MIPS TECHNOLOGIES INC - FORM 10-Q

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EX-32.1 - EXHIBIT 32.1 CEO CERTIFICATION - MIPS TECHNOLOGIES INC	exh321fy11q3.htm
EX-32.2 - EXHIBIT 32.2 CFO CERTIFICATION - MIPS TECHNOLOGIES INC	exh322fy11q3.htm
EX-31.1 - EXHIBIT 31.1 CEO CERTIFICATION - MIPS TECHNOLOGIES INC	exh311fy11q3.htm
EX-31.2 - EXHIBIT 31.2 CFO CERTIFICATION - MIPS TECHNOLOGIES INC	exh312fy11q3.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED March 31, 2011

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

For the transition period from to .

Commission file number 000-24487

MIPS TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

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

955 EAST ARQUES AVENUE, SUNNYVALE, CA 94085-4521

(Address of principal executive offices)

Registrant’s telephone number, including area code: (408) 530-5000

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ (Do not check if smaller reporting company) Smaller reporting company ¨

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

As of April 30, 2011, the number of outstanding shares of the registrant’s common stock, $0.001 par value, was 52,544,078.

PART I – FINANCIAL INFORMATION

Item Item 1.	Financial Statements (Unaudited):

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

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

Item Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item Item 4.	Controls and Procedures

PART II – OTHER INFORMATION

Item Item 1.	Legal Proceedings

Item Item 1A.	Risk Factors

Item Item 6.	Exhibits

Signatures

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MIPS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands except share data)

	March 31, 2011			June 30, 2010
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	73,130		$	31,625
Short-term investments		35,223			20,736
Accounts receivable, net		4,575			7,527
Prepaid expenses and other current assets		1,178			819
Total current assets		114,106			60,707
Equipment, furniture and property, net		2,108			2,093
Intangible assets, net		2,177			275
Goodwill		565			565
Other assets		4,153			7,267
Total Assets	$	123,109		$	70,907
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,793		$	1,529
Accrued liabilities		11,888			13,911
Deferred revenue		2,636			3,217
Total current liabilities		16,317			18,657
Long-term liabilities:
Other long-term liabilities		5,230			6,116
Total long-term liabilities		5,230			6,116
Liabilities of discontinued operations		—			26
Stockholders’ equity:
Common stock, $0.001 par value: 250,000,000 shares authorized at March 31, 2011 and June 30, 2010; and 52,396,648 and 46,070,714 shares outstanding at March 31, 2011 and June 30, 2010, respectively, net of 70,269 and 59,876 reacquired shares at March 31, 2011 and June 30, 2010, respectively		52			46
Preferred stock, $0.001 par value; 50,000,000 shares authorized; none issued and outstanding		—			—
Additional paid-in-capital		303,093			264,794
Accumulated other comprehensive income		595			475
Accumulated deficit		(202,178	)		(219,207	)
Total stockholders’ equity		101,562			46,108
Total Liabilities and Stockholders’ Equity	$	123,109		$	70,907

See accompanying notes.

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MIPS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(In thousands, except per share data)

		Three Months Ended				Nine Months Ended
		March 31,				March 31,
		2011		2010		2011		2010
Revenue:
Royalties	$	13,415	$	12,100		$	41,846	$	33,244
License and contract revenue		6,633		5,406			22,597		14,431
Total revenue		20,048		17,506			64,443		47,675
Operating Expenses:
Cost of sales		163		75			1,060		309
Research and development		7,073		6,315			20,024		17,913
Sales and marketing		5,377		3,889			14,215		10,840
General and administrative		3,362		3,282			10,253		9,993
Total operating expenses		15,975		13,561			45,552		39,055
Operating income		4,073		3,945			18,891		8,620
Other income (expense), net		137		(136	)		894		201
Income before income taxes		4,210		3,809			19,785		8,821
Provision for income taxes		845		748			2,968		1,889
Income from continuing operations		3,365		3,061			16,817		6,932
Income from discontinued operations, net of tax		—		—			212		—
Net income	$	3,365	$	3,061		$	17,029	$	6,932
Net income per share, basic – from continuing operations	$	0.06	$	0.07		$	0.34	$	0.15
Net income per share, basic– from discontinued operations	$	—	$	—		$	0.00	$	—
Net income per share, basic	$	0.06	$	0.07		$	0.34	$	0.15
Net income per share, diluted – from continuing operations	$	0.06	$	0.07		$	0.32	$	0.15
Net income per share diluted – from discontinued operations	$	—	$	—		$	0.00	$	—
Net income per share, diluted	$	0.06	$	0.07		$	0.32	$	0.15
Common shares outstanding, basic		52,254		45,560			49,820		45,339
Common shares outstanding, diluted		54,889		46,472			53,036		46,148

See accompanying notes.

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MIPS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands)

	Nine Months Ended March 31,
	2011			2010
Operating activities:
Net income – continuing operations	$	16,817		$	6,932
Adjustments to reconcile net income to cash provided by operations:
Depreciation		781			1,181
Stock-based compensation		3,616			2,695
Amortization of intangible assets		83			83
Gain on exchange and sale of investment		(611	)		(611	)
Other non-cash charges		569			130
Changes in operating assets and liabilities:
Accounts receivable, net		2,952			(1,160	)
Prepaid expenses and other current assets		(417	)		651
Other assets		1,130			2,959
Accounts payable		235			(331	)
Accrued liabilities		(2,011	)		1,009
Deferred revenue		(794	)		(72	)
Long-term liabilities		(700	)		(2,344	)
Net cash provided by operating activities – continuing operations		21,650			11,122
Net cash provided by (used in) operating activities – discontinued operations		212			(1,412	)
Net cash provided by operating activities		21,862			9,710
Investing activities:
Purchases of marketable securities		(48,225	)		(27,014	)
Proceeds from sales of marketable securities		5,413			4,491
Proceeds from maturities of marketable securities		28,356			—
Capital expenditures		(698	)		(1,009	)
Net cash used in investing activities		(15,154	)		(23,532	)
Financing activities:
Net proceeds from issuance of common stock		34,689			1,415
Repayments of debt		—			(4,049	)
Net cash provided by (used in) financing activities		34,689			(2,634	)
Effect of exchange rates on cash		108			(2	)
Net increase (decrease) in cash and cash equivalents		41,505			(16,458	)
Cash and cash equivalents, beginning of period		31,625			44,507
Cash and cash equivalents, end of period	$	73,130		$	28,049
Supplemental disclosure of cash transaction:
Release of restricted cash by escrow agent to former shareholders of Chipidea	$	—		$	4,509

See accompanying notes.

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MIPS TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

Note 1. Description of Business and Basis of Presentation.

MIPS Technologies, Inc. (MIPS) is a leading provider of industry-standard processor architectures and cores that power some of the world’s most popular home entertainment, communications, networking and mobile products. Our technology is broadly used in markets such as mobile handsets and tablets, digital entertainment, wired and wireless communications and networking, office automation, security, microcontrollers, and automotive. Our customers are global semiconductor companies and system original equipment manufacturers (system OEMs). We offer our customers high-performance, easy-to-use functionality at a fraction of the cost and time to market that internal development would require. Our customers pay us license fees for architectural and product rights, as well as royalties based on processor unit shipments.

On May 7, 2009, we completed the sale of our Analog Business Group (ABG) to an unrelated third party for $22 million in cash. In connection with this divestiture, we have classified the financial statements of the ABG as discontinued operations. The ABG was initially formed through MIPS' acquisition of Chipidea Microelectronica S.A. (Chipidea) in August 2007.

Basis of Presentation. The condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) applicable to interim financial information. Certain information and footnote disclosures included in financial statements prepared in accordance with generally accepted accounting principles have been omitted in these interim statements as allowed by such SEC rules and regulations. The balance sheet at June 30, 2010 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, 2010, included in our 2010 Annual Report on Form 10-K.

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

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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.

Discontinued operations. In fiscal 2009, we completed the sale of our ABG and therefore it is no longer part of our ongoing operations. Accordingly, we have separately classified the results of operations, assets and liabilities, and cash flows of the discontinued operations of ABG on our Statements of Operations, Balance Sheets and Statements of Cash Flows, respectively, for all periods presented (See Note 6).

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Revenue Recognition.

Royalty Revenue.

We classify all revenue that involves the sale of a licensee’s products as royalty revenue. Royalty revenue is recognized in the quarter in which we receive a report from a licensee detailing the shipments of products incorporating our IP components, which is generally in the quarter following the licensee’s sale of the 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, as specified in our agreement with the licensee. We periodically engage a third party to perform royalty audits of our licensees, and if these audits indicate any over- or under-reported royalties, we account for the results when they are resolved.

License and Contract Revenue.

We generally derive revenue from license fees for the transfer of proven and reusable IP components on currently available technology. We enter into licensing agreements that provide licensees the right to incorporate our IP components in their products with terms and conditions that have historically varied by licensee. Each of these types of contracts includes a nonexclusive license for the underlying IP. Fees for contracts for currently available technology include: license fees relating to our IP, including processor designs; maintenance and support, typically for one year; and royalties payable following the sale by our licensees of products incorporating the licensed technology. Generally, our customers pay us a single upfront fee that covers the license and first year maintenance and support. Our deliverables in these arrangements include (a) processor designs and related IP and (b) maintenance and support.

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-13, “Revenue Arrangements with Multiple Deliverables” (“ASU 2009-13”). The standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable based on the relative selling price. The selling price for each deliverable is based on vendor-specific objective evidence (“VSOE”) if available, third-party evidence (“TPE”) if VSOE is not available, or best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. We adopted the provisions of ASU 2009-13 as of the beginning of fiscal 2011 for licenses that originate or are materially modified customer arrangements originating after July 1, 2010.

The amount of license and contract revenue we recognize in a given period is affected by our judgment as to whether an arrangement includes multiple deliverables and, if so, our determinations surrounding whether VSOE exists. In circumstances when VSOE does not exist, we then apply judgment with respect to whether we can obtain TPE. Generally, we are not able to determine TPE because our go-to-market strategy typically differs from that of our peers. When we are unable to establish selling price using VSOE or TPE, we use BESP in our allocation of arrangement consideration. We determine VSOE based on our normal pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range. In determining BESP, we apply significant judgment as we weigh a variety of factors, based on the facts and circumstances of the arrangement. We typically arrive at BESP for license and contract revenue by considering historical and current evidence of pricing including bundled pricing practices, selling region, license term and number of uses allowed. The adoption of ASU 2009-13 had no material effect to our financial results.

License and contract revenue from currently available technology is 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 collectability is reasonably assured. We assess the credit worthiness of each customer when a transaction under the agreement occurs. If collectability is not considered reasonably assured, revenue is recognized when the fee is collected. Other than maintenance and support, there is no continuing obligation under these arrangements after delivery of the IP.

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

When we provide engineering services involving design and development of customized specifications, we recognize revenue on a percentage of completion basis from the signing of the agreement through the completion of all outstanding development obligations. The amount of revenue recognized is based on the total license fees under the license agreement and the percentage of completion is measured by the actual costs incurred to date on the project compared to the total estimated project cost. Revenue is recognized only when collectability is probable. The estimates of project costs are based on the IP specifications and prior experience with the same or similar IP development and are reviewed and updated regularly. Under the percentage of completion method, provisions for estimated losses on uncompleted contracts are recognized in the period in which the likelihood of such losses is determined. Licensing of existing IP that does not require any configuration is recognized upon delivery of the IP and when all other revenue recognition criteria have been met. Direct costs incurred in the design and development of the IP under these arrangements is included in cost of contract revenue.

Maintenance and Support.

Certain arrangements include maintenance and support obligations. Under such arrangements, we provide unspecified upgrades, bug fixes and technical support. No other upgrades, products or other post-contract support are provided. These arrangements are generally renewable annually by the customer. Maintenance and support revenue is recognized at its selling price based on VSOE ratably over the period during which the obligation exists, typically 12 months.

Cash and Cash Equivalents and Short-Term Investments. Cash and cash equivalents consist mainly of cash, money market funds, and other highly liquid investments which have original maturities of three months or less at the time of acquisition. Investments with original maturities of greater than 90 days at the time of acquisition but less than one year from the balance sheet date are classified as short-term investments. The fair value of cash and cash equivalents approximates their carrying value at March 31, 2011.

Available-for-sale securities are carried at fair value, based on quoted market prices, with the unrealized gains or losses reported, net of tax, in stockholders’ equity as part of accumulated other comprehensive income (loss). We determine the fair values for short-term investments (that principally consist of marketable debt and equity securities) using industry standard pricing services, data providers and other third-party sources and by internally performing valuation analyses (see Note 4). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, both of which are included in interest and other income, net. Realized gains and losses, if any, are recorded on the specific identification method and are included in interest and other income, net.

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We review our investments in marketable securities for possible other-than-temporary impairments on a regular basis. In determining if and when a decline in value below the adjusted cost of marketable debt and equity securities is other-than-temporary, we evaluate, on an ongoing basis the market conditions, trends of earnings, financial condition, credit ratings, any underlying collateral and other key measures for our investments. In addition, we consider: 1) our intent to sell the security, 2) if we intend to hold the security, whether it is more likely than not that we will be required to sell the security before recovery of the security’s amortized cost basis and 3) if we intend to hold the security, whether or not we expect to recover the entire amortized cost basis of the security. If any loss on investment is believed to be other-than-temporary, a charge will be recognized. Due to the high credit quality and short term nature of our investments, there have been no other-than-temporary impairments recorded to date.

Reclassifications. Certain reclassifications have been made in our fiscal 2010 consolidated financial statements to conform to the current year’s presentation of financial information.

Note 2. Computation of Earnings Per Share

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares that were outstanding during the period. Diluted earnings per share is computed giving effect to all dilutive potential common shares that were outstanding for any periods presented in these financial statements.

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

	Three Months Ended March 31,				Nine Months Ended March 31,
	2011		2010		2011		2010
Numerator:
Net income from continuing operations	$	3,365	$	3,061	$	16,817	$	6,932
Net income from discontinued operations		—		—		212		—
Net income – basic and diluted	$	3,365	$	3,061	$	17,029	$	6,932
Denominator:
Weighted-average shares of common stock outstanding		52,254		45,560		49,820		45,339
Effect of dilutive securities-employee stock options and shares subject to repurchase		2,635		912		3,216		809
Shares used in computing diluted net income per share		54,889		46,472		53,036		46,148
Net income per share, basic - from continuing operations	$	0.06	$	0.07	$	0.34	$	0.15
Net income per share, basic - from discontinued operations	$	—	$	—	$	0.00	$	—
Net income per share, basic	$	0.06	$	0.07	$	0.34	$	0.15
Net income per share, diluted - from continuing operations	$	0.06	$	0.07	$	0.32	$	0.15
Net income per share, diluted - from discontinued operations	$	—	$	—	$	0.00	$	—
Net income per share, diluted	$	0.06	$	0.07	$	0.32	$	0.15
Potentially dilutive securities excluded from diluted net income per share because they are anti-dilutive (A)		458		8,675		356		9,412

(A)

For the three months ended March 31, 2011 and 2010, we excluded 0.5 million and 8.7 million shares, respectively, and for the nine months ended March 31, 2011 and 2010, we excluded 0.4 million and 9.4 million shares, respectively, underlying outstanding weighted average stock options from the calculation of diluted earnings per common share because the exercise prices of these stock options were greater than or equal to the average market value of the common shares. Some portion, or all, of the shares underlying these options would be included in the calculation of earnings per share in future periods when we report net income if the average market value of the common shares increases and is greater than the exercise price of these options.

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Note 3. Comprehensive Income

Total comprehensive income includes net income and other comprehensive income, which primarily comprises adjustments from foreign currency adjustments. Total comprehensive income for the third quarter of fiscal 2011 was $3.4 million and total comprehensive income for the first nine months of fiscal 2011 was $17.1 million compared to total comprehensive income of $3.2 million for the third quarter of fiscal 2010 and total comprehensive income of $7.2 million for the first nine months of fiscal 2010. Gains or losses resulting from amounts reclassified out of accumulated other comprehensive income into earnings are determined based on the specific identification method.

Note 4. Fair Value

We invest in short-term investments which principally consist of marketable debt and equity securities. Our financial assets are measured and recorded at fair value, except for equity investments in privately-held companies. These equity investments are generally accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. Our non-financial assets, such as goodwill, intangible assets, and property, plant and equipment, are recorded at cost and are assessed for impairment when an event or circumstance indicates that a decline in value may have occurred or at least annually in the case of goodwill.

Fair Value Hierarchy

The measurements of fair value were established based on a fair value hierarchy that prioritizes the utilized inputs. This hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. The guidance for fair value measurements requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:

Level 1 – Quoted (unadjusted) prices in active markets for identical assets or liabilities.

Our Level 1 assets consist of U.S. Treasury bills, marketable equity securities and money market funds.

Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Our Level 2 assets consist of time deposits, commercial paper, corporate bonds and government agency bonds.

Level 3 - Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.

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We had no Level 3 assets as of March 31, 2011 or June 30, 2010.

The following table presents our cash equivalents and short-term investments by the above pricing levels as of March 31, 2011 (in thousands):

	Fair value measurement at reporting dates using
	Total		Quoted Price in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
			(Level 1)		(Level 2)		(Level 3)
Money Market Funds	$	49,765	$	49,765	$	—	$	—
Commercial Paper		2,499		—		2,499		—
Total Cash Equivalents	$	52,264	$	49,765	$	2,499	$	—
Commercial Paper	$	11,693	$	—	$	11,693	$	—
Corporate Bonds		7,967		—		7,967		—
Government Agency		3,512		—		3,512		—
Treasury Bills		12,051		12,051		—		—
Total Short-term Investments	$	35,223	$	12,051	$	23,172	$	—

Available-for-sale securities, all of which were classified as short-term investments, held by the Company as of March 31, 2011 were as follows (in thousands):

	March 31, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Corporate Bonds	$	7,967	$	2	$	(2)	$	7,967
Commercial Paper		11,692		1		—		11,693
Government Agency		3,510		2		—		3,512
Treasury Bills		12,044		7		—		12,051
Total Short-term Investments	$	35,213	$	12	$	(2)	$	35,223

All contractual maturities of the Company's available-for-sale marketable securities at March 31, 2011 were within one year.

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The following table presents our cash equivalents and short-term investments by the above pricing levels as of June 30, 2010 (in thousands):

	Fair value measurement at reporting dates using
	Total		Quoted Price in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
			(Level 1)		(Level 2)		(Level 3)
Money market funds	$	10,007	$	10,007	$	—	$	—
Commercial Paper		999		—		999		—
Total cash equivalents	$	11,006	$	10,007	$	999	$	—
Commercial Paper	$	1,000	$	—	$	1,000	$	—
Corporate Bonds		6,874		—		6,874		—
Treasury Bills		4,495		4,495		—		—
Government Agency		6,979		—		6,979		—
Domestic Time deposits		1,000		—		1,000		—
Marketable equity securities		388		388		—		—
Total short-term investments	$	20,736	$	4,883	$	15,853	$	—

Available-for-sale securities, of which $1.0 million was classified as cash equivalents and $20.7 million was classified as short-term investments, held by the Company as of June 30, 2010 were as follows (in thousands):

	June 30, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Corporate Bonds	$	6,882	$	—	$	(8	)	$	6,874
Commercial Paper		1,999		—		—			1,999
Treasury Bills		4,492		3		—			4,495
Government Agency		6,977		2		—			6,979
Domestic Time deposits		1,000		—		—			1,000
Marketable Equity securities		306		82		—			388
Total available-for-sale securities	$	21,656	$	87	$	(8	)	$	21,735

All contractual maturities of the Company's available-for-sale marketable securities at June 30, 2010 were within one year.

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Note 5. Goodwill and Purchased Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired through past business combinations. Our goodwill balance of $565,000 is primarily attributable to the First Silicon Solutions acquisition and did not change in fiscal 2010 and in the first nine months of fiscal 2011.

Purchased intangible assets subject to amortization consisted of the following (in thousands):

	March 31, 2011							June 30, 2010
	Gross Carrying Value		Accumu- lated Amortization			Net Carrying Value		Gross Carrying Value		Accumu- lated Amortization			Net Carrying Value
Developed and core technology	$	1,100	$	(908	)	$	192	$	1,100	$	(825	)	$	275
Purchased software licenses		1,985		—			1,985		—		—			—
Purchased intangible assets	$	3,085	$	(908	)	$	2,177	$	1,100	$	(825	)	$	275

Developed and core technology is being amortized over its useful life of 10 years. Purchased software licenses are being amortized over their useful lives of 3 to 6 years. The amortization expense for the intangible assets for three and nine months ended March 31, 2011 was $28,000 and $0.1 million, respectively.

Estimated future amortization expense related to our existing purchased intangible assets is as follows:

	in thousands
Fiscal Year
Remaining 2011	$	120
2012		479
2013		424
2014		329
2015		300
Thereafter		525
Total	$	2,177

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Note 6. Discontinued Operations

On May 7, 2009, we entered into a simultaneous sale and close agreement with Synopsys, Inc. (Synopsys) to sell our Analog Business Group (ABG) for $22 million in cash. As a result of the sale, the assets and liabilities related to ABG are presented as assets and liabilities of discontinued operations, respectively, and the results of ABG’s operations are classified as discontinued operations on our statements of operations for all periods presented.

In connection with the sale of our ABG to Synopsys, we agreed to retain responsibility for certain actual or contingent liabilities and agreed to indemnify Synopsys against certain breaches of representations and warranties and other liabilities. Our potential liability to Synopsys is subject to certain limitations, including limitations on the time period during which claims may be asserted and the amounts for which we are liable. To date, we have not incurred any losses in respect of claims asserted by Synopsys in connection with this transaction. However, there can be no assurance that we will not incur future liabilities to Synopsys in connection with this transaction, or that the amount of such liabilities will not be material. In May 2010, Synopsys delivered a letter to MIPS asserting breaches of certain representations and warranties and requesting compensation in an aggregate amount of approximately $3.7 million. We responded to Synopsys in June 2010 and denied all claims set forth in the May 2010 letter. In July 2010, Synopsys responded to our letter. General discussions between the parties have commenced and additional documents have been exchanged. However, there can be no assurance that the current dispute can be resolved on terms that are acceptable to us.

At June 30, 2010, we had liability of $26,000 relating to discontinued operations consisting of remaining administrative costs relating to the closure of certain foreign operations. There is no remaining liability outstanding as of March 31, 2011. In the second quarter of fiscal 2011, we recorded a gain from discontinued operations of $0.2 million, as a result of receiving a withholding tax refund from discontinued operations. The payments and receipts relating to discontinued operations have been reflected as cash activities from discontinued operations in our Statement of Cash Flows for all periods presented.

Note 7. Debt

Revolving Credit Agreement. On September 20, 2010, our revolving line of credit which enabled us to borrow up to $10 million from Silicon Valley Bank expired with no balance due. Loans under this facility would be secured by virtually all of our assets with the exception of IP, and the facility contained affirmative and negative covenants that imposed restrictions on the operation of our business. As of June 30, 2010, we were in compliance with the debt covenants. There was no debt covenant at March 31, 2011. The revolving credit agreement interest was at SVB’s prime rate plus 0.25% as defined in the credit facility agreement. SVB’s prime rate at June 30, 2010 was 4.0%.

Note 8. Restructuring

In our first quarter of fiscal 2011, we completed all the payments of the $0.7 million restructuring liability that we incurred in our fourth quarter of fiscal 2010, which related to severance and benefit costs.

There was no restructuring activity in the third quarter of fiscal 2011 and 2010.

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Note 9. Other Income (Expense), Net

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

	Three months ended March 31,						Nine months ended March 31,
	2011			2010			2011			2010
Interest income	$	71		$	33		$	437		$	114
Interest expense		—			(102	)		—			(343	)
Gain on investment		67			(36	)		646			569
Other		(1	)		(31	)		(189	)		(139	)
Total other income (expense), net	$	137		$	(136	)	$	894		$	201

Note 10. Equipment, Furniture and Property

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

	March 31, 2011			June 30, 2010
Equipment	$	9,246		$	9,343
Furniture and fixtures		1,849			2,119
Leasehold improvements		651			632
		11,746			12,094
Accumulated depreciation and amortization		(9,638	)		(10,001	)
Equipment, furniture and property, net	$	2,108		$	2,093

Note 11. Other Long-Term Assets

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

	March 31, 2011		June 30, 2010
Equity investment in privately held company	$	400	$	368
Long-term engineering design software licenses		2,092		4,928
Cash surrender value of insurance contracts tied to our deferred compensation plan		1,344		1,677
Other		317		294
Total other assets	$	4,153	$	7,267

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Note 12. Accrued and Other Long-Term Liabilities

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

	March 31, 2011		June 30, 2010
Accrued compensation and employee-related expenses	$	6,039	$	6,530
Income taxes payable		1,926		1,920
Accrued restructuring		—		696
Obligations related to purchased software licenses		1,300		—
Obligations related to engineering design software licenses		867		2,752
Other accrued liabilities		1,756		2,013
Total accrued liabilities	$	11,888	$	13,911

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

	March 31, 2011		June 30, 2010
Deferred compensation	$	1,435	$	1,770
Long-term income tax liability		1,200		1,146
Long-term obligations related to purchased software licenses		500		—
Long-term obligations related to engineering design software licenses		—		867
Long-term deferred revenue		1,781		1,993
Other		314		340
Total long-term liabilities	$	5,230	$	6,116

Note 13. Commitments and Contingencies

Purchase Commitments with Suppliers. The Company has agreements with suppliers and other parties to purchase goods, services and long-lived assets. Unconditional obligations under these agreements at March 31, 2011 for the remainder of fiscal 2011 and for each of the subsequent four years from fiscal 2012 through 2015 were approximately $1.4 million, $0.3 million, $0.3 million, $0.1 million and $0.1 million, respectively. These commitments are exclusive of purchased software licenses and engineering design software license contracts of $2.7 million that are reflected in the Company’s accrued liabilities (see Note 12).

Operating Lease Commitments. At March 31, 2011, the Company’s future minimum payments for operating lease obligations are as follows:

	In thousands
Fiscal Year
Remainder of 2011	$	293
2012		1,021
2013		798
2014		735
2015		728
Thereafter		686
Total	$	4,261

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

In connection with the sale of our Analog Business Group to Synopsys, Inc. (Synopsys) in May 2009, we agreed to retain responsibility for certain actual or contingent liabilities and agreed to indemnify Synopsys against certain breaches of representations and warranties and other liabilities. Our potential liability to Synopsys is subject to certain limitations, including limitations on the time period during which claims may be asserted and the amounts for which we are liable. To date, we have not incurred any losses in respect of claims asserted by Synopsys in connection with this transaction. However, there can be no assurance that we will not incur future liabilities to Synopsys in connection with this transaction, or that the amount of such liabilities will not be material. In May 2010, Synopsys delivered a letter to MIPS asserting breaches of certain representations and warranties and requesting compensation in an aggregate amount of approximately $3.7 million. We responded to Synopsys in June 2010 and denied all claims set forth in the May 2010 letter. In July 2010, Synopsys responded to our letter. General discussions between the parties have commenced and additional documents have been exchanged. However, there can be no assurance that the current dispute can be resolved on terms that are acceptable to us.

Note 14. Stock-Based Compensation

The following table shows total stock-based employee compensation expense included in the condensed consolidated statements of operations for the three months and nine months ended March 31, 2011 and 2010 (in thousands):

		Three months ended March 31,			Nine months ended March 31,
		2011		2010	2011		2010
Operating expenses:
Research and development	$	395	$	297	$	1,050	$	1,030
Sales and marketing		462		221		996		679
General and administrative		617		282		1,570		986
Total stock-based compensation expense	$	1,474	$	800	$	3,616	$	2,695

In the three months and nine months ended March 31, 2011 we issued 489,443 and 6,325,934 shares, respectively, of common stock for employee restricted stock award settlements, purchases under our employee stock purchase plan and stock option exercises. In the three months and nine months ended March 31, 2010 we issued 40,007 and 510,508 shares, respectively, of common stock for employee restricted stock award settlements, purchases under our employee stock purchase plan and stock option exercises.

In fiscal 2010, we issued 570,386 shares of common stock upon stock option exercise purchases.

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Stock Options

Following are the significant weighted average assumptions used for estimating the fair value of the share–based compensation awards under our stock option plans and the weighted average grant date fair value for such awards:

	Employee Stock Options for three months ended March 31,						Employee Stock Options for nine months ended March 31,						Employee Stock Purchase Plan for three months ended March 31,						Employee Stock Purchase Plan for nine months ended March 31,
	2011			2010				2011			2010		2011			2010					2011			2010
Expected volatility		0.65			0.61			0.62			0.62			0.68			0.43				0.55			0.74
Risk-free interest rate		1.66	%		2.00	%		1.20	%		2.00	%		0.19	%		0.20	%			0.21	%		0.29	%
Expected dividends		0.00	%		0.00	%		0.00			0.00			0.00	%		0.00	%			0.00	%		0.00	%
Expected life (in years)		4.2			4.2			4.2			4.2			0.50			0.50				0.50			0.50
Weighted-average grant date fair value	$	6.29		$	2.06		$	4.39		$	1.88		$	4.88		$	1.07			$	2.91		$	1.22

Restricted Stock Units and Awards

For the three months and nine months ended March 31, 2011 we granted 80,800 and 433,674 restricted stock units, respectively, with a weighted-average grant date fair value of $12.34 and $9.50, respectively. For the three months and nine months ended March 31, 2010 we granted 81,775 and 91,775 restricted stock units, respectively, with a weighted-average grant date fair value of $4.18 and $4.09 respectively.

Note 15. Income Taxes

We recorded an income tax expense of $0.8 million and $3.0 million for the three-month and nine-month periods ended March 31, 2011, respectively. We recorded an income tax expense of $0.7 million and $1.9 million for the three-month and nine-month periods ended March 31, 2010, respectively. We continue to recognize a valuation allowance against net U.S. deferred tax assets as we believe that it is more likely than not that the deferred tax assets will not be realized.

Our estimated annual income tax for fiscal 2011 consists of U.S. state, foreign income and withholding taxes. U.S. federal tax has been offset by foreign tax credits from withholding taxes, and tax benefits from employee stock option exercises. Included in the fiscal 2011 income tax expense is $0.8 million withholding tax related to the pending repatriation of undistributed earnings from one of our foreign subsidiaries, for which a U.S. foreign tax credit is available. However, our U.S. foreign tax credit is subject to a valuation allowance consistent with the other U.S. deferred tax assets. The tax expense recognized for the quarter ended March 31, 2011 is higher than that of the same period ended March 31, 2010 primarily due to an increase in withholding taxes as a result of an increase in certain foreign revenues.

There were no material changes to our reserves for unrecognized tax benefits in our quarter ended March 31, 2011. The total amount of gross unrecognized tax benefits as of March 31, 2011 and June 30, 2010 was approximately $4.1 million and $4.3 million, respectively. We accrue interest and penalties related to uncertain tax positions as a component of the provision for income taxes. Accrued interest and penalties relating to income tax on the unrecognized tax benefits as of March 31, 2011 and June 30, 2010 was approximately $0.3 million and $0.2 million, respectively. Also, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $1.2 million and $1.1 million as of March 31, 2011 and June 30, 2010, respectively.

Although we file tax returns in several overseas tax jurisdictions, our major tax jurisdiction is the United States where we file U.S. federal and state returns. Our fiscal 2008 and subsequent tax years remain subject to examination by the IRS for U.S. federal tax purposes. The Company does not expect any significant change in the total amount of uncertain tax benefits in the next 12 months.

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

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

Overview

MIPS Technologies, Inc. is a leading provider of industry-standard processor architectures and cores for digital home, networking and mobile applications. Our offerings include flexible and widely-applicable single- and multi-threaded core processors that can be used in a wide variety of markets. Our technology is broadly used in markets such as mobile consumer electronics, digital entertainment, wired and wireless communications and networking, office automation, security, microcontrollers and automotive. Our customers are global semiconductor companies and system original equipment manufacturers (system OEMs). We offer our customers high-performance, easy-to-use functionality at a fraction of the cost and time to market that internal development would require. Our customers pay us license fees for architectural and product rights, as well as royalties based on processor unit shipments.

In fiscal 2011 we have increased our investments in research and development and marketing with a specific focus on the mobile market, as our activities and opportunities in that market are growing. Our increased investment activities included adding headcount, utilizing third party IP suppliers, contracting with software developers and partnering with third parties to accelerate our development efforts. To date, our investments have enabled us to secure numerous mobile-related licenses including those for the MIPS architecture, as well as the MIPS32 4KE, M4K, M14K and 1004K cores. In addition, we received the first royalties related to mobile products in the third quarter of fiscal 2011.

We reported third quarter fiscal 2011 revenue of $20.0 million, representing a 15% increase compared to third quarter of fiscal 2010. Royalty revenue in the third quarter of fiscal 2011 was $13.4 million, an 11% increase compared to the third quarter of fiscal 2010. Total royalty units reported in the third quarter of fiscal 2011 were 163 million units, a 20% increase from our third quarter of fiscal 2010. As our royalty revenue is reported one quarter in arrears, shipments and revenue reported in our third quarter of fiscal 2011 generally represented our customer shipments from the quarter ended December 31, 2010. License and contract revenue in the third quarter of fiscal 2011 was $6.6 million, representing an increase of 23% compared to the $5.4 million in the third quarter of fiscal 2010. We completed seven new license agreements in the third quarter of fiscal 2011 as compared to nine in the same period from the prior year. The increase in license and contract revenue in the third quarter of fiscal 2011 as compared to same period of the prior year was due to the higher average selling prices of our licenses in fiscal 2011 as compared to the prior year.

Our operating income for the third quarter of fiscal 2011 increased to $4.1 million from $3.9 million in our third quarter of fiscal 2010. The increase in operating performance for our third quarter of fiscal 2011 compared to the same quarter of fiscal 2010 was mainly due to the increase in royalty and license revenue, which were partially offset by increased operating expenses as we continued to invest in research and development and marketing.

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We recorded a tax provision of approximately $0.8 million in the quarter ended March 31, 2011 and 2010 consisting mainly of U.S. state, foreign income taxes and withholding taxes.

Our cash, cash equivalents and short term investments as of March 31, 2011 were $108.4 million compared to $52.4 million at June 30, 2010. The increase in cash, cash equivalents and short term investments was primarily a result of cash provided from operations and stock option exercises. We issued approximately 0.5 million shares from option exercises for the three months ended March 31, 2011 and 6.2 million shares for the nine months ended March 31, 2011. These exercises were the primary reason that our diluted share total increased from 46.4 million for the year ending June 30, 2010 to 54.9 million for the quarter ending March 31, 2011. As a result of these option exercises, our total outstanding options decreased from 11.5 million at June 30, 2010 to 6.2 million at March 31, 2011. Approximately 38% of the options exercised in the nine months ended March 31, 2011 were from two executives that recently departed the company, one departure was in December 2009 and the other departure was in August 2010. As of March 31, 2011, these departed executives held less than 10% of our remaining outstanding option balance.

Discontinued Operations

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Results of Operations

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

Our revenue in the three-month and nine-month periods ended March 31, 2011 and March 31, 2010 was as follows (in thousands, except percentages):

	Three Months Ended March 31,									Nine Months Ended March 31,
	2011			2010			Change (in Percent)			2011			2010			Change (in Percent)
Revenue
Royalties	$	13,415		$	12,100			11	%		41,846		$	33,244			26	%
Percentage of Total Revenue		67	%		69	%					65	%		70	%
License and Contract Revenue	$	6,633		$	5,406			23	%		22,597		$	14,431			57	%
Percentage of Total Revenue		33	%		31	%					35	%		30	%
Total Revenue	$	20,048		$	17,506			15	%	$	64,443		$	47,675			35	%

Royalties. The increase in royalty revenue in the third quarter of fiscal 2011 from the comparable period in fiscal 2010 was primarily due to an increase in unit volumes reported by our royalty paying licensees. Total royalty units reported by our customers in the third quarter of fiscal 2011 were 163 million units, a 20% increase from our third quarter of fiscal 2010.

The increase in royalty revenue in the first nine months of fiscal 2011 from the comparable period in fiscal 2010 was primarily due to an increase in royalty units reported by our customers. Total royalty units reported by our customers in the first nine months of fiscal 2011 were 491 million units, a 34% increase from the same period of the prior year. The increase in units was partially offset by lower average selling price of royalty units as certain customers had lower volume based per unit pricing in fiscal 2011 as compared to fiscal 2010.

License and Contract Revenue.

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The increase of 23% in license and contract revenue in the third quarter of fiscal 2011 from the comparable period in fiscal 2010 was due to higher average selling price of licenses. There were 7 new license agreements executed in the third quarter of fiscal 2011 compared to 9 in the third quarter of fiscal 2010. Unlimited use licenses accounted for $2.8 million of our license and contract revenue in our third quarter of fiscal 2011. The unlimited use license agreements we completed in the third quarter of fiscal 2011 had one year terms. Contract revenue from unlimited use license agreements was $2.5 million in the same period of fiscal 2010.

License and contract revenue for the nine months ended March 31, 2011 was up 57% from the comparable period in fiscal 2010. The increase was due to higher average selling price of licenses as compared to the first nine months of fiscal 2010. Unlimited use licenses accounted for $13.1 million of our license and contract revenue in the nine months ended March 31, 2011. Excluding one architecture agreement that had a term of 16 years, the range of terms of unlimited license agreements we completed in the nine months of fiscal 2011 was 1 to 6 years with an average term of approximately 3 years. Contract revenue from unlimited use license agreements was $6.1 million in the same period of fiscal 2010.

Cost and Expenses

The following is a summary of certain consolidated statement of operations data for the periods indicated (in thousands, except percentages):

	Three Months Ended March 31,							Nine Months Ended March 31,
	2011		2010		Change in Percent			2011		2010		Change in Percent
Operating Expenses
Cost of Sales	$	163	$	75		117	%	$	1,060	$	309		244	%
Research and Development	$	7,073	$	6,315		12	%	$	20,024	$	17,913		12	%
Sales and Marketing	$	5,377	$	3,889		38	%	$	14,215	$	10,840		31	%
General and Administrative	$	3,362	$	3,282		2	%	$	10,253	$	9,993		3	%

Cost of Sales. Cost of sales includes costs associated with acquired third party software used in our products and engineering labor and overhead costs associated with the development costs of certain customer contracts relating to technology under development.

The increase in cost of sales in the third quarter of fiscal 2011 compared to the same period of fiscal 2010 was primarily due to additional costs related to acquired third party software. The increase in cost of sales for the nine months ended March 31, 2011 compared to the same period of fiscal 2010 was primarily due to additional engineering labor and overhead costs associated with a customer project that commenced in the fourth quarter of 2010 and completed in the second quarter of 2011.

Research and Development. Research and development expenses include salaries and contractor and consultant fees, as well as costs related to workstations, software, and computer aided design tools utilized in the development of new technologies. 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.

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The $0.8 million increase in research and development expense for the third quarter of fiscal 2011 over the comparable period in fiscal 2010 was primarily due to a $0.5 million increase in salary related expense due to increased headcount and a $0.3 million increase in consulting related expenses resulting from additional product development efforts.

The $2.1 million increase in research and development expense for the nine months ended March 31, 2011 compared to the same period in fiscal 2010 was primarily due to $1.3 million increase in consulting related expenses resulting from additional product development efforts and a $0.7 million increase in bonus expense resulting from the company having more engineering employees in fiscal 2011 as well as the company exceeding certain financial targets in the first nine months of fiscal 2011. In addition, there was a $0.5 million increase in employer payroll taxes due to an increase of stock option exercises in the first three quarters of fiscal 2011 as compared to the same period of fiscal 2010. These increases were partially offset by lower depreciation expense of $0.3 million with more equipment fully depreciated.

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

The $1.5 million increase in sales and marketing expense for third quarter of fiscal 2011 over the comparable period in fiscal 2010 was due in part to a $0.6 million increase in salary, benefit and recruiting expenses primarily resulting from increased headcount in our marketing group. There was also a $0.3 million increase in outside service related expense with higher utilization of third party vendors, a higher stock-based compensation expense of $0.3 million resulting from increased marketing headcount as well as a higher average grant date fair value of options as compared to the prior year, a $0.2 million increase in travel expenses and a $0.1 million increase in other facilities and personnel expenses.

The $3.4 million increase in sales and marketing expense for the nine months ended March 31, 2011 compared to the same period in fiscal 2010 was due in part to a $1.5 million increase in salary, benefit and recruiting expenses resulting from increased headcount in our marketing group and a $0.5 million increase in commissions and bonus expense resulting from the company having more marketing employees in fiscal 2011 as well as the company exceeding certain financial targets in the first three quarters of fiscal 2011. There was also a $0.8 million increase in outside service related expense with higher utilization of third party vendors, a higher stock-based compensation expense of $0.3 million resulting from increased marketing headcount as well as a higher average grant date fair value of options as compared to prior year, a $0.2 million increase in travel expenses and a $0.1 million increase in other facilities and personnel expenses.

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 and financial audit fees.

General and administrative costs were relatively flat at $3.4 million in the quarter ending March 31, 2011 compared to $3.3 million in the quarter ending March 31, 2010.

The $0.3 million increase in general and administrative expense for the nine months ended March 31, 2011 compared to the same period in fiscal 2010 was primarily due to higher stock-based compensation expense of $0.6 million primarily resulting from new executive and board of director grants as well as higher average grant date fair value of options as compared to prior years and a $0.3 million increase in bonus expense primarily resulting from the company exceeding certain financial targets in the first three quarters of fiscal 2011. These increases were partially offset by a $0.5 million severance expense we incurred in the second quarter of fiscal 2010 in connection with our former Chief Executive Officer and lower recruiting fees of $0.2 million.

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Other Income (Expense), Net. Other income (expense), net for the quarter ending March 31, 2011 increased by $0.3 million as compared to the same period of the prior year primarily due to a decrease of $0.1 million in interest expenses as the company had $8.8 million of debt as of March 31, 2010 which we fully repaid in April 2010 and an increase in interest income by $0.2 million as a result of higher cash and investment balances in fiscal 2011.

Other income (expense), net increased by $0.7 million for the nine months ended March 31, 2011 compared to the same period in fiscal 2010 primarily due to an increase of $0.3 million of interest payments received from customers with respect to catch up royalty payments and a decrease of $0.4 million in interest expenses and other loan costs as the company had $8.8 million of debt as of March 31, 2010 which we fully repaid in April 2010.

Income Taxes. We recorded an income tax expense of $0.8 million and $3.0 million for the three-month and nine-month periods ended March 31, 2011, respectively. We recorded an income tax expense of $0.7 million and $1.9 million for the three-month and nine-month periods ended March 31, 2010, respectively. We continue to recognize a full valuation allowance against net U.S. deferred tax assets as we believe that it is more likely than not that the deferred tax assets will not be realized.

Liquidity and Capital Resources

At March 31, 2011, we had cash, cash equivalents and short term investments of $108.4 million, an increase of approximately $56 million from June 30, 2010. Our cash and cash equivalents increased by $41.5 million, primarily as a result of cash provided from operations and stock option exercises, offset by net purchases of marketable securities. We allowed our revolving credit facility to expire during the first quarter of fiscal 2011 without being renewed.

Operating Activities

Net cash provided by operating activities was $21.9 million for the nine months ended March 31, 2011. The cash generated from operating activities included $21.7 million from continuing operations and cash provided from discontinued operations of $0.2 million. The cash generated from operations was primarily a result of our positive net income net of non-cash expenses. Our net income from continuing operations included the effects of non-cash charges of $3.6 million from stock-based compensation expense and $0.9 million in depreciation and amortization of intangible assets. In addition, cash generated from operating activities of continuing operations increased primarily as a result of a $0.7 million decrease in prepaid expenses and other current and long term assets, primarily reflecting the timing of engineering design software license payments as compared to their amortization and a $3.0 million decrease in accounts receivable, reflecting timing of customer billings and payments received. These increases were offset by cash used as a result of (i) a $0.7 million decrease in long term liabilities, primarily reflecting timing of engineering design software license payments and (ii) a $1.8 million decrease in accounts payable and accrued liabilities, primarily due to the payment of our fiscal 2010 bonus and commissions in the first quarter of fiscal 2011.

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Net cash provided by operating activities was $9.7 million for the nine months ended March 31, 2010. The cash generated from operating activities included $11.1 million from continuing operations, partially offset by cash used by discontinued operations of $1.4 million. The cash generated from continuing operations was primarily a result of our positive net income net of non-cash expenses and cash provided from changes in our asset and liability balances. Our net income from continuing operations included the effects of non-cash charges of $2.7 million from stock-based compensation expense, $1.3 million in depreciation and amortization of intangible assets and a $0.6 million gain on exchange on investments. In addition, cash generated from operating activities of continuing operations increased primarily as a result of (i) a $3.6 million decrease in prepaid expenses and other current and long term assets, primarily reflecting the timing of engineering design software license payments as compared to their amortization and (ii) a $1.0 increase in accrued liabilities, primarily due to the withholding tax accrual in connection with a change in our foreign legal structure. These increases in cash were partially offset by cash used as a result of (i) a $2.3 million decrease in long term liabilities, primarily reflecting timing of engineering design software license payments, (ii) a $0.3 million decrease in accounts payable due to the timing of payments and (iii) a $1.2 million increase in accounts receivable, reflecting timing of customer billings and payments received. The negative cash flow from operating activities of discontinued operations was primarily driven by the payment of $1.4 million of cash for restructuring and administrative expenses.

Investing Activities

Net cash used in investing activities was $15.2 million for the nine months ended March 31, 2011 as a result of usage of $14.5 million from the net purchases of available-for-sale securities and $0.7 million used to purchase property, furniture and equipment.

Net cash used in investing activities was $23.5 million for the nine months ended March 31, 2010 as a result of usage of $22.5 million from the net purchases of available-for-sale securities and $1.0 million used to purchase property, furniture and equipment.

Financing Activities

Net cash provided by financing activities was $34.7 million for the nine months ended March 31, 2011. This cash generated from financing activities resulted from stock option exercises and purchases under our employee stock purchase plan.

Net cash used in financing activities was $2.6 million for the nine months ended March 31, 2010. Net cash used of $4.0 million related to the principal payments of our debt. This use of cash was partially offset by $1.4 million that we received from stock option exercises and purchases under our employee stock purchase plan.

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Liquidity

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

•

general economic and political conditions and specific conditions in the markets we address, including the continuing volatility in the technology sector and semiconductor industry, the recent global economic recession, trends in the semiconductor markets in various geographic regions, including seasonality in sales of consumer products into which our products are incorporated;

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our ability to continue to generate cash flow from operations;

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litigation expenses, settlements and judgments;

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required levels of research and development and other operating costs;

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changes in our compensation policies;

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the issuance of restricted stock units and the related cash payments we make for withholding taxes due from employees in future years;

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the level of exercises of stock options and stock purchases under our employee stock purchase plan;

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the timing and payment of taxes in connection with changing the legal structure of our foreign operations;

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significant payments to suppliers including Computer Aided Design (CAD) system vendors required under long term purchase agreements as these payments vary and can be up to $1.0 million per quarter;

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the costs associated with capital expenditures.

Our investment policy requires all investments with original maturities at the time of investment of up to 6 months to be rated at least A-1/P-1 by Standard & Poor’s/Moody’s, and specifies higher minimum ratings for investments with longer maturities. We continually monitor the credit risk in our portfolio and seek to mitigate our credit and interest rate exposures. We intend to continue to closely monitor future developments in the credit markets and make appropriate changes to our investment policy as deemed necessary. Based on our ability to liquidate our investment portfolio and our expected operating cash flows, we do not anticipate any liquidity constraints as a result of either the current credit environment or potential investment fair value fluctuations.

We believe that we have sufficient cash to meet our projected operating and capital requirements for the foreseeable future and at least the next twelve months. Our future capital requirements will depend on many factors including our rate of revenue growth, the timing and extent of spending to support development efforts, any expansion of sales and marketing activities and potential future acquisitions.

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Our contractual obligations as of March 31, 2011 were as follows:

	Payments due by period (in thousands)
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating lease obligations (1)	$	4,261	$	293	$	1,819	$	2,149	$	—
Purchase obligations (2)		4,940		4,446		294		200		—
Other long-term liabilities and obligations (3)		1,435		—		1,435		—		—
Total	$	10,636	$	4,739	$	3,548	$	2,349	$	—

(1)	We lease office facilities and equipment under non-cancelable operating leases including the lease for our headquarter facility in Sunnyvale, California.

(2)

Our purchase obligations of $4.9 million at March 31, 2011 decreased from our purchase obligations as of June 30, 2010 by $0.5 million primarily as a result of the timing of payments to certain vendors as compared to their contractual end or renewal dates. Of the total obligations, $2.7 million relates to engineering design software license contracts that are reflected in the Company’s accrued liabilities.

(3)	Other Long-term liabilities and obligations consist of amounts due to employees under a deferred compensation plan, under which distributions are elected by the employees.

The table above excludes estimated liabilities of $1.2 million for uncertainty in income taxes as we are unable to reasonably estimate the ultimate amount or timing of settlement.

Critical Accounting Polices and Estimates

We prepare our financial statements in conformity with U.S. generally accepted accounting principles, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We regularly evaluate our accounting estimates and assumptions. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results inevitably will differ from the estimates, and such differences may require material adjustments to our financial statements. We believe there have been no significant changes to the items we disclosed as our critical accounting policies and estimates in our discussion and analysis of financial condition and results of operations in our 2010 Form 10-K, except for the following policy:

Revenue Recognition.

Royalty Revenue.

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

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License and Contract Revenue.

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Maintenance and Support.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We believe there have been no significant changes to the discussion of quantitative and qualitative disclosures about market risk in our 2010 Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in control over financial reporting

There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Item 1A. Risk Factors

Our success is subject to numerous risks and uncertainties, including those discussed below. These factors could hinder our growth, cause us to sustain losses or have other adverse effects on us, which could individually or collectively cause our stock price to decline. The following list is not exhaustive and you should carefully consider these risks and uncertainties before investing in our common stock.

Our financial results could be negatively impacted by economic conditions. The markets served by the Company, and those of our customers, can be highly cyclical, and our financial results, both our royalty revenue and our ability to secure new contracts, could be impacted by consumer spending in the U.S. and global economies. In addition, from time to time, the semiconductor industry has experienced significant downturns and our prospects and results are influenced in a significant way by conditions in this industry. Royalty revenues depend significantly on worldwide economic conditions, including business and consumer spending, and contract revenues depend on the willingness of our potential customers to invest in new products, and both our royalty revenue and our contract revenue may be impacted by weak economic conditions in consumer spending and infrastructure spending. Some of the factors that could influence the levels of consumer and infrastructure spending include continuing increases in fuel and other energy costs, conditions in the real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting consumer spending behavior. In addition, recent economic volatility could lead to a number of follow-on effects on our business, including insolvency issues with our customers or suppliers. These and other economic factors could have a material adverse effect on demand for our products and services, and on our financial condition and operating results.

We compete against much larger companies in the microprocessor IP market that have larger market share and broader lines of products. Some of our competitors, including Intel Corporation and ARM Holdings plc, have significant financial resources enabling them to market their products aggressively and to target our customers with special incentives. As long as Intel and ARM remain in their dominant position, we may be negatively impacted by their business practices, product mix and product introduction schedules, marketing strategies and exclusivity clauses with customers. In addition, Intel and ARM have substantially greater financial resources than we do and, accordingly, spend substantially greater amounts on research and development and marketing than we do. We expect Intel and ARM to maintain their dominant market positions and to continue to invest heavily in marketing, research and development and in other technology companies. To the extent our competitors develop microprocessor products using more advanced process technologies or introduce competitive new products into the market before we do, our financial condition and operating results will be adversely impacted.

Since a substantial portion of our revenue is derived from a few significant customers, the loss of a key customer or any significant delay in our customers’ product development plans could seriously impact our revenue and harm our business. In addition, if we are unable to continue to sell existing and new products to our key customers or to attract new significant customers, our future operating results could be adversely affected. We have derived a substantial portion of our past revenue from sales to and royalties from a relatively small number of customers. As a result, the loss of any significant customer could materially and adversely affect our financial condition and results of operations.

Revenue from our five largest customers represented 47% and 49% of our net revenue in the quarters ended March 31, 2011 and 2010, respectively. We expect that our largest customers will continue to account for a substantial portion of our net revenue for the foreseeable future. Our largest customers, and their respective contributions to our net revenue, have varied from time to time and will probably continue to vary.

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We may not be able to maintain or increase revenue from certain of our key customers for a variety of reasons, including the following:

·	our agreements with our customers typically do not provide for minimum royalties;

·	many of our customers have pre-existing or concurrent relationships with our current or potential competitors that may affect the customers’ decisions to purchase our products; and

·	some of our customers face intense competition from other manufacturers that do not use our products.

The loss of a key customer, a reduction in the contractual royalty rate of a customer based on volume or the passage of time, a reduction in royalty units used by any key customer, a significant delay in our customers’ product development plans or our inability to attract new significant customers could adversely impact our revenue and our results of operations.

Our stock price is volatile. The market price of our common stock has fluctuated substantially in the past and is likely to continue to be highly volatile and subject to wide fluctuations. From January 1, 2008 through March 31, 2011 our common stock has traded at prices as low as $1.00 and as high as $18.19 per share. Fluctuations have occurred and may continue to occur in response to various factors, many of which we cannot control.

In addition, the market prices of securities of Internet-related, semiconductor and other technology companies have been and remain volatile. The market prices of securities of many technology companies have fluctuated significantly for reasons frequently unrelated to the operating performance of the specific companies. If our operating results do not meet the expectations of securities analysts or investors, who may derive their expectations by extrapolating data from recent historical operating results, the market price of our common stock will likely decline. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid.

Due to the nature of our compensation programs, most of our executive officers sell shares of our common stock each quarter or otherwise periodically (including pursuant to Rule 10b5-1 stock trading plans). Sales of shares by our executive officers may not be indicative of their respective opinions of our performance at the time of sale or of our potential future performance. Nonetheless, the market price of our stock may be affected by sales of shares by our executive officers.

Our financial results are subject to significant fluctuations that could adversely affect our stock price. Our financial results may vary significantly due to a number of factors. In addition, our revenue components are difficult to predict and may fluctuate significantly from period to period. Because our revenues are somewhat independent of our expenses in any particular period, it is difficult to accurately forecast our operating results. Our operating expenses are based, in part, on anticipated future revenue and a very high percentage of our expenses are fixed in the short term. As a result, if our revenue is below expectations in any quarter, the adverse effect may be magnified by our inability to adjust spending in a timely manner to compensate for the revenue shortfall. Therefore, we believe that quarter-to-quarter comparisons of our revenue and operating results may not be a good indication of our future performance. 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.

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

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

·	our ability to successfully conclude licensing agreements of any significant value in a given quarter;

·	the financial terms and delivery schedules of our contractual arrangements with our licensees, which may provide for significant up-front payments, payments based on the achievement of certain milestones or extended payment terms;

·	the demand for products that incorporate our technology;

·	our ability to develop, introduce and market new intellectual property;

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

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

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

·	changes in economic and market conditions.

The success of our business depends on sustaining or growing our license and contract revenue. License and contract revenue consists of technology license fees paid for access to our developed technology, associated maintenance agreements 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 and digital consumer, mobile, wireless, connectivity and business product manufacturers, adopting our technology and using it in the products they sell. Our contract revenue decreased by 23%, 8% and 9% in fiscal 2008, 2009 and 2010 respectively as compared to the prior fiscal year. However, our contract revenue increased by 23% in the third quarter of fiscal 2011 as compared to the same period of fiscal 2010.

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We license our embedded processor intellectual property in the form of both architectures and specific processor cores. Our license agreements include both limited and unlimited uses of our products; however, all licenses contain a limitation on the number of years that a license is valid and only cover those products specifically licensed and available at the time of the license. Under unlimited use license agreements, customers typically pay a larger fixed, up-front fee for the unlimited use of (i) one or more of our MIPS-developed cores or (ii) our architecture to develop their own MIPS-compatible cores during the term of the agreement. Architecture license agreements are not as common as core license agreements. The company currently has 11 active architecture customers. We recognize all license revenues under limited and unlimited use license agreements upon execution of the agreement, provided all revenue recognition criteria have been met. Contract revenue from unlimited use license agreements was 54% in fiscal 2008, 32% in fiscal 2009 and 51% in fiscal 2010 of our total license and contract revenue. Additionally, contract revenue from unlimited use license agreements was $2.8 million in the third quarter of fiscal 2011 as compared with $2.5 million in the third quarter of fiscal 2010. The unlimited use license agreements we completed in the third quarter of fiscal 2011 had one year terms.

Historically, a license-based business can have strong quarters or weak quarters depending on the number and size of the license deals closed during the quarter. We cannot predict whether we can maintain our current contract revenue levels or if contract revenue will grow. Our licensees are not obligated to license new or future generations of our products, so past contract revenue may not be indicative of the amount of such revenue in any future period. If we cannot maintain or grow our contract revenue or if our customers do not adopt our technology and obtain corresponding licenses, our results of operations will be adversely affected.

If we do not succeed in the market for mobile products, our medium to long term revenue growth may be adversely impacted. We believe that our future success depends in part on our ability to develop software, processor cores or other intellectual property that satisfies the requirements of developers, chip suppliers and manufacturers in the market for mobile products, and in fiscal 2011 we increased our spending in research and development and in marketing with a specific focus on this market. If our development efforts for mobile products are not successful or if our IP product offerings and related designs are not widely adopted, our ability to achieve design wins in this market may be limited, and this may in turn adversely affect our medium to long term revenue growth. Further, with our focus on the mobile products market we are, to some extent, foregoing other uses of our research and development and marketing resources, and if this focus is not successful we may fail to capitalize on opportunities available in other markets.

As international business is a significant component of our revenue, we are increasingly exposed to various legal, business, political and economic risks associated with our international operations. For our third quarters of fiscal 2011 and 2010, 48% and 49% of our net revenue, respectively, was derived from sales to customers outside the United States. In addition, we have sales and operations in China as well as sales offices in Germany, Japan, Israel, Korea and Taiwan.

We intend to continue our international business activities. International operations are subject to many inherent risks, including but not limited to:

·	changes in tax laws, trade protection measures and import or export licensing requirements;

·	potential difficulties in protecting our intellectual property rights;

·	fluctuations in foreign currency exchange rates;

·	restrictions, or taxes, on transfers of funds between entities or facilities in different countries;

·	changes in a given country’s political, regulatory or economic conditions;

·	burdens of complying with a variety of foreign laws;

·	difficulties in staffing and managing international operations; and

·	difficulties in collecting receivables from foreign entities or delayed revenue recognition.

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Any of the factors described above may have a material adverse effect on our ability to increase or maintain our foreign sales. Economic conditions in our primary overseas markets, particularly in Asia, may negatively impact the demand for our products abroad. All of our international sales to date have been denominated in U.S. dollars. Accordingly, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets or require us to assume the risk of denominating certain sales in foreign currencies. These factors could impact our business to a greater degree if we further expand our international business activities.

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

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

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

·	our ability to anticipate and timely respond to changes in semiconductor manufacturing processes;

·	changing customer preferences in the digital consumer, mobile, wireless, connectivity and business products markets;

·	the emergence of new standards in the semiconductor industry and for digital consumer, mobile, wireless, connectivity and business products;

·	the significant investment in a potential product that is often required before commercial viability is determined; and

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

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

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. If we are unable to attract, retain and motivate such personnel in sufficient numbers and on a timely basis, we may experience difficulty in implementing our current business and product plans. In that event, we may be unable to successfully meet competitive challenges or to exploit potential market opportunities, which could adversely affect our business and results of operations. In addition, we cannot assume that we will retain our other key officers and employees. Competition for qualified personnel, particularly those with significant experience in the semiconductor and processor design industries, remains intense.

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We rely on third-party technologies for the development of our products and if we were unable to use such technologies in the future, our ability to remain competitive could be harmed. We rely on third parties for technologies that are integrated into our products. If we are unable to continue to use or license these technologies on reasonable terms, or if these technologies fail to operate properly, we may not be able to secure alternatives in a timely manner and our ability to remain competitive would be harmed. In addition, if we are unable to successfully license technology from third parties to develop future products, we may not be able to develop such products in a timely manner or at all.

We rely on the efforts of third parties to enhance our technology offerings and our ecosystem, and an inability to develop or maintain relationships with these parties would harm our ability to remain competitive. We have developed relationships with third parties, including software developers, development tools providers, and third party IP suppliers, pursuant to which these parties provide operating systems, tool support, reference designs and other services that support the MIPS-based ecosystem for our licensees. We believe that these relationships enhance the attractiveness of our technology and improve our ability to achieve design wins. If we are unable to develop or maintain these relationships, or if a product is discontinued by an existing ecosystem partner, our ability to achieve design wins in the future may be limited and our ability to remain competitive would be harmed. In addition, the inability to maintain an attractive MIPS-based ecosystem could adversely affect our business, results of operations and financial condition.

If we do not succeed on key platforms, including Android, our ability to compete and grow may be adversely impacted. Our future success may depend, in part, on our ability to develop software, processor cores or other intellectual property that satisfies the requirements of key platforms, such as Android. If our development efforts are not successful or are significantly delayed, or if the characteristics of our IP product offerings and related designs are not compatible with the requirements of key platforms, our ability to achieve design wins may be limited. In addition, if we fail to achieve a significant number of design wins with respect to new platforms like Android, our medium to longer term revenue growth may be adversely impacted. Furthermore, even if we are successful in developing technologies based on Android or other key platforms, those platforms may not be widely adopted in the industry, which may also limit our growth opportunities.

Our business depends 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 licensees incorporating our technology into their products, bringing those products to market, and the success of those products in the market. In the case of our semiconductor licensees, the amount of such sales is further dependent upon the sale of the products by their customers into which our licensees’ 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 we do not set the prices at which products incorporating our technology are sold. Further, the royalty revenues we report in any given quarter represent licensee and customer shipments one quarter in arrears, and we have very little visibility into our licensees’ and customers’ shipping of products incorporating our technology.

We rely on our licensees to correctly report to us the number or dollar value of products incorporating our technology that they have sold, as these sales are the basis for the royalty payments that they make to us. We have the right under our licensing agreements to perform a royalty audit of the licensee’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.

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

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

Some of our existing competitors, as well as a number of potential new competitors, have longer operating histories, greater brand recognition, and larger customer bases, as well as greater financial and marketing resources. 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.

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

Our results of operations could vary as a result of the methods, estimates, and judgments that we use in applying our accounting policies. The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting Policies and Estimates” under Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended June 30, 2010). Such methods, estimates, and judgments are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise over time that lead us to change our methods, estimates, and judgments. Changes in these methods, estimates, and judgments could significantly affect our results of operations.

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 changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or regulations or in the interpretation of tax laws or regulations. We operate in the United States and internationally and occasionally face inquiries and examinations regarding tax matters in the countries that we operate in. There can be no assurance that the outcomes from examinations will not have an adverse effect on our operating results and financial condition. In addition, we are subject to certain withholding taxes relating to the repatriation of undistributed earnings from certain foreign subsidiaries. Any changes in international laws or tax rulings in countries that we operate in could have an adverse impact on our operating results and financial condition.

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

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We may be subject to claims of infringement. Significant litigation regarding intellectual property rights exists in our industry. As we grow our business and expand into new markets that other companies are developing in, the risk that our technology may infringe upon the intellectual property rights of others increases. In addition, it is standard practice for us to include some form of indemnification of our licensees in our core and architecture license agreements. 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 the use of our technology. Any claims, even those without merit, could be time consuming to defend, result in costly litigation and/or require us to enter into royalty or licensing agreements. These royalty or licensing agreements, if required, may not be available on acceptable terms to us or at all. A successful claim of infringement against us or one of our licensees in connection with its use of our technology could adversely affect our business.

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

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

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

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We may be subject to claims and liabilities in connection with the sale of our discontinued business. In connection with the sale of our Analog Business Group to Synopsys, Inc. (Synopsys) in May 2009, we agreed to retain responsibility for certain actual or contingent liabilities and agreed to indemnify Synopsys against certain breaches of representations and warranties and other liabilities. Our potential liability to Synopsys is subject to certain limitations, including limitations on the time period during which claims may be asserted and the amounts for which we are liable. To date, we have not incurred any losses in respect of claims asserted by Synopsys in connection with this transaction. However, there can be no assurance that we will not incur future liabilities to Synopsys in connection with this transaction, or that the amount of such liabilities will not be material.

In May 2010, Synopsys delivered a letter to MIPS asserting breaches of certain representations and warranties and requesting compensation in an aggregate amount of approximately $3.7 million. We responded to Synopsys in June 2010 and denied all claims set forth in the May 2010 letter. In July 2010, Synopsys responded to our letter. General discussions between the parties have commenced and additional documents have been exchanged. However, there can be no assurance that the current dispute can be resolved on terms that are acceptable to us.

Catastrophic events may disrupt our business and harm our operating results. Our corporate headquarters, a significant portion of our research and development activities, our data centers and certain other critical business operations are located in California. A disruption or failure of these systems in the event of a major natural disaster, telecommunications failure, cyberattack, civil unrest, acts of war, terrorist attack or other catastrophic event could cause system interruptions, delays in our product development and loss of critical data and could prevent us from fulfilling our customers’ orders. An earthquake or other catastrophic event that results in the destruction or disruption of any of our data centers or our critical business or IT systems would severely affect our ability to conduct normal business operations and, as a result, our operating results would be adversely affected. In addition, the March 2011 earthquake and tsunami in Japan may negatively affect the operations, facilities, development plans, sales, and financial condition of our existing licensees and potential licensees with operations in Japan. The Japan earthquake and tsunami and other future catastrophic events may adversely affect our ability to enter into new agreements with licensees and the ability of these licensees to complete product shipments upon which we earn royalty revenues.

We may incur impairments to long-lived assets. We review our long-lived assets, including other intangible assets, for impairment annually in the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Significant negative industry or economic trends, including a significant decline in the market price of our common stock, or disruptions to our business could lead to an impairment charge of our long-lived assets, including the other intangible assets.

Our consideration of impairment indicators and valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance. We operate in highly competitive environments and projections of future operating results and cash flows may vary significantly from results. Additionally, if our analysis results in impairment to our goodwill, intangible and long-lived assets, we may be required to record a charge to earnings in our financial statements during a period in which such impairment is determined to exist, which may negatively impact our results of operations.

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We cannot be assured that our past restructurings will sufficiently reduce our expenses relative to future revenue and may have to implement additional restructuring plans in order to reduce our operating costs. We have implemented restructuring plans in the past to reduce our operating costs. If we have not sufficiently reduced operating expenses or if revenues are below our expectations, we may be required to engage in additional restructuring activities, which could result in additional restructuring charges. These restructuring charges could harm our results of operations. Further, our restructuring plans could result in a potential adverse effect on employee capabilities that could harm our efficiency and our ability to act quickly and effectively in the rapidly changing technology markets in which we sell our products.

The market value of our investment portfolio is exposed to fluctuations in interest rates and changes in credit ratings which could have a material adverse impact on our financial condition and results of operations. Our cash and cash equivalents and short term investments represent significant assets that may be subject to fluctuating or even negative returns depending upon interest rate movements, changes in credit ratings and various financial market conditions. The global credit and capital markets have experienced significant volatility and disruption due to the instability in the global financial system and the current uncertainty related to global economic conditions.

There is a risk that we may incur other-than-temporary impairment charges for certain types of investments, should the credit markets experience further deterioration or the underlying assets fail to perform as anticipated. Our future investment income may fall short of expectations due to changes in interest rates or a decline in fair values of our debt securities that is judged to be other-than-temporary. Furthermore, we may suffer losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates or financial market conditions.

The amount of our other income (expense), net could be adversely affected by macroeconomic conditions and other factors. The amount of other income (expense), net in our consolidated statements of operations is subject to fluctuations in foreign currency exchange rates, fluctuations in interest rates and changes in our cash and cash equivalent balances. These changes are, to a large extent, beyond our control and we have limited ability to predict them.

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.

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SIGNATURES

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

	MIPS Technologies, Inc., a Delaware corporation

May 9, 2011	By:	/s/ MAURY AUSTIN
		Maury Austin
		Vice President and Chief Financial Officer
		(Principal Financial Accounting Officer)

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