MIPS (MIPS) 10-Q 2012 Q3 Quarterly report

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, 2012

OR

¨ 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  x    No  ¨

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

                    Large accelerated filer  x       Accelerated filer  ¨ 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, 2012, the number of outstanding shares of the registrant’s common stock, $0.001 par value, was 53,485,862.

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 Financial Condition and Results of Operations
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

PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

MIPS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	March 31, 2012			June 30, 2011
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	74,701		$	69,202
Short-term investments		34,783			40,194
Accounts receivable, net		3,414			2,619
Prepaid expenses and other current assets		1,501			1,615
Total current assets		114,399			113,630
Equipment, furniture and property, net		2,760			2,014
Intangible assets, net		1,753			2,132
Goodwill		565			565
Other assets		10,113			3,286
Total Assets	$	129,590		$	121,627
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,745		$	1,684
Accrued liabilities		8,951			8,127
Deferred revenue		1,241			1,812
Total current liabilities		11,937			11,623
Long-term liabilities:
Other long-term liabilities		9,485			5,231
Total long-term liabilities		9,485			5,231
Stockholders’ equity:
Common stock, $0.001 par value:  250,000,000 shares authorized March 31, 2012 and June 30, 2011; and 53,198,801 and 52,556,367 shares outstanding at March 31, 2012 and June 30, 2011, respectively, net of 120,053 and 70,269 reacquired shares at March 31, 2012 and June 30, 2011, respectively		53			52
Preferred stock, $0.001 par value; 50,000,000 shares authorized; none issued and outstanding		—			—
Additional paid-in-capital		311,985			305,542
Accumulated other comprehensive income		561			629
Accumulated deficit		(204,431	)		(201,450	)
Total stockholders’ equity		108,168			104,773
Total Liabilities and Stockholders’ Equity	$	129,590		$	121,627

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,
		2012			2011	2012			2011
Revenue:
Royalties	$	11,064		$	13,415	$	37,267		$	41,846
License and contract revenue		4,270			6,633		10,585			22,597
Total revenue		15,334			20,048		47,852			64,443
Operating Expenses:
Cost of sales		348			163		953			1,060
Research and development		9,086			7,073		25,270			20,024
Sales and marketing		4,233			5,377		12,956			14,215
General and administrative		3,443			3,362		10,046			10,253
Total operating expenses		17,110			15,975		49,225			45,552
Operating income (loss)		(1,776	)		4,073		(1,373	)		18,891
Other income, net		69			137		136			894
Income (loss) before income taxes		(1,707	)		4,210		(1,237	)		19,785
Provision for income taxes		825			845		1,744			2,968
Income (loss) from continuing operations		(2,532	)		3,365		(2,981	)		16,817
Income from discontinued operations, net of tax		—			—		—			212
Net income (loss)	$	(2,532	)	$	3,365	$	(2,981	)	$	17,029
Net income (loss) per share, basic – from continuing operations	$	(0.05	)	$	0.06	$	(0.06	)	$	0.34
Net income (loss) per share, basic – from discontinued operations	$	—		$	—	$	—		$	0.00
Net income (loss) per share, basic	$	(0.05	)	$	0.06	$	(0.06	)	$	0.34
Net income (loss) per share, diluted – from continuing operations	$	(0.05	)	$	0.06	$	(0.06	)	$	0.32
Net income (loss) per share, diluted – from discontinued operations	$	—		$	—	$	—		$	0.00
Net income (loss) per share, diluted	$	(0.05	)	$	0.06	$	(0.06)		$	0.32
Common shares outstanding, basic		53,111			52,254		52,868			49,820
Common shares outstanding, diluted		53,111			54,889		52,868			53,036

See accompanying notes.

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MIPS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands)

	Nine Months Ended March 31,
	2012			2011
Operating activities:
Net income (loss) – continuing operations	$	(2,981	)	$	16,817
Adjustments to reconcile net income (loss) to cash provided by operations:
Depreciation		772			781
Stock-based compensation		4,673			3,616
Amortization of intangible assets		378			83
Gain on exchange and sale of investment		—			(611	)
Amortization of investment premium, net		379			404
Other non-cash charges		220			165
Changes in operating assets and liabilities:
Accounts receivable		(878	)		2,952
Prepaid expenses		79			(417	)
Other assets		795			1,130
Accounts payable		95			235
Accrued liabilities		(2,197	)		(2,011	)
Deferred revenue		(783	)		(794	)
Long-term liabilities		(105	)		(700	)
Net cash provided by operating activities – continuing operations		447			21,650
Net cash provided by operating activities – discontinued operations		—			212
Net cash provided by operating activities		447			21,862
Investing activities:
Purchases of marketable securities		(49,001	)		(48,225	)
Proceeds from sales of marketable securities		2,613			5,413
Proceeds from maturities of marketable securities		51,307			28,356
Capital expenditures		(1,578	)		(698	)
Net cash provided by (used in) investing activities		3,341			(15,154	)
Financing activities:
Net proceeds from issuance of common stock		1,771			34,689
Net cash provided by financing activities		1,771			34,689
Effect of exchange rates on cash		(60	)		108
Net increase in cash and cash equivalents		5,499			41,505
Cash and cash equivalents, beginning of period		69,202			31,625
Cash and cash equivalents, end of period	$	74,701		$	73,130

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 for home entertainment, networking, mobile and embedded applications. The MIPS architecture powers some of the world's most popular electronic products. Our technology is used in products such as digital televisions, set-top boxes, Blu-ray players, broadband customer premises equipment, WiFi access points and routers, networking infrastructure and portable/mobile communications and entertainment products. 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, 2011 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, 2011, included in our 2011 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.

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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.

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.

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.

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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.

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 fair value 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, 2012.

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  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.

 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.

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,
	2012			2011		2012			2011
Numerator:
Net income (loss) from continuing operations	$	(2,532	)	$	3,365	$	(2,981	)	$	16,817
Net income  from discontinued operations		—			—		—			212
Net income (loss) – basic and diluted	$	(2,532	)	$	3,365	$	(2,981	)	$	17,029
Denominator:
Weighted-average shares of common stock outstanding		53,111			52,254		52,868			49,820
Effect of dilutive securities		—			2,635		—			3,216
Shares used in computing diluted net income  per share		53,111			54,889		52,868			53,036
Net income (loss) per share, basic - from continuing operations	$	(0.05	)	$	0.06	$	(0.06	)	$	0.34
Net income per share, basic - from discontinued operations	$	—		$	—	$	—		$	0.00
Net income (loss) per share, basic	$	(0.05	)	$	0.06	$	(0.06	)	$	0.34
Net income (loss) per share, diluted - from continuing operations	$	(0.05	)	$	0.06	$	(0.06	)	$	0.32
Net income per share, diluted - from discontinued operations	$	—		$	—	$	—		$	0.00
Net income (loss) per share, diluted	$	(0.05	)	$	0.06	$	(0.06	)	$	0.32
Potentially dilutive securities excluded from diluted net income per share because they are anti-dilutive (A)		3,632			458		3,554			356

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(A) For the three months and nine months ended March 31, 2011, we excluded approximately 0.5 million shares and 0.4 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 and releases of restricted stock units were greater than or equal to the average market value of the common shares.  Some portion, or all, of the shares underlying these options would be included in the calculation of earnings per share in future periods when we report net income if the average market value of the common shares increases and is greater than the exercise price of these options.   For the three months and nine months ended March 31, 2012, dilutive securities were excluded from diluted net loss per share because they are anti-dilutive.

Note 3.  Comprehensive Income (Loss)

Total comprehensive income (loss) includes net income (loss) and other comprehensive income, which primarily comprises foreign currency adjustments and changes in unrealized gains (losses) on short-term investments.   Total comprehensive loss for the third quarter of fiscal 2012 was $2.6 million and total comprehensive loss for the nine months of fiscal 2012 was $3.0 million compared to total comprehensive income of $3.4 million for the third quarter of fiscal 2011 and total comprehensive income of $17.1 million for the first nine months of fiscal 2011.

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.

We had no Level 3 assets as of March 31, 2012 or June 30, 2011.

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The following table presents our cash equivalents and short-term investments by the above pricing levels as of March 31, 2012 (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 (1)	$	65,717	$	65,717	$	—	$	—
Commercial Paper	$	11,482		—		11,482	$	—
Corporate Bonds		18,285		—		18,285		—
Government Agency		5,016		—		5,016		—
Total Short-term Investments	$	34,783	$	—	$	34,783	$	—

(1)   At March 31, 2011, $65.7 million of money market funds were included in the cash and cash equivalents in our condensed consolidated balance sheet.

Available-for-sale securities, all of which were classified as short-term investments, held by the Company as of March 31, 2012 were as follows (in thousands):

	March 31, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Corporate Bonds	$	5,014	$	2	$	—		$	5,016
Commercial Paper		11,482		—		—			11,482
Government Agency		18,301		—		(16	)		18,285
Total Short-term Investments	$	34,797	$	2	$	(16	)	$	34,783

The assets of the Company’s non-qualified deferred compensation plan consist of money market and mutual funds invested in domestic and international marketable securities.

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The following table presents our cash equivalents and short-term investments by the above pricing levels as of June 30, 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	$	52,712	$	52,712	$	—	$	—
Commercial Paper		2,500		—		2,500		—
Total Cash Equivalents	$	55,212	$	52,712	$	2,500	$	—
Commercial Paper	$	12,189	$	—	$	12,189	$	—
Corporate Bonds		12,454		—		12,454		—
Government Agency		13,552		—		13,552		—
Treasury Bills		1,999		1,999		—		—
Total Short-term Investments	$	40,194	$	1,999	$	38,195	$	—

Available-for-sale securities, all of which were classified as short-term investments, held by the Company as of June 30, 2011 were as follows (in thousands):

	June 30, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Corporate Bonds	$	12,460	$	1	$	(7	)	$	12,454
Commercial Paper		12,189		—		—			12,189
Government Agency		13,538		14		—			13,552
Treasury Bills		1,997		2		—			1,999
Total Short-term Investments	$	40,184	$	17	$	(7	)	$	40,194

All contractual maturities of the Company’s available-for-sale marketable securities at March 31, 2012 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 2011 and in the first nine months of fiscal 2012.

The balances of our acquisition related intangible assets, all relating to developed and core technology, were as follows (in thousands):

	March 31, 2011							June 30, 2011
	Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Gross Carrying Value		Accumulated Amortization			Net Carrying Value
Developed and core technology	$	1,100	$	(1,018	)	$	82	$	1,100	$	(935	)	$	165
Purchased software licenses		2,083		(412	)		1,671		2,083		(116	)		1,967
Purchased intangible assets	$	3,183	$	(1,430	)	$	1,753	$	3,183	$	(1,051	)	$	2,132

Our intangible assets are being amortized over their estimated useful lives of 10 years.

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

	in thousands
Fiscal Year
Remaining 2012	$	126
2013		449
2014		353
2015		300
2016		300
2017		225
Total	$	1,753

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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 Analog Business Group (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 and exchange of information between the parties have occurred; however, there can be no assurance that the current dispute can be resolved on terms that are acceptable to us. 

There is no remaining liability outstanding as of March 31, 2012 and June 30, 2011.  In 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 consolidated statement of cash flows for all periods presented. There were no discontinued operation activities recorded in the Statement of Income for the nine months ended March 31, 2012 or March 31, 2011.

 Note 7.  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 other restructuring activity in the nine months ended of March 31, 2012 and March 31, 2011.

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Note 8.   Other Long-Term Assets

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

	March 31, 2012		June 30, 2011
Investment in other company	$	400	$	400
Long-term computer aided design licenses		8,010		1,229
Deferred compensation plan		1,385		1,332
Other		318		325
Total other assets	$	10,113	$	3,286

Note 9.  Accrued and Other Long-Term Liabilities

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

	March 31, 2012		June 30, 2011
Accrued compensation and employee-related expenses	$	2,872	$	6,268
Income taxes payable		71		—
Engineering design software licenses		3,148		100
Other accrued liabilities		2,860		1,759
Total accrued liabilities	$	8,951	$	8,127

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

	March 31, 2012		June 30, 2011
Deferred compensation	$	1,375	$	1,461
Long-term income tax liability		1,343		1,248
Long-term computer aided design licenses and purchased software licenses		4,972		500
Long-term deferred revenue		1,496		1,709
Other		299		313
Total long-term liabilities	$	9,485	$	5,231

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Note 10.  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 for each of the six years from fiscal 2012 through 2017 were approximately $4.5 million, $0.7 million, $0.5 million, $0.5 million, $0.4 million and $0.1 million, respectively. These commitments are exclusive of purchased software licenses and engineering design software license contracts of $8.1 million that are reflected in the Company’s accrued liabilities (see Note 9).  In fiscal 2011, we entered into a software license agreement where we may be obligated to pay an additional $0.2 million on an annual basis, depending upon the volume of future usage by end users from fiscal 2012 to 2017. 

Operating Lease Commitments.  At March 31, 2012, the Company’s future minimum payments for operating lease obligations are as follows:

	In thousands
Fiscal Year
Remaining 2012	$	301
2013		1,107
2014		863
2015		861
2016		835
Thereafter		64
Total	$	4,031

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.

We have been notified by ten licensees of a potential infringement claim by Biax Corporation asserting two US patents, allegedly involving our products.  A number of these licensees have requested indemnification from us. Given the nature of these claims, we cannot yet determine the amount or a reasonable range of potential loss, if any.

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.  See Note 6 “Discontinued Operations” for further details.

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Note 11.  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, 2012 and 2011 (in thousands):

		Three months ended March 31,			Nine months ended March 31,
		2012		2011	2012		2011
Operating expenses:
Research and development	$	541	$	395	$	1,536	$	1,050
Sales and marketing		466		462		1,200		996
General and administrative		713		617		1,937		1,570
Total stock-based compensation expense	$	1,720	$	1,474	$	4,673	$	3,616

In the three months and nine months ended March 31, 2012 we issued 224,179 and 642,434 shares, respectively, of common stock for employee stock purchase plan issuances, employee restricted stock awards and stock option exercises.  For 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 stock purchase plan issuances, employee restricted stock awards and stock option exercises.

In fiscal 2011, we issued 6,211,738 shares of common stock upon stock option exercise purchases.

Stock Options

The following are significant weighted average assumptions used for estimating the fair value of the activity under our stock option plans:

	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,
	2012			2011				2012			2011		2012			2011					2012			2011
Expected volatility		0.72			0.65			0.71			0.62			0.86			0.68				0.78			0.55
Risk-free interest rate		0.74	%		1.66	%		0.68	%		1.20	%		0.06	%		0.19	%			0.07	%		0.21	%
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	$	3.01		$	6.29		$	2.66		$	4.39		$	1.97		$	4.88			$	2.21		$	2.91

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Restricted Stock Units and Awards

For the three months and nine months ended March 31, 2012, we granted 395,500 and 888,738 restricted stock units, respectively, with an average grant date fair value of $5.50 and $5.18, respectively.  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.

Note 12.  Income Taxes

 We recorded an income tax expense of $0.8 million and $1.7 million for the three-month and nine-month period ended March 31, 2012, respectively. We recorded an income tax expense of $0.8 million and $3.0 million for the three-month and nine-month period ending March 31, 2011, respectively. The tax expense recognized for the nine months ended March 31, 2012 is lower than that of the same period ended March 31, 2011 primarily due to a decrease in our income before taxes. 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 recognized.

            Our annual income tax for fiscal 2012 will consist of U.S. state income taxes, foreign income taxes and withholding taxes. Our annual income tax for fiscal 2011 consisted of U.S. state income taxes, foreign income taxes, and withholding taxes.

 There were no material changes to our reserves for unrecognized tax benefits in our quarter ended March 31, 2012. The total amount of gross unrecognized tax benefits as of March 31, 2012 and June 30, 2011 was approximately $5.1 million and $4.6 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, 2012 and June 30, 2011 was approximately $0.3 million, respectively. Also, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $1.3 and $1.2 million as of March 31, 2012 and June 30, 2011, 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.

Note 13.  Supplemental Cash Flow Information

The Company licensed $9.2 million of assets under the financing arrangements in the first nine months of fiscal 2012 and none in the first nine months of fiscal 2011.

Note 14.  Recent Accounting Pronouncements

In June 2011, the FASB amended its guidance on the presentation of comprehensive income in financial statements. The amended guidance eliminates the option to present components of other comprehensive income (“OCI”) as part of the statement of changes in equity. Instead, entities can elect to present items of net income and OCI in one continuous statement (a “statement of comprehensive income”), or can elect to present these items in two separate but consecutive statements. The guidance, which is effective beginning the Company’s fiscal year 2013, will not have an impact on the Company’s consolidated financial statements as the guidance only relates to changes in financial statement presentation.

In April 2011, the FASB issued new guidance to achieve common fair value measurement and disclosure requirements between U.S. generally accepted accounting principles (“U.S. GAAP”) and International Financial Reporting Standards (“IFRS”). This new guidance, which the Company became subject to at the start of its fiscal year 2012, amends current U.S. GAAP fair value measurement and disclosure requirements to include increased transparency around valuation inputs and investment categorization. The adoption of this new guidance did not have a material impact on the Company’s consolidated financial statements.

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

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 home entertainment, networking, mobile and embedded 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 products such as digital televisions, set-top boxes, Blu-ray players, broadband customer premises equipment, WiFi access points and routers, networking infrastructure and portable/mobile communications and entertainment products. 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.

We reported third quarter fiscal 2012 revenue of $15.3 million, representing a 24% decrease compared to third quarter of fiscal 2011.  Royalty revenue in the third quarter of fiscal 2012 was $11.1 million, an 18% decrease compared to the third quarter of fiscal 2011.  Total royalty units reported in the third quarter of fiscal 2012 were 172 million, a 5% increase from our third quarter of fiscal 2011.  As our royalty revenue is reported one quarter in arrears, shipments and revenue reported in our third quarter of fiscal 2012 represented our customer shipments from the quarter ended December 31, 2011.  License and contract revenue in the third quarter of fiscal 2012 was $4.3 million, a 36% decrease compared to the third quarter of fiscal 2011.  There were 4 new license agreements executed in the third quarter of fiscal 2012 compared to 7 in the third quarter of fiscal 2011. The decrease was driven by variety of factors including weak economic conditions and consolidation in the semiconductor industry.  

Our operating loss for the third quarter of fiscal 2012 decreased to an operating loss of $1.8 million from an operating income of $4.1 million in our third quarter of fiscal 2011.  The decrease in operating performance for our third quarter of fiscal 2012 compared to the same quarter of fiscal 2011 was mainly due to the decrease in royalty and license revenue and increase in our investments in research and development activities.  

We recorded a tax provision of $0.8 million in the quarter ended March 31, 2012 consisting mainly of foreign income taxes, U.S. state income taxes and withholding taxes.

Our cash, cash equivalents and short term investments as of March 31, 2012 were $109.5 million compared to $109.4 million at June 30, 2011. 

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.

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In connection with the sale of our Analog Business Group (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 and exchange of information between the parties have occurred; however, there can be no assurance that the current dispute can be resolved on terms that are acceptable to us. 

There is no remaining liability outstanding as of March 31, 2012 and June 30, 2011.  In 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 consolidated statement of cash flows for all periods presented. There was no discontinued operation activities recorded in the Statement of Income for the nine months ended March 31, 2012.

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, 2012 and March 31, 2011 was as follows (in thousands, except percentages):

	Three Months Ended March 31,									Nine Months Ended March 31,
	2012			2011			Change  (in Percent)			2012			2011			Change  (in Percent)
Revenue
Royalties	$	11,064		$	13,415			-18	%		37,267		$	41,846			-11	%
Percentage of Total Revenue		72	%		67	%					78	%		65	%
License and Contract Revenue	$	4,270		$	6,633			-36	%		10,585		$	22,597			-53	%
Percentage of Total Revenue		28	%		33	%					22	%		35	%
Total Revenue	$	15,334		$	20,048			-24	%	$	47,852		$	64,443			-26	%

Royalties.  Our royalty revenue in the third quarter of fiscal 2012 decreased by 18% from the comparable period in fiscal 2011. Total royalty units reported by our customers in the third quarter of fiscal 2012 were 172 million, a 5% increase from our third quarter of fiscal 2011. The royalty per unit for the current quarter was 6 cents compared to 7 cents in the year ago period.  The decline in the royalty per unit was due to several licensees reaching volume tiers in their licenses that triggered lower royalty rates, coupled with decline in average selling price at certain of our customers whose royalties are calculated as a percentage of their revenue as well as shifts in product mix at several of our licensees.

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Royalties in the first nine months of fiscal 2012 were down 11% from the comparable period in fiscal 2011. The decrease was primarily due to decrease in royalty per unit. The decline in the royalty per unit was due to several licensees hitting the next volume tier, coupled with decline in average selling price as well as shifts in product mix at several of our licensees.Included in our royalties in the first nine months of fiscal 2012 were $2.8 million in royalty adjustments from several of our customers.

License and Contract Revenue. 

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 in the number of years that 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 14 active architecture customers. We recognize all license revenues under limited and unlimited use license agreements upon execution of the agreement when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred and collectability is reasonably assured.

Our license and contract revenue decreased by 36% in the third quarter of fiscal 2012 from the comparable period in fiscal 2011. There were 4 new license agreements executed in the third quarter of fiscal 2012 compared to 7 in the third quarter of fiscal 2011.  The decrease was driven by variety of factors including economic conditions and consolidation in the semiconductor industry. Unlimited use licenses accounted for $3.1 million of our license and contract revenue in our third quarter of fiscal 2012, and had terms ranging from 1 to 4 years with an average term of approximately 2.5 years.  Contract revenue from unlimited use license agreements was $2.5 million in the same period of fiscal 2011.  

License and contract revenue for the nine months ended March 31, 2012 decreased by 53% from the comparable period in fiscal 2011 which was primarily due to decrease in the number of licenses and the average selling price of licenses as compared to the first nine months of fiscal 2011. Unlimited use licenses accounted for $6.6 million of our license and contract revenue in the nine months ended March 31, 2012. The range of terms of unlimited license agreements we completed in the first nine months of fiscal 2012 was 1 to 10 years with an average term of approximately 4.2 years. Contract revenue from unlimited use license agreements was $13.1 million in the same period of fiscal 2011.  Excluding one architecture agreement that had a term of 16 years, the range of terms of unlimited license agreements we completed in the first nine months of fiscal 2011 was 1 to 6 years with an average term of approximately 3 years.

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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,
	2012		2011		Change (in Percent)			2012		2011		Change (in Percent)
Operating Expenses
Cost of Sales	$	348	$	163		113	%	$	953	$	1,060		(10)	%
Research and Development	$	9,086	$	7,073		28	%	$	25,270	$	20,024		26	%
Sales and Marketing	$	4,233	$	5,377		(21)	%	$	12,956	$	14,215		(9)	%
General and Administrative	$	3,443	$	3,362		2	%	$	10,046	$	10,253		(2)	%

Cost of Sales.  Cost of sales primarily includes labor and overhead related costs for contracts with engineering service requirements, material costs and costs associated with acquired third party software used in our products.   

The increase in cost of sales in the third quarter of fiscal 2012 over the same period in fiscal 2011 was primarily due to increased amortization of purchased technology in fiscal 2012.

The decrease in cost of sales for the first nine months ended March 31, 2012 compared to the same period of fiscal 2011 was primarily due to additional engineering labor and overhead costs associated with a customer project in fiscal 2011 as compared to fiscal 2012.  This decrease was partially offset by increased amortization of purchased technology in fiscal 2012.

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 generally not directly related to any particular licensee, license agreement or license fee.

The $2.0 million increase in research and development expense for the third quarter of fiscal 2012 over the comparable period in fiscal 2011 was primarily due to a $0.7 million increase in employee related expense due to increased headcount, a $0.6 million increase in consulting related expenses and a $0.7 million increase in supplies and maintenance in preparation for the launch of our next generation products, a $0.1 million increase in depreciation and facilities costs and a $0.1 million increase in stock compensation expense related to grants to additional employees.  These increases were partially offset by a $0.2 million decrease in incentive compensation.

The $5.2 million increase in research and development expense for the nine months ended March 31, 2012 compared to the same period in fiscal 2011 was primarily due to a $2.7 million increase in employee related expense due to increased headcount, a $1.7 million increase in consulting and a $1.5 million increase in supplies and maintenance in preparation for the launch of our next generation products, a $0.2 million increase in depreciation and facilities costs and a $0.5 million increase in stock compensation expense related to grants to additional employees.  These increases were partially offset by a $1.4 million decrease in incentive compensation.

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

            The $1.1 million decrease in sales and marketing expense for third quarter of fiscal 2012 over the comparable period in fiscal 2011 was primarily due to a $0.5 million decrease in commission and incentive compensation, a $0.4 million decrease in employee related expense due to decreased headcount and a $0.2 million decrease in consulting related expense.

The $1.3 million decrease in sales and marketing expense for the nine months ended March 31, 2012 compared to the same period in fiscal 2011 was due to a mix of increases and decreases in various expenses, including (i) a $1.6 million decrease in commission and incentive compensation, (ii) a $0.4 million decrease in employee related expense due to decreased headcount, (iii) an increase of $0.3 in severance related to a former executive of the Company, (iv) an increase of $0.3 million in consulting and outside services fees related to mobile and Android projects, and (v) an increase of $0.1 million in stock compensation based on the mix and timing of employee stock grants.

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.

The $0.1 million increase in general and administrative expense for the third quarter of fiscal 2012 over the comparable period in fiscal 2011 was primarily due to a $0.1 million increase in stock compensation expense based on the mix and timing of employee stock grants and a $0.2 million increase in consulting and outside services fees. These increases were partially offset by $0.1 million decrease in employer payroll taxes due to the higher level of employee stock option exercises in fiscal 2011 as compared to fiscal 2012 and a $0.1 million decrease in incentive compensation.  

The $0.2 million decrease in general and administrative expense for the nine months ended March 31, 2012 over the comparable period in fiscal 2011 was primarily due to a $0.5 million decrease in employer payroll taxes due to the higher level of employee stock option exercises in fiscal 2011 as compared to fiscal 2012, a $0.8 million decrease in incentive compensation, and a $0.1 million decrease in hiring and personnel costs.  These decreases were partially offset by a $0.1 million increase in bad debt expense, a $0.4 increase in stock compensation expense based on the mix and timing of employee stock grants and a $0.7 million increase in legal and consulting expenses in response to our activities and inquiries of an activist shareholder.

Other Income (Expense), Net. Other Income (Expense), net decreased by $0.1 million for the three months ended March 31, 2012 compared to the same period in fiscal 2011 primarily due to a gain on an investment in a privately held company that was acquired in fiscal 2011.

Other Income (Expense), Net. Other Income (Expense), net decreased by $0.8 million for the nine months ended March 31, 2012 compared to the same period in fiscal 2011 primarily due to fiscal 2011 results including (i) $0.3 million of interest payments received from customers with respect to late royalty payments and (ii) a $0.5 million gain on an investment in a privately held company that was acquired.

 Income Taxes.  Our income tax primarily consists of U.S. state income taxes, foreign income taxes and withholding taxes.

We recorded an income tax expense of $0.8 million and $1.7 million for the three-month and nine-month periods ended March 31, 2012, respectively. We recorded an income tax expense of $0.8 million and $3.0 million for the three-month and nine-month periods ending March 31, 2011, respectively. The tax expense recognized for the nine months ended March 31, 2012 is lower than that of the same periods ended March 31, 2011 primarily due to a decrease in our income before taxes. 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 recognized.

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Liquidity and Capital Resources

At March 31, 2012, we had cash, cash equivalents and short term investments of $109.5 million, an increase of approximately $0.1 million from June 30, 2011.  

Operating Activities

Net cash provided by operating activities was $0.4 million for the nine months ended March 31, 2012.   Our loss in the first nine months of fiscal 2012 was offset by non-cash charges of $4.7 million from stock compensation expense and $1.2 million in depreciation and amortization of intangible assets.  In addition, we generated cash from operating activities as a result of a $0.9 million decrease in prepaid expenses and other current and long term assets.  We used cash used in operations primarily as a result of a $0.9 million increase in accounts receivable, reflecting timing of customer billings and payments received, and a $2.1 million decrease in accounts payable and accrued liabilities, primarily due to the payment of our fiscal 2011 bonus in the first quarter of 2012.

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.

Investing Activities

 Net cash provided by investing activities was $3.3 million for the nine months ended March 31, 2012 as a result of $4.9 million from the net maturities of available-for-sale securities and $1.6 million used to purchase property, furniture and equipment.

 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.

Financing Activities

Net cash provided by financing activities was $1.8 million for the nine months ended March 31, 2012.   This cash generated from financing activities resulted from stock option exercises and purchases under our employee stock purchase plan.

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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.

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, and trends in the semiconductor markets in various geographic regions, including seasonality in sales of consumer products into which our products are incorporated;

• our ability to continue to generate cash flow from operations;

• litigation expenses, settlements and judgments;

• required levels of research and development and other operating costs;

• changes in our compensation policies;

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

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

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

• 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;

• the costs associated with capital expenditures.

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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.

Our contractual obligations as of March 31, 2012 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)	$	4,031	$	301	$	1,970	$	1,696	$	64
Purchase obligations (2)		14,815		7,549		6,216		950		100
Other long-term liabilities and obligations (3)		1,375		—		1,375		—		—
Total	$	20,221	$	7,850	$	9,561	$	2,646	$	164

(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 $14.8 million at March 31, 2012 increased from our purchase obligations as of June 30, 2011 by $6.0 million.�� Of the total, $8.1 million of the obligations relate to purchased software licenses or engineering design software license contracts that are reflected in the Company’s accrued liabilities.  The Company has agreements with suppliers and other parties to purchase goods, services and long-lived assets for the remaining $6.7 million unconditional obligations.  Unconditional obligations under these agreements for each of the six years from fiscal 2012 through 2017 were approximately $4.5 million, $0.7 million, $0.5 million, $0.5 million, $0.4 million and $0.1 million, respectively. 

(3) 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, an aggregate of $1.3 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 2011 Form 10-K.

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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 2011 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.

PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

From time to time, we receive communications from third parties asserting patent or other rights allegedly covering our products and technologies. Based upon our evaluation, we may take no action or we may seek to obtain a license, redesign an accused product or technology, initiate a formal proceeding with the appropriate agency (e.g., the U.S. Patent and Trademark Office) and/or initiate litigation.  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.  For additional information regarding intellectual property litigation, see Part II, Item 1A. Risk Factors—“We may be subject to litigation and other legal claims that could adversely affect our financial results.” and “We may be subject to claims of infringement.”

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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.

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. As compared to the prior year, our license and contract revenue decreased by 8% and 9% in fiscal 2009 and 2010, respectively. However, our license and contract revenue increased by 12% in fiscal 2011 as compared to fiscal 2010.  In the third quarter of fiscal 2012, our license and contract revenue decreased by 36% as compared to the third quarter of fiscal 2011.

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.

Changes in the size and nature of the license agreements that we enter into in a given period could cause our operating results to differ significantly from one period to another.  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 14 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.  License revenue from unlimited use license agreements was 32% in fiscal 2009, 51% in fiscal 2010 and 61% in fiscal 2011 of our total license and contract revenue. Additionally, in the third quarter of fiscal 2012, license revenue from unlimited use license agreements was 72% of our total license and contract revenue.  

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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 and it is difficult to predict the level of licensing activity in future periods. Our licensees are not obligated to license new or future generations of our products, so past license and contract revenue may not be indicative of the amount of such revenue in any future period. In addition, consolidation, merger and acquisition activity involving our customers and potential customers may limit our ability to enter into new license agreements, as such activity reduces the number of potential licensees for our products. If we cannot maintain or grow our contract revenue or if our customers do not adopt our technology and obtain corresponding licenses, our results of operations will be adversely affected.

Our royalty revenue may be adversely affected by a number of factors.  Our royalty revenue may be adversely affected by a number of factors, including certain contractual provisions in our license agreements and consolidation activity in our customer base.  A number of our license agreements have provisions that allow a customer to pay a lower contractual royalty rate based on volume (of customer products shipped) or the passage of time.  In addition, consolidation, merger and acquisition activity in our customer base may also negatively impact our royalties. For example, one of our customers was recently acquired by one of our largest customers, and the acquiring customer has historically paid a lower royalty rate than the acquired customer.  In these situations, the combined entity will often seek to pay us royalties based on the lower royalty rate.  Furthermore, a combined entity will likely reach a volume-based royalty reduction (if applicable to such customer) at a faster pace, due to the higher number of units shipped by the combined entity.  Similar consolidation events in the future among our customer base would likely have an adverse effect on our royalties.  

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 approximately 52% and 47% of our net revenue in the quarters ended March 31, 2012 and 2011, respectively. We expect that our largest customers will continue to account for a substantial portion of our net revenue for the foreseeable future.

In addition, consolidation, merger and acquisition activity involving our customers may enhance our reliance on our largest customers.  Our largest customers, and their respective contributions to our net revenue, have varied from time to time and will probably continue to vary.

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.

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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 license and contract revenues depend on the willingness of our potential customers to invest in new products, and both our royalty revenue and our license and 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, the threat of sovereign default 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.

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.

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;

· consolidation, merger and acquisition activity of our customer base, or customers developing competing products internally, which may cause delays or loss of sales;

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· the amount and timing of royalty payments;

· 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.

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 development of platforms, such as Android, by third parties and the selection of preferred solutions for such platforms;

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

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

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

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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, 2012 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. Nevertheless, the market price of our stock may be affected by sales of shares by our executive officers.

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, such as handsets, tablet computers, portable media players and netbooks.   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. In addition, the proliferation of the Android platform (and other mobile-related technologies) beyond the market for mobile handsets may increase our reliance on such technologies in attempting to achieve design wins in other markets, including the market for digital consumer products.  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.

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, the proliferation of the Android platform and Android-based applications beyond the market for mobile handsets may increase our reliance on Android-related technology in attempting to achieve design wins in the market for digital consumer products, including high-end digital televisions. Competition for the development of technologies for the Android platform is rapidly developing and remains intense.

Our ability to remain competitive may be adversely affected if platform owners select competing technologies as preferred solutions for such platforms.  To date, most owners have not favored any particular technology for products based on their platform.  However, a decision by a platform owner to standardize on a technology offering provided by a competitor may affect the decisions of potential licensees when considering technology offerings provided by MIPS.

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 and our technology offerings for such platforms may not be widely adopted in the industry, which may also limit our growth opportunities.

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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 2012 and 2011, 59% and 48%, respectively, of our net revenue was derived from sales to customers outside the United States.  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.

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.

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.

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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.

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 royalty 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.

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 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.

 On August 4, 2011, our former Chief Financial Officer, Maury Austin, informed the Company that he intended to retire as an employee of the Company effective at such time as the company appointed a successor Chief Financial Officer.  On October 27, 2011, the Company announced that the Board of Directors had appointed William Slater as the new Chief Financial Officer of the Company, effective November 10, 2011.  

On September 30, 2011, Arthur Swift resigned as the Company’s Vice President of Marketing and Business Development. In connection with Mr. Swift's resignation, the Company has named Gideon Intrater as the new Vice President of Marketing.

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. For example, we have been notified by ten licensees of a potential infringement claim by Biax Corporation asserting two US patents, allegedly involving MIPS products.  A number of these licensees have requested indemnification from MIPS. We are currently reviewing these claims, but to date, we have not incurred any losses in respect of such claims.  However, there can be no assurance that we will not incur future liabilities in connection with such claims, or that the amount of such liabilities will not be material.

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.

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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 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 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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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, 2011). 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.

If we experience security breaches, our reputation and business could suffer.  We retain certain technical, customer, design, and employee information on our IT systems, and it is critical to our business strategy that our facilities and infrastructure remain secure. Despite our security measures, our IT infrastructure may be vulnerable to physical break-ins, computer viruses, attacks by hackers or nefarious actors, or similar disruptive problems, including “hacktivism”. It is possible that we may have to expend additional financial and other resources to address any such problems that should arise. Any physical or electronic break-in or other security breach or compromise of the information stored on our IT systems could adversely affect our reputation and harm our business.

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 and exchange of information between the parties have occurred, however, there can be no assurance that the current dispute can be resolved on terms that are acceptable to us.

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.

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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 our operations in the event of a major natural disaster, telecommunications failure, cyber attack, 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 revenue.

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.

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, sovereign defaults 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.

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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 Exchange 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 8, 2012	By:	/s/ WILLIAM SLATER
		William Slater
		Vice President and Chief Financial Officer
		(Principal Financial Accounting Officer)

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