R as well as an increase in salary expense of $329,000 due to an
increase in headcount of 12 employees including 4 from the FS2 acquisition and an increase
of $110,000 in travel expense. These increases were offset in part by a decrease of
$271,000 in commission and bonus expense due to lower commissions because of the decrease
in contract revenue and lower bonus and profit sharing expense as we did not reach plan
targets in the first quarter of fiscal 2006. We expect that our sales and marketing
expenses will increase during the remainder of fiscal 2006 as we focus additional
resources on expanding our market presence.

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.

General
and administrative expenses for the first quarter of fiscal 2006 increased over the
comparable period in fiscal 2005. The increase in general and administrative expenses was
primarily the result of the recognition of $380,000 in stock-based compensation
expense due to the adoption of SFAS No. 123R, as well as an increase of $326,000 in
accounting and audit fees related to our compliance with Sarbanes-Oxley. These increases
were offset in part by a decrease in bonus and profit sharing expense of $237,000 as we
did not reach plan targets in the first fiscal quarter of fiscal 2006. We expect that our
general and administrative expenses will remain relatively constant over the next few
quarters.

Acquired
In-process Research and Development. In September 2005 we completed the acquisition of
FS2, a design services and development tools company, for cash consideration. We recorded a
charge in the first quarter of fiscal 2006 of $570,000 for acquired in-process research
and development expense upon completion of the acquisition because technological
feasibility of certain of the acquired technology had not been established and no future
alternative use for the in-process technology existed. 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.

Restructuring.                 In
September 2004, we entered into an agreement with the landlord of our Denmark
          design center facilities that we closed in fiscal 2003 and obtained a new
tenant           which allowed us to terminate our long-term lease obligation in return
for a           lump sum payment of approximately $1.9 million. This resulted in an
additional           charge to restructuring in the first quarter of fiscal 2005 of
$277,000.

Other
Income, Net. Other income, net, for the first quarter of fiscal 2006 was $809,000 compared
to $245,000 for the comparable period in fiscal 2005. The increase in other income was
primarily due to an increase in interest income, due to higher interest rates.

Income
Taxes. We recorded an income tax benefit of $694,000 for the first quarter of fiscal
2006 due to our net loss benefited at an estimated annual effective tax rate of 21%,
offset in part from a tax charge due to our inability to benefit from the in-process
research and development charge related to the FS2 acquisition. The estimated annual
effective tax rate of 21% in the first quarter of fiscal 2006 is lower than the applicable
statutory rate primarily due to the availability of foreign tax credit, research and
development credit and general business tax credit carryovers from prior years. We
recorded an income tax provision of $880,000 for the first quarter of fiscal 2005. The
estimated annual effective tax rate of 22% in the first quarter of fiscal 2005 is lower
than the applicable statutory rate primarily due to the availability of foreign tax credit
and general business tax credit carryovers from prior years.

The
amount of income taxes we pay is subject to ongoing audits by federal, state and foreign
tax authorities, which often result in proposed assessments. For example, the Internal
Revenue Service (IRS) has completed its examination of our fiscal year 2002
federal income tax return and has issued a notice of proposed adjustment. We do not agree
with the adjustments and have appealed the assessment. Our estimate for the potential
outcome for any uncertain tax issue is highly judgmental. We believe we have adequately
provided for any reasonably foreseeable outcome related to these and other matters.
However, our future results may include favorable or unfavorable adjustments to our
estimated tax liabilities in the period the assessments are made or resolved or when
statutes of limitation on potential assessments expire. As a result, our effective tax
rate may fluctuate significantly on a quarterly basis.

Financial Condition

At
September 30, 2005, we had cash, cash equivalents and short-term investments of $105.5
million and total working capital of $99.5 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 statement of cash flows for the three months ended
September 30, 2005 and 2004. For complete statements of cash flows for those periods, see
the financial statements in Item 1.

|                                                      | Three Months Ended September 30,
|----------------------------------------------------- | --------------------------------
|
|Net cash provided by (used in) operating activities   |                                 
|Net income (loss)                                     |                                 
|Depreciation                                          |                                 
|Stock-based compensation                              |                                 
|Acquired in-process research and development          |                                 
|Amortization of intangibles and deferred compensation |                                 
|Accounts receivable                                   |                                 
|Prepaid expenses and other current assets             |                                 
|Other assets                                          |                                 
|Other current accrued liabilities                     |                                 
|Income tax payable                                    |                                 
|Accrued compensation                                  |                                 
|                                                      |                                 
|Net cash used in investing activities                 |                                 
|Net maturities (purchases) of short-term investments  |                                 
|Capital expenditures                                  |                                 
|Acquisition of FS2                                    |                                 
|Restricted cash                                       |                                 
|                                                      |                                 
|Net cash provided by financing activities             |                                 
|Net proceeds from issuance of common stock            |                                 
|                                                      |                                 
|Net decrease in cash and cash equivalents             |                                 

For
the three-month period ended September 30, 2005, our operating activities used net cash of
$2.2 million primarily reflecting our net loss offset by in-process research and
development charges related to the FS2 acquisition, and by non-cash charges including
stock-based compensation under SFAS No. 123R, depreciation expense and amortization of
intangibles and deferred compensation. In addition, cash was used by increases in accounts
receivable due to new balances during the quarter and other assets due to an increase in
the cash surrender value on life insurance policies. Also, cash was used by a decrease in
accounts payable due to payment of our annual business insurance policy renewal of
$913,000, a decrease in accrued compensation which included $1.0 million in executive
bonus payments from our prior fiscal year, and a decrease of $693,000 in income taxes
payable due to our tax benefit for the period. This was partially offset by cash generated
from a decrease in prepaid expenses and other current assets due to collection of a
non-trade receivable and $228,000 due to amortization of our business insurance policy
along with an increase in long-term liabilities due to additional deferrals under our
deferred compensation plan.

For
the three-month period ended September 30, 2004, our operating activities provided net
cash of $664,000 primarily reflecting net income, depreciation and amortization of
intangibles and deferred compensation. In addition, cash was generated by a decrease in
prepaid expenses of $255,000 due to amortization of our business insurance policy,
$291,000 related to amortization of our computer aided design time-based licenses and an
increase of $880,000 in income taxes payable due to our tax provision for the period,
partially offset by foreign withholding taxes on accounts receivable collections. This was
partially offset by an increase in accounts receivable due to new balances during the
quarter and decreases in other current accrued liabilities from payments under our
restructuring plan for our Denmark facility lease termination of $1.9 million and accrued
compensation due to $1.5 million in executive bonus payments.

Net
cash used in investing activities was $4.5 million for the three months ended September
30, 2005 which included cash used for the acquisition of FS2 of $3.7 million, and $656,000 for
the establishment of an escrow account related to the acquisition, along with purchases of
equipment and computer-aided design tools used in our development activities offset
slightly by net maturities of short-term investments. This compared to net cash used in
investing activities of $5.0 million for the three months ended September 30, 2004 which
included purchases of short-term investments and purchases of equipment and computer-aided
design tools used in our development activities

Net
cash provided by financing activities was $699,000 for the three months ended September
30, 2005 compared to $74,000 for the comparable period in the prior year. Net cash
provided by financing activities during the three-month period ended September 30, 2005
and September 30, 2004 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
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.
| | - | --------------------------------------------------------

We
believe that we have sufficient cash to meet our projected operating and capital
requirements for the foreseeable future. However, we may in the future be required to
raise additional funds through public or private financing, strategic relationships or
other arrangements. Additional equity financing may be dilutive to holders of our common
stock, and debt financing, if available, may involve restrictive covenants. Moreover,
strategic relationships, if necessary to raise additional funds, may require that we
relinquish our rights to certain of our technologies. Our failure to raise capital when
needed could have a material adverse effect on our business, results of operations and
financial condition.

Contractual
Obligations

Our
contractual obligations as of September 30, 2005 were as follows:

|                                                                          | Payments due by period (in thousands)
|------------------------------------------------------------------------- | -------------------------------------
|
|Operating lease obligations (1)                                           |                                      
|Purchase obligations (2)                                                  |                                      
|Other long-term liabilities reflected on our Balance Sheet under GAAP (3) |                                      
|                                                                          |                                      
|Total                                                                     |                                      
|                                                                          |                                      

| | (1) | We
lease office facilities under noncancelable operating leases that expire
          through 2009. In connection with a lease, 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.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | 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 $965,000 since June 30, 2005           primarily due to a
contract for a tools development project beginning in           September 2005.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Long-term
liability to employees under a deferred compensation plan accounts for           $2.4
million of this amount. Distributions under this plan are elected by the
          employees. An escrow account of $656,000 which will be settled eighteen months
          from the acquisition date, represents an amount related to the FS2 acquisition
completed in September 2005.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 the following critical accounting policies affect the significant judgments and
estimates we use in the preparation of our consolidated financial statements.

Revenue
Recognition. Our revenue consists of royalties and contract revenue earned under contracts
with our licensees. Although the precise terms of our contracts vary, they typically
provide for royalties, technology license fees for currently available technology or
engineering service fees for technology under development, and maintenance fees.

We
recognize revenue upon concluding that all of the fundamental criteria for revenue
recognition have been met. We generate royalties from the sale by our licensees of
products incorporating our technology. 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, which is 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 perform royalty reviews of our licensees and if these reviews indicate any
over- or under-reported royalties, we accrue for the results when they are identified as
was the case in the second quarter of fiscal 2005 when we reduced our royalty revenue by
$900,000 due to an over-reporting by one of our licensees.

Contract
revenue includes technology license fees for currently available technology or engineering
service fees for technology under development, and support and maintenance fees. Each of
these types of contracts is a nonexclusive license for the underlying intellectual
property. While we may be required to perform certain services to render the intellectual
property suitable for license under an engineering service contract, we continue to own
the intellectual property that we develop. Consistent with SAB No. 104, license fees 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 probable. We assess the credit worthiness of each customer at the time
the license agreement is executed or when a transaction under the agreement occurs. If
collectibility is not considered probable, revenue is recognized when the fee is
collected. Fees related to engineering services contracts for technology under
development, which contracts are performed on a best efforts basis, are recognized as
revenue as services are performed. The amount of the license fee under an engineering
service agreement is primarily a function of our determination of the underlying value of
the technology rather than our cost of completing the development of the technology
required by the agreement. We also have the right to license the intellectual property
developed under engineering service agreements to other licensees. Under our support and
maintenance 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. Support and maintenance revenue is
recognized at its fair value ratably over the period during which the obligation exists,
typically 12 months. The fair value of any support and maintenance obligation is
established based on the specified renewal rate for such support and maintenance and
generally priced as a percentage of license fees.

Income
Taxes. Significant judgment is required in determining our worldwide income tax provision.
In the ordinary course, there are many transactions and calculations for which the
ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of
revenue sharing and cost reimbursement arrangements among related entities and segregation
of foreign and domestic income and expense to avoid double taxation. Although we believe
that our estimates are reasonable, no assurance can be given that the final tax outcome of
these matters will not be different from that which is reflected in our historical income
tax provisions and accruals. Such differences could have a material effect on our income
tax provision and net income in the period in which such determination is made.

We
record a valuation allowance to reduce our deferred tax assets to the amount that is more
likely than not to be realized. In order for us to realize our deferred tax assets, we
must be able to generate sufficient taxable income in those jurisdictions where the
deferred tax assets are located. We have provided a full valuation allowance against our
U.S. net deferred tax assets due to our history of net losses, difficulty in forecasting
future results and belief that we cannot rely on projections of future taxable income to
realize deferred tax assets. Significant management judgment is required in determining
our deferred tax assets and liabilities and valuation allowances for purposes of assessing
our ability to realize any future benefit from our net deferred tax assets. We intend to
maintain this valuation allowance until sufficient positive evidence exists to support the
reversal of the valuation allowance. Future income tax expense will be reduced to the
extent that we have sufficient positive evidence to support a reversal of, or decrease in,
our valuation allowance.

We
calculate our current and deferred tax provision based on estimates and assumptions that
could differ from the actual results reflected in income tax returns filed during the
subsequent year. Adjustments based on filed returns are generally recorded in the period
when the tax returns are filed and the tax implications are known.

The
amount of income taxes we pay is subject to ongoing audits by federal, state and foreign
tax authorities, which often result in proposed assessments. For example, the Internal
Revenue Service (IRS) has completed its examination of our fiscal year 2002
federal income tax return and has issued a notice of proposed adjustment. We do not agree
with the adjustments and have appealed the assessment. Our estimate for the potential
outcome for any uncertain tax issue is highly judgmental. We believe we have adequately
provided for any reasonably foreseeable outcome related to these and other matters.
However, our future results may include favorable or unfavorable adjustments to our
estimated tax liabilities in the period the assessments are made or resolved or when
statutes of limitation on potential assessments expire. As a result, our effective tax
rate may fluctuate significantly on a quarterly basis.

Impairment
of Long-Lived Assets. We evaluate our long-lived assets, including purchased intangible
assets, whenever certain events or changes in circumstances indicate that the carrying
value of assets may not be recoverable or that the estimated useful life of the asset has
changed. In order to judge the carrying value of an asset or the remaining useful life of
an asset, we make various assumptions about the value of the asset in the future. This may
include assumptions about future prospects for the products to which the asset relates and
typically involves computations of the estimated future cash flows to be generated by
these products. If such assets are deemed impaired, an impairment loss equal to the amount
by which the carrying amount exceeds the fair value of the assets is recognized. Judgments
and assumptions about future values and remaining useful lives are complex and often
subjective. They can be affected by a variety of factors, including external factors such
as industry and economic trends, and internal factors such as changes in business strategy
and our internal forecasts. For example, research and development expense included zero in
fiscal 2005, $1.7 million in fiscal 2004 and $696,000 in fiscal 2003 related to the
accelerated amortization and depreciation of certain computer aided design tool and
software assets whose estimated useful lives were reduced because of the restructuring
actions announced in the fourth quarter of fiscal 2003. Furthermore, in fiscal 2003, we
recorded an impairment charge of $1.2 million relating to purchased developed technology
due to change in our product development strategy.

Goodwill
and Purchased Intangible Assets. We make estimates when we acquire businesses or acquire
groups of assets for a single aggregate price. The purchase method of accounting for
acquisitions requires extensive use of accounting estimates and judgments to allocate the
purchase price to the fair value of the tangible and intangible assets acquired, including
in-process research and development, or IPR&D. Goodwill is recorded as the difference,
if any, between the aggregate consideration paid for an acquisition of a business and the
fair value of the net tangible and intangible assets acquired. Goodwill is not amortized
but is subject to annual impairment tests. The amounts and useful lives, generally 3 to 10
years, assigned to tangible and intangible assets, other than IPR&D, impact future
amortization expense; the amount assigned to IPR&D is expensed immediately. Patent
costs are being amortized and charged as a research and development expense, on a
straight-line basis, over their estimated useful lives of ten years.

Accrued
Facilities Restructuring Costs. In October 2002, we exited our Denmark research facility,
and we recorded a restructuring charge in the second quarter of fiscal 2003 to reflect the
anticipated costs of the restructuring. Among other things, the anticipated costs included
lease charges that were based on assumptions about the estimated period to sublease the
facilities and future rental income. The sublease income estimate and the estimated period
to sublease the facility entail a high level of management judgment. On September 28,
2004, we entered into an agreement with the landlord and a new tenant to terminate our
lease obligation in return for a lump sum payment of approximately $1.9 million, resulting
in additional charges of $277,000 in the first quarter of fiscal 2005.

Stock-Based
Compensation. Effective July 1, 2005, we adopted SFAS No. 123R, Share-Based Payment which
requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair value. The fair
value is estimated at the date of grant using a Black-Scholes option pricing model with
weighted average assumptions for the activity under our stock plans. Option pricing model
input assumptions such as expected term, expected volatility, and risk-free interest rate,
impact the fair value estimate. Further, the forfeiture rate impacts the amount of aggregate compensation.
These assumptions are subjective and
generally require significant analysis and judgment to develop. When estimating fair
value, some of the assumptions will be based on or determined from external data and other
assumptions may be derived from our historical experience with share-based payment
arrangements. The appropriate weight to place on historical experience is a matter of
judgment, based on relevant facts and circumstances.

As
a result of the adjustment to our term and vesting schedule in July 2005 for stock options
awarded under our 1998 and 2002 Plans, we do not believe that we are able to rely on our
historical exercise and post-vested termination activity to provide accurate data for
estimating our expected term for use in determining the fair value of these options.
Therefore, as allowed by Staff Accounting Bulletin (SAB) No. 107,
Share-Based Payment, we have opted to use the simplified method for estimating our
expected term equal to the midpoint between the vesting period and the contractual term.

We
currently estimate volatility by considering the implied volatility derived from publicly
traded options to purchase our common stock and our historical stock volatility.

The
risk-free interest rate is the implied yield currently available on U.S. Treasury
zero-coupon issues with a remaining term equal to the expected term used as the input to
the Black-Scholes model.

We
estimate forfeitures using a weighted average historical forfeiture rate. Our estimates of forfeitures
will be adjusted over the requisite service period based on the extent to which actual forfeitures
differ, or are expected to differ, from their estimate.

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.

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, many of which are outside of our control. 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. 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 in to 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
relative mix of contract revenue and royalties;
| | - |  | ---------------------------------------------------

| |  |  | the
demand for products that incorporate our technology;
| | - |  | --------------------------------------------------------

| |  |  | our
ability to develop, introduce and market new processor intellectual property;
| | - |  | ---------------------------------------------------------------------------------

| |  |  | the
 establishment  or  loss  of  licensing   relationships   with   semiconductor companies
or digital consumer 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 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 and business product manufacturers,
adopting our technology and using it in the products they sell. Our contract revenue
increased by 5% in fiscal 2004 and increased 28% in fiscal 2005, but declined 51% in the
first quarter of fiscal 2006 over the same quarter a year ago. While we expect that we
will continue to grant additional licenses to new licensees and develop new products to
license to both new and existing licensees, 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.

We
depend on design wins to expand our revenue base. Our ability to generate royalties is
uncertain and depends in large part on whether our processors and related designs are
selected by our licensees and their customers for design, which we refer to as design
wins, into a broader range of both digital consumer and business products. Our ability to
achieve design wins is subject to several risks and uncertainties, including:

| |  |  | the
potentially limited opportunities for design wins with respect to certain digital
consumer products, such as video game products or digital television set top boxes, due
to a limited number of product manufacturers and the length of product life cycles;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the
risk that the performance,  functionality,  price and power characteristics of our
designs may not satisfy those that are critical to specific digital consumer and business
product applications; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | our
failure to  identify  and  respond in a timely  manner to trends and  emerging
              markets for embedded processors.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------

Even
if our technology is incorporated into new products, we cannot be certain that any such
products will ultimately be brought to market, achieve commercial acceptance or generate
meaningful royalties for us.

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 and
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 processor, core 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 and business products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | our
 ability  to  anticipate  and  timely  respond  to  changes  in  semiconductor
              manufacturing processes;
| | - |  | -------------------------------------------------------------------------------------------------------------------------

| |  |  | changing
 customer  preferences  in the digital  consumer  and  business  products
              markets;
| | - |  | ---------------------------------------------------------------------------------------------------------

| |  |  | the
 emergence  of new  standards  in the  semiconductor  industry and for digital
              consumer 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 processor, core 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 processor, core 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 review 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 a
review, 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.

If
we do not compete effectively in the market for embedded processors, our business will be
adversely affected. Competition in the market for embedded processors is intense. Our
products compete with those of other designers and developers of processors and cores, as
well as those of semiconductor manufacturers whose product lines include processors for
embedded and non-embedded applications. In addition, we may face competition from the
producers of unauthorized MIPS-based clones and other technology designs. The market for
embedded processors 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 processors, 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
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. We cannot assure you that we
will retain our key officers and employees. Competition for qualified personnel,
particularly those with significant experience in the semiconductor 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 the interpretation of tax laws. In addition, the Internal Revenue
Service has completed its examination of our federal income tax return for fiscal year
2002 and has issued a notice of proposed adjustment. We do not agree with the adjustments
and have appealed the assessment. We believe that adequate amounts have been provided for
any adjustment that may ultimately result from this issue. 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 our current
examination or any other examinations will not have an adverse effect on our operating
results and financial condition.

We
may encounter difficulties with future acquisitions, which 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 in-process
research and development charge in the first quarter of fiscal 2006 as a result of our
acquisition of First Silicon Solutions, Inc. 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 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 the 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.

We
are subject to litigation that could adversely affect our financial results.From time to
time, we are subject to litigation and other legal claims incidental to our business. It
is possible that we could suffer unfavorable outcomes from claims 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.

Our
intellectual property may be misappropriated and we may be unable to obtain or enforce
intellectual property rights. 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, we cannot be certain that we will be able to prevent
other parties from designing and marketing unauthorized MIPS-Based products or that others
will not independently develop or otherwise acquire the same or substantially equivalent
technologies as ours. 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. In addition,
effective trade secret protection may be unavailable or limited in certain countries. If
we are unable to protect 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
may be subject to claims of infringement. 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. Significant litigation regarding
intellectual property rights exists in our industry. As we grow our business and expand
into new markets that other companies are developing in, the risk that our technology may
infringe upon the intellectual property rights of others increases. We cannot be certain
that third parties will not make a claim of infringement against us, our licensees, or our
licensees customers in connection with use of our technology. Any claims, even those
without merit, could be time consuming to defend, result in costly litigation and/or
require us to enter into royalty or licensing agreements. These royalty or licensing
agreements, if required, may not be available on acceptable terms to us or at all. A
successful claim of infringement against us or one of our licensees in connection with its
use of our technology could adversely affect our business.

We
have recorded long-lived assets, and our results of operations would be adversely affected
if their value becomes impaired. In the first quarter of fiscal 2006, we acquired certain
core and developed technologies and customer relationships and a tradename, and the
purchase price of these long-lived assets is being amortized over schedules based on their
useful lives. If we complete additional acquisitions in the future, our purchased
intangible assets amortization charge could increase, and we may be required to record
substantial amounts of goodwill. We evaluate our long-lived assets, including purchased
assets, for impairment on an annual basis or whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable from its estimated future cash
flows. We recorded additional research and development expense of $1.7 million in fiscal
2004 and $696,000 in fiscal 2003 related to the accelerated amortization and depreciation
of certain computer aided design tool and software assets whose estimated useful lives
were reduced because of the restructuring actions announced in the fourth quarter of
fiscal 2003.

In
the future, if we determine that our long-lived assets are impaired, we will have to
recognize additional charges for this impairment. We cannot be sure that we will not be
required to record additional long-lived asset impairment charges in the future.

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.

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.

ITEM 4.    CONTROLS AND
PROCEDURES

| | (a.) | The
Securities and Exchange Commission defines the term disclosure           controls
and  procedures
to mean a companys controls and other procedures that are designed to ensure that
information required to be disclosed in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within
the time periods specified in the Commissions rules and forms. 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 were
effective for this purpose.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b.) | There
were no changes in our internal control over the financial reporting that occurred
during the first quarter of fiscal 2006 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# PART II  OTHER
INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

On
April 30, 2003, our Swiss subsidiary, MIPS Technologies International AG, or MIPS AG,
through which we conducted our operations in Denmark, terminated the employment of 55
employees in connection with the closure of our Denmark design center. Of these, 45
employees filed claims against MIPS AG in the County Court of Ballerup, Denmark
(subsequently transferred to the Maritime and Commercial Court of Copenhagen, Denmark).
Subsequently, 13 of these employees agreed to withdraw their claims. On the termination
date, the remaining 32 employees of MIPS AG held options to purchase an aggregate of
724,830 shares of our common stock, of which options to purchase 413,552 shares were
vested and options to purchase 311,278 shares were unvested. The exercise price of these
options ranged from $2.94 to $25.50 per share. Under our stock option plans, unvested
options expire upon termination of employment and vested options expire three months after
the termination of employment.

In
September 2005, we reached a settlement with each of the 32 former Danish employees and
the union that represented them. Pursuant to the settlement, each of the 32 former
employees will retain a substantial portion of his or her options and relinquish claims to
the balance of the options and any other claims regarding the options. As a result of the
settlement, the Danish lawsuit was withdrawn in October 2005 and MIPS Technologies, Inc.
withdrew the lawsuit filed on April 11, 2005 in the U.S. federal court (Northern District
of California) against the terminated employees who had pending Danish claims against MIPS
AG. As a result, MIPS Technologies, Inc. and MIPS AG no longer have any litigation pending
with respect to this matter.

From
time to time, we receive communications from third parties asserting patent or other
rights covering our products and technologies. Based upon our evaluation, we may take no
action or we may seek to obtain a license. There can be no assurance in any given case
that a license will be available on terms we consider reasonable or that litigation will
not ensue.

ITEM 6.    EXHIBITS

| | (a) | Exhibits
| | --- | --------

| | 31.1 | Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | ---------------------------------------------------------------------------------------------------

| | 31.2 | Certification
 of  Chief  Financial   Officer  pursuant  to  Section  302  of  the Sarbanes-Oxley Act
of 2002.
| | ---- | --------------------------------------------------------------------------------------------------------------

| | 32.1 | Certification
 of  Chief  Executive   Officer  pursuant  to  Section  906  of  the Sarbanes-Oxley Act
of 2002. *
| | ---- | ----------------------------------------------------------------------------------------------------------------

| | 32.2 | Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
| | ---- | -----------------------------------------------------------------------------------------------------

---

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

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

25

---

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 corporation                      
|
| | By:     /s/ KEVIN C. EICHLER                
| | Kevin C. Eichler                            
| | Vice President and Chief Financial Officer  
| | (Principal Financial and Accounting Officer)

Dated:  November 9, 2005

26

---