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

Revenue for the quarter ended September 30, 2008 was $26.2 million compared to revenue of $22.2 million for the quarter ended September 30, 2007. The revenue increase was primarily due to the impact of having a full quarter of ABG revenue in our September 2008 quarter as compared to only 5 weeks of ABG revenue in the quarter ended September 30, 2007.

Revenue from royalties was $11.8 million for the quarter ended September 30, 2008, an increase of $1.3 million or 12 percent from the $10.5 million reported in the first quarter a year ago. The increase in royalty revenue was driven by higher licensee unit volumes compared with the first quarter of fiscal 2007. End user licensee units grew 22% to 112 million units.

Contract and license revenue was $14.4 million for the quarter ended September 30, 2008, an increase of 24% from the $11.6 million reported in the same quarter a year ago. License revenue from the Processor business was $8.0 million with 8 new license agreements signed during the quarter. Contract and license revenue from the Analog business was $6.4 million generated from existing contracts along with a portion of the 16 new contracts signed during the quarter. The increase in contract and license revenue was due to ABG contributing to revenue for the full quarter in September 2008 as compared to only 5 weeks in September 2008. We believe Analog revenues were negatively affected during the September 2008 quarter by the dramatic change in business conditions along with the disruptions associated with our restructuring efforts announced during the quarter.

Our operating expense for the first quarter of fiscal 2009 was $24.3 million including a restructuring charge of $4.9 million as compared to $27.0 million for the first quarter of fiscal 2008, which included a $5.4 million acquired in-process research and development (IPR&D) charge.

The total of our research and development, sales and marketing and general and administrative costs for the quarter ended September 30, 2008 was $2.3 million lower than the comparable period of 2007 and was also $3.3 million lower than our quarterly operating expenses for the quarter ended June 30, 2008 as a result of our cost reduction programs. The reduction in operating expenses reflects the impact of our cost reduction programs implemented as per our August 2008 corporate restructuring plan in an effort to better integrate the ABG and reduce our overall cost structure. Our employee count reduced by approximately 56 during the September 2008 quarter, which reflected our planned and completed domestic reductions along with our international reductions in progress, for which the vast majority of the termination notifications were given by September 30, 2008. We expect to fully achieve our goal of reducing quarterly operating costs by approximately $5.0 million by the end of our second quarter of fiscal 2009. As a result of the restructuring, we expect to generate additional cash flow in the coming quarters and improve our overall liquidity position.

Our initial estimated range of restructuring expense relating to the August 2008 corporate restructuring plan as reported in our 2008 Annual Report on Form 10-K was $6.5 million to $7.5 million. We now expect the restructuring expense to be in the range of $6.0 million to $6.5 million. The reduction in our expected costs is primarily due to the weakening of the euro relative to the dollar and to the related impact on severance and contract termination costs in our European operations. We are still anticipating that the corporate restructuring will result in reduced quarterly spending of approximately $5.0 million.

In the quarter ended September 30, 2008, our cash and short term investments increased by $2.2 million to $16.2 million even though we expended approximately $1.3 million to fund restructuring costs during the quarter. In addition, in July 2008 we paid off our Jefferies debt facility of $16.0 million in connection with borrowing approximately $16.2 million from our Silicon Valley Bank term and revolving credit facility. Our debt balance as of September 30, 2008 was approximately $18.8 million, which included $2.6 million in debt associated with the ABG.

Our Operating Segments

We operate with two business groups, the Processor Business Group (PBG) and the Analog Business Group (ABG). These segments were determined based upon our internal organization and management structure and are the primary way in which the CODM is provided with financial information.

The major segments we serve are as follows:

(i) Processor Business Group:

The PBG provides industry-standard processor architectures and cores for digital consumer and business applications. This group designs and licenses high performance 32- and 64-bit architectures and cores, which offer smaller dimensions and greater energy efficiency in embedded processors. Markets served by the PBG segment include digital set-top boxes, digital televisions, DVD recordable devices, broadband access devices, digital cameras, laser printers, portable media players, microcontrollers and network routers.

(ii) Analog Businesss Group:

The ABG includes the Chipidea operation and provides analog and mixed-signal IP that produces cost-efficient System-on-Chip (SoC) applications and turnkey solutions. The ABG IP portfolio covers all fundamental functions in the analog and mixed-signal electronic space, including data conversion, clock management, power management, radio connectivity, physical connectivity, and voice audio and video processing. Market segments served by the ABG segment are wireless communications, power line communications, data communications, video, audio and voice signal processing, xDSL modems, set-top boxes, multimedia and digital consumer electronics.

Our reportable segments are the same as our operating segments. The following table provides a summary of our net revenue and operating loss by segment for the quarters ended September 30, 2008 and 2007:

                                       Quarter Ended
                            September 30,       September 30,
                                 2008                2007
                                      (In thousands)
Net revenue:
PBG                        $        19,580     $        19,931
ABG                                  6,637               2,221
All Other                                -                   -
Total Net Revenue                   26,217              22,152
Gross Margin:
PBG                                 19,414              19,628
ABG                                    603                  35
All Other                           (1,444 )              (835 )
Total Gross Margin                  18,573              18,828
Operating income (loss):
PBG                                 12,765              11,002
ABG                                   (634 )              (646 )
All Other                          (17,838 )           (18,576 )
Total Operating Loss       $        (5,707 )   $        (8,220 )

PBG

PBG net revenue of $19.6 million in the first quarter of fiscal 2009 decreased by 2 percent compared to net revenue of $19.9 million in the first quarter of fiscal 2008. Net revenue decreased primarily as a result of a $1.5 million decrease in license and contract revenue partially offset by an increase of royalty revenue of $1.1 million.

PBG gross margin of $19.4 million in the first quarter of fiscal 2009 decreased by 1 percent compared to gross margin of $19.6 million in the first quarter of fiscal 2008. Gross margin decreased primarily as a result of the decrease in PBG revenue for the quarter.

PBG operating income of $12.8 million in the first quarter of fiscal 2009 increased by 16 percent compared to operating income of $11.0 million in the first quarter of fiscal 2008. Operating income increased primarily as a result of the quarterly decrease in PBG operating expenses for the quarter ended September 30, 2008 as compared to the same period of the prior year.

ABG

ABG net revenue of $6.6 million in the first quarter of fiscal 2009 increased 199 percent compared to net revenue of $2.2 million in the first quarter of fiscal 2008. The revenue increase was primarily due to the impact of having a full quarter of ABG revenue in our September 2008 quarter as compared to only 5 weeks of ABG revenue in the quarter ended September 30, 2007.

ABG gross margin of $0.6 million in the first quarter of fiscal 2009 increased from a gross margin of $35,000 in the first quarter of fiscal 2008. Gross margin increased primarily due to the impact of having a full quarter of ABG revenue and cost of sales in our September 2008 quarter as compared to only 5 weeks of ABG revenue and cost of sales in the quarter ended September 30, 2007.

ABG operating loss was relatively flat at $0.6 million for both the first quarter of fiscal 2009 as well as the first quarter of fiscal 2008.

All Other Category

All Other negative gross margin of $1.4 million in the first quarter of fiscal 2009 compared to negative gross margin of $0.8 million in the first quarter of fiscal 2008. The increase in negative gross margin was primarily due to the impact of having a full quarter of intangible asset amortization in the first quarter of fiscal 2009 as compared to only 5 weeks of acquired intangible asset amortization in the first quarter of fiscal 2008.

All Other operating loss of $17.8 million in the first quarter of fiscal 2009 improved by 4 percent as compared to operating loss of $18.6 million in the first quarter of fiscal 2008. The first quarter loss of 2009 was less than the loss in same period of 2008 primarily due to a $0.9 million decrease in All Other stock compensation expense.

Results of Operations

Revenue. Total revenue consists of royalties and contract revenue. Royalties are based upon sales by licensees of products incorporating our technology. 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 periods ended September 30, 2008 and September 30, 2007 was as follows (in thousands):

                                      Three Months Ended
                                         September 30,
                                                         Change
                                                           in
                                2008         2007        Percent
Revenue
Royalties                     $ 11,832     $ 10,519            12 %
Percentage of Total Revenue         45 %         47 %
Contract Revenue                14,385       11,633            24 %
Percentage of Total Revenue         55 %         53 %
Total Revenue                 $ 26,217     $ 22,152

Royalties. The 12% increase in royalties primarily resulted from the addition of royalties from an increase in PBG royalty volumes compared to the prior year on chips sold by our licensees and the addition of the ABG royalties of $200,000 following the acquisition of Chipidea in August 2007 compared to $50,000 in the first quarter of fiscal 2008.

License and Contract Revenue. The 24% increase in contract revenue is due to the impact of having a full quarter of ABG revenue in the quarter ended September 30, 2008 as compared to only 5 weeks of revenue contributing to the first quarter of fiscal 2008. In the first quarter of fiscal 2009, contract revenues from the ABG were $6.4 million compared to $2.2 million in first quarter of fiscal 2008. The ABG entered into 16 new contracts in the first quarter of fiscal 2009. Revenue from the ABG contracts is generally recognized on a percentage of completion basis over the period of contract performance. The ABG revenue increase was offset in part by a decrease in license revenue generated by the PBG of $1.5 million. There were 8 new agreements executed by the PBG in first quarter of fiscal 2009 compared to 6 in first quarter of fiscal 2008.

In our PBG, we entered into a number of unlimited use license agreements with our customers. Under these agreements, customers generally pay a larger fixed up-front fee to use one or more of our cores in unlimited SoC designs during the term of the agreement, which can be up to 7 years. We recognize all license revenues under these unlimited use license agreements upon execution of the agreement provided all revenue recognition criteria had been met. Contract revenue from unlimited use license agreements was $4.4 million in first quarter of fiscal 2009 as compared with $5.0 million in first quarter of fiscal 2008.

Comparison of Gross Margin and Operating Expenses

The following is a summary of certain consolidated statement of operations data
for the periods indicated:

                                                     Three Months Ended
                                                        September 30,
                                                                              Change
                                                                                in
                                           2008               2007            Percent
                                           (in thousands, except for percentages)
Cost of Sales                          $      7,644       $      3,324             130 %
Gross Margin                           $     18,573       $     18,828              (1 )%
Gross Margin Percentage                          71 %               85 %             -
Research and Development               $      7,347       $      9,013             (18 )%
Sales and Marketing                    $      5,045       $      5,586             (10 )%
General and Administrative             $      6,957       $      7,009              (1 )%
Acquired in-process research &
development                                       -       $      5,440               -
Restructuring                          $      4,931       $          -               -

Cost of Sales. Cost of sales includes salaries, depreciation, and the amortization of intangible assets. PBG cost of sales has historically been insignificant as the majority of our PBG revenue is derived from royalties and licenses which have insignificant related costs. With the addition of the ABG in August 2007, our blended margins have decreased as ABG revenue is substantially driven by relatively lower margin service related contract revenue.

ABG revenue is generated by projects which include the development of technology that is directly related to the requirements of particular licensees and license agreements and, accordingly entails a higher cost of sales as compared to PBG. As the acquisition was in the latter half of the first quarter of fiscal 2008, our results for the first quarter of 2008 included only 5 weeks of ABG cost of sales as compared to a full quarter of ABG sales for the comparable period in fiscal 2009.

Gross Margin. Gross margin as a percentage of net revenue decreased to 71 percent in the first quarter of fiscal 2009 compared to 85 percent in the comparable quarter in fiscal 2008. The decrease in gross margin was primarily due to the first quarter of fiscal 2009 including a full quarter of ABG revenue and corresponding cost of sales compared with only 5 weeks of ABG cost of sales in the same period of the prior year.

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

The $1.7 million decrease in research and development expenses for the first quarter of fiscal 2009 compared to the same period in fiscal 2008 was primarily due to $0.6 million decrease in stock compensation expense, $0.4 million decrease in outside services fees and $0.2 million decrease in bonus expense. The remainder of the $0.5 million decrease was spread across various expenses and primarily related to the additional activities in the prior year associated with the acquisition and integration of Chipidea.

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

The $0.5 million decrease in sales and marketing expense for first quarter of fiscal 2009 over the comparable period in fiscal 2008 was primarily due to $0.2 million in decrease in salary expenses and $0.2 million decrease in stock compensation expense.

General and Administrative. General and administrative expenses comprise salaries, legal fees including those associated with the establishment and protection of our patent, trademark and other intellectual property rights which are integral to our business and expenses related to compliance with the reporting and other requirements of a publicly traded company including directors and officers liability insurance, in addition to stock-based compensation expense.

General and administrative expenses were relatively flat at $7.0 million for the first quarters of fiscal 2009 and 2008.

Acquired In-process Research and Development. In August 2007, we completed the acquisition of Chipidea, a privately held supplier of analog and mixed signal intellectual property, for cash consideration. The fair value of the in-process technology was determined by estimating the present value of the net cash flows we believed would result from the acquired technology. Because technological feasibility of certain of the acquired technology had not been established and no future alternative use for the in-process technology existed at the time of the acquisition, we recorded a charge in the first quarter of fiscal 2008 of $5.4 million for the acquired in-process research and development expense upon completion of the acquisition.

Restructuring Expense. In August 2008 we announced a plan to reduce the Company's operating costs by a reduction in employee headcounts in the Company's facilities in United States, Israel, Portugal and closing of the Belgium center. In total, 58 employees were given notice of termination during the first quarter of fiscal 2008, resulting in approximately $4.7 million of severance and benefits costs recorded as restructuring expense. In addition, asset disposal and other closure totaling approximately $0.2 million were recorded as restructuring expense in the first quarter of fiscal 2009.

Other Income, Net. Other income, net, for the first quarter of fiscal 2009 was an expense of $1.4 million as compared to income of $0.4 million for the comparable period in fiscal 2008. The decrease in other income was primarily due to a decrease in interest income due to a decrease in our invested balances as we spent substantially all our cash on the Chipidea acquisition in August 2007. In addition, we incurred approximately $0.8 million in foreign exchange remeasurement losses in the first quarter of fiscal 2009 in connection with the weaker euro. We also incurred approximately $0.5 million in interest expense and loan amortization fees in the first quarter of fiscal 2009.

Income Taxes. We recorded an income tax benefit of $0.2 million for the three-month period ended September 30, 2008 and an income tax benefit of $0.7 million for the comparable period in fiscal 2008. For the Processor Business Group, we continued to recognize a valuation allowance against the deferred tax assets in U.S. as we believe that it is more likely than not that the deferred tax assets will not be recognized.

Our estimated annual income tax for fiscal 2009 primarily consists of US deferred tax from goodwill amortization, foreign tax and withholding tax, offset by releases of unrecognized tax benefits that are no longer applicable. Our estimated annual income tax for fiscal 2008 primarily consists of US federal, state, foreign income taxes and withholding taxes, offset in part by certain foreign tax credits and general business tax credits. The tax benefit recognized for the quarter ended September 30, 2008 is lower than that of 2007 because we are not recognizing the tax benefits from US income until it is more likely than not that such benefits can be utilized.

Liquidity and Capital Resources

At September 30, 2008, we had cash, cash equivalents and marketable investments of $16.2 million, an increase of approximately $2.2 million from June 30, 2008.

On July 3, 2008, we entered into a new credit facility with Silicon Valley Bank (SVB). This new facility includes a four year term loan of $15 million and a revolving credit line in the amount of $10 million due on July 2, 2009. Loans under this facility are secured by virtually all of our assets with the exception of IP, and the facility contains affirmative and negative covenants that impose restrictions on the operation of our business. Proceeds of $16.2 million from this new facility were used to pay off our prior loan balance. As of September 30, 2008, outstanding balances under these facilities were $14.4 million for the term loan and $1.2 million for the revolving credit facility. We borrowed the full amount available under the $15 million term loan facility and paid off $0.6 million in the quarter ended September 30, 2008. We had $8.8 million available to borrow under the revolving credit line at September 30, 2008.

On August 13, 2008, we announced a restructuring plan designed to reduce $5 million in costs of sales and operating expenses per quarter. With the reduction in interest and principle payments associated with the new loan and the operating cost reductions being implemented in the first and second fiscal quarters in 2009, we expect to improve our liquidity position throughout the fiscal year.

For complete statements of cash flows for the three months ended September 30, 2008 and 2007, see our consolidated financial statements.

Net cash provided by operating activities was $3.2 million for the quarter ended September 30, 2008. The loss in the first quarter of fiscal 2009 was partially offset by non-cash activities including amortization of acquired intangible assets, depreciation expense and stock compensation expense. In addition, cash from operating activities increased as a result of accrued restructuring costs, an increase in accrued compensation and a decrease in our long term engineering design software licenses due to normal amortization.

Net cash used in operating activities was $1.0 million for the three month period ended September 30, 2007, primarily due to our net loss partially offset by non-cash charges including stock-based compensation under SFAS No. 123R, depreciation, amortization of intangible assets, and acquired in-process research and development costs. Cash was used by a decrease in our income taxes payable, a decrease in accrued compensation due to the payout of accrued bonuses offset in part by an increase in accruals for services related to the integration of Chipidea, and an increase in accounts receivable due to the addition of the Analog Business Group. This use of cash was partially offset by cash provided by increases in our accrued liabilities primarily due to increases from our Analog Business Group, and a decrease in prepaid expenses and other assets due to interest received.

Net cash used in investing activities was $0.4 million for the three month period ended September 30, 2008 as a result of capital expenditures in the quarter.

Net cash used in investing activities was $122.2 million for the three month period ended September 30, 2007. This usage was primarily due to cash used for our acquisition of Chipidea and the establishment of restricted cash accounts for the amounts held in escrow related to the Chipidea acquisition. This use of cash was offset in part by $25.9 million of cash provided from the proceeds of the sale of our marketable investments.

Net cash used in financing activities was $0.4 million for the three months ended September 30, 2008. As we entered into a new credit facility and borrowed amounts primarily to pay off existing debt, our net cash used in debt financing activities was $0.4 million, which primarily related to monthly principal payments for our new debt in the first quarter of fiscal 2009.

Net cash provided by financing activities was $21.6 million for the three months ended September 30, 2007. Net cash provided by financing activities during the three month period ended September 30, 2007 was primarily attributable to the loan of $20 million under our revolving credit agreement established in connection with the Chipidea acquisition and activity under our employee stock plans, offset in part by cash paid for loan origination fees.

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

· from time to time we have certain significant payments to suppliers including Computer Aided Design (CAD) system vendors required under long term purchase agreements. These payments vary and can be up to $2 million per quarter.

· from time to time we have certain significant payments to investors relating to prior acquisitions. These payments can range up to $2.5 million a quarter.

· our ability to continue to generate cash flow from operations.

· financing activities under borrowing arrangements. Our borrowing availability with SVB varies according to MIPS' accounts receivable and . . .