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

In the third quarter of fiscal 2009 we made a determination with regard to the ABG to either improve the financial performance or investigate the potential divestiture of the unit, and progress has been made on both of those strategic alternatives. The Company replaced the Vice President of the ABG in January 2009 and subsequently the underlying financial performance, specifically bookings, has improved. In addition the Company has had discussions with third parties about the possible sale of the business unit. While no definitive sale agreement has been reached, the possibility of a divesture remains.

We ended our third quarter of fiscal 2009 with cash and investments of $21.1 million, up approximately $0.5 million from the prior quarter and up approximately $7.1 million from June 30, 2008. Our aggregate loan balance outstanding as of March 31, 2009 was $15.3 million which includes $1.6 million of debt associated with our Analog Business unit in Portugal and the balance due under our credit facility in the United States through Silicon Valley Bank.

Our third quarter results were impacted by the slowdown in the worldwide economy. Total revenue of $22.7 million in the third quarter of fiscal 2009 was lower than the $26.4 million reported in the prior quarter and down from the $27.3 million reported in the same quarter a year ago. Total third quarter revenue from the PBG was $17.7 million and revenue from the ABG was $5.0 million Our fourth quarter results may continue to be impacted by the slowdown in the worldwide economy. We expect our fourth quarter royalty revenue may decline from our third quarter results by 10% to 20%. However, based on the relatively positive future guidance provided by many of our publically traded licensees we believe our fourth quarter license revenue could be relatively flat with our third quarter revenue. There is still significant macroeconomic uncertainty that could impact the achievement of our fourth quarter revenue totals.

Royalty revenue in the third quarter of fiscal 2009 was $10.9 million, a decrease of 16% from the $13.0 million reported in the prior quarter and a decrease of 13% from the $12.6 million reported in the same quarter a year ago. Our processor licensees reported shipments of 107 million units during our third quarter of fiscal 2009, approximately 15% lower than the 126 million units shipped in the prior quarter and a decrease of approximately 7% compared with the 115 million units shipped in third quarter of fiscal 2008. As royalties reported by our customers are one quarter in arrears, shipments and revenue reported in our third quarter represented our customer shipments from the quarter ended December 31, 2008.

Contract and license revenue in the third quarter of fiscal 2009 was $11.8 million, a decrease of 12% from the $13.4 million reported in the prior quarter and 20% lower than the $14.8 million reported in the same quarter a year ago. License revenue from the processor business was $7.0 million with 8 new license agreements signed during the quarter. Contract and License revenue from the analog business was $5.0 million generated from existing contracts along with a portion of the 19 new license agreements signed during the quarter.

Our third quarter gross margin of $18.4 million decreased $2.2 million or 11% compared to second quarter results primarily as a result of lower royalty revenues. However, our blended gross margin for the third quarter was 81% which is up from 78% in the second quarter of fiscal 2009 and 65% in the fourth quarter of fiscal 2008.

Our operating expense in the third quarter of fiscal 2009 was $17.7 million, including a restructuring charge of $1.0 million as compared to our operating expense in the second quarter of fiscal 2009 which was $15.7 million including a restructuring charge of $0.5 million. Our operating expense in the second quarter of fiscal 2009 benefitted from approximately $0.5 million of cost savings due to refunds or updated estimates of expenses. In addition, ABG engineers spent more time on roadmap projects in the third quarter of 2009 as compared to prior quarters, leading to higher development costs in the third quarter and lower cost of sales. Included in our operating expenses in the third quarter of fiscal 2009 were approximately $1.1 million in stock based compensation expense and $0.9 million in deferred purchase price consideration due to former shareholders of Chipidea.

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 have incurred approximately $6.0 million in restructuring charges through the third quarter in connection with the August 2008 plan and are substantially complete with those activities. Actual costs were lower than estimated costs 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. In addition to the $6.0 million of restructuring charges we incurred with the August 2008 plan, we also incurred $0.4 million in restructuring charges in the third quarter of 2009 in connection with certain executive departures.

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 Business Group:

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

Our reportable segments are the same as our operating segments. The following tables provide a summary of our net revenue and operating loss by segment (in thousands):

                                                       Three Months Ended
                                                           March 31,
                                                      2009           2008
        Processor Business Group
          Net revenue                               $  17,663      $  18,110
          Gross margin                                 17,401         17,666
          Operating income                             11,230          9,846
        Analog Business Group
          Net revenue                                   5,043          9,213
          Gross margin                                  1,765          2,555
          Operating income                                347          1,588
        All Other
          Net revenue                                       -              -
          Gross margin                                   (785 )       (2,305 )
          Operating loss                              (10,919 )      (16,727 )
        Total
          Net revenue                                  22,706         27,323
          Gross margin                                 18,381         17,916
          Operating income (loss)                         658         (5,293 )
        Interest income                                    31             89
        Interest expense                                 (600 )         (585 )
        Other expense, net                               (573 )         (266 )
        Loss before income taxes                         (484 )       (6,055 )
        Provision for (benefit from) income taxes         323         (1,798 )
          Net loss                                  $    (807 )    $  (4,257 )

                                                       Nine months ended
                                                           March 31,
                                                      2009           2008
        Processor Business Group
          Net revenue                               $  57,578      $  54,665
          Gross margin                                 56,706         53,373
          Operating income                             38,281         29,231
        Analog Business Group
          Net revenue                                  17,743         21,261
          Gross margin                                  3,879          5,775
          Operating loss                                  505          2,949
        All Other
          Net revenue                                       -              -
          Gross margin                                 (3,025 )       (5,332 )
          Operating loss                              (38,922 )      (53,047 )
        Total
          Net revenue                                  75,321         75,926
          Gross margin                                 57,560         53,816
          Operating loss                                 (136 )      (20,867 )
        Interest income                                   147          1,266
        Interest expense                               (1,429 )       (1,417 )
        Other expense, net                             (2,173 )       (1,337 )
        Loss before income taxes                       (3,591 )      (22,355 )
        Provision for (benefit from) income taxes        (792 )        1,018
          Net loss                                  $  (2,799 )    $ (23,373 )

PBG

PBG net revenue of $17.7 million in the third quarter of fiscal 2009 decreased by 3 percent compared to net revenue of $18.1 million in the third quarter of fiscal 2008. Net revenue decreased primarily as a result of a $1.6 million decrease in royalty revenue partially offset by an increase of contract revenue of $1.2 million. PBG net revenue of $57.6 million for the nine months ended March 31, 2009 increased by 5% compared to net revenue of $54.7 million for the nine months ended March 31, 2008 as a result of a $2.9 million increase in contract revenue.

PBG gross margin of $17.4 million in the third quarter of fiscal 2009 decreased by 2 percent compared to gross margin of $17.7 million in the second quarter of fiscal 2008. PBG gross margin of $56.7 million for the nine months ended March 31, 2009 increased by 6 percent compared to gross margin of $53.4 million for the comparable period a year ago. Since PBG cost of sales are historically an insignificant percentage of revenue totals, changes in gross margin totals were primarily due to changes in revenue.

PBG operating income of $11.2 million in the third quarter of fiscal 2009 increased by 14 percent compared to operating income of $9.8 million in the third quarter of fiscal 2008. Operating income increased as a result of the decrease in PBG operating expenses for the quarter ended March 31, 2009 as compared to the same period of the prior year. PBG operating income of $38.3 million for the nine months ended March 31, 2009 increased by 30 percent compared to operating income of $29.2 million for the comparable period a year ago. Operating income increased primarily as a result of the increases in PBG revenue coupled with decreases in PBG operating expenses during fiscal year 2009. The decrease in PBG operating expenses is primarily due to reduced headcount from the restructuring efforts and a reduction in outside services and consulting expenses.

ABG

ABG net revenue of $5.0 million in the third quarter of fiscal 2009 decreased 45 percent compared to net revenue of $9.2 million in the third quarter of fiscal 2008. ABG revenue of $17.7 million during the nine months ended March 31, 2009 decreased by 17% compared to the net revenue of $21.3 million in same period of the prior year. The revenue decreases for both periods was primarily due to the continuing deterioration in global economic conditions along with the disruptions associated with our restructuring efforts announced during the first quarter of fiscal 2009.

ABG gross margin of $1.8 million in the third quarter of fiscal 2009 decreased from a gross margin of $2.6 in the third quarter of fiscal 2008. ABG gross margin for the nine months ended March 31, 2009 decreased to $3.9 million from a gross margin of $5.8 million. Gross margins decreased in both periods primarily due to the decrease in ABG revenue, partially offset by cost savings resulting from our restructuring efforts.

ABG operating income decreased to $0.3 million in the third quarter of fiscal 2009 as compared to $1.6 million during the third quarter of fiscal 2008. The ABG operating income for nine months ended March 31, 2009 is $0.5 million compared to $2.9 million during the comparable period a year ago. These decreases in operating income are primarily due to a decrease in the ABG revenue for the comparable periods.

All Other Category

The All Other Category included costs associated with Corporate activities such as selling, General and administrative costs and other costs not allocated to the business units.

All Other negative gross margin was $0.8 million in the third quarter of fiscal 2009 compared to negative gross margin of $2.3 million in the third quarter of fiscal 2008. All Other negative gross margin of $3.0 million for the nine months ended March 31, 2009 decreased compared to negative gross margin of $5.3 million for the same period of the prior year. The decrease in negative gross margin was primarily due to the decrease in intangible asset amortization in fiscal 2009 as compared to fiscal 2008, primarily as a result of the impairment write-off the company recorded in the fourth quarter of fiscal 2008. The amount of the decrease in the nine month period in fiscal 2009 partially offset by having only approximately seven months of amortization in fiscal 2008 as compared to nine months in fiscal 2009 based on the timing of the Chipidea acquisition in fiscal 2008.

All Other operating loss of $10.9 million decreased by 35% in the third quarter of fiscal 2009 compared to operating loss of $16.7 million in the third quarter of fiscal 2008. All Other operating loss of $38.9 million for the nine months ended March 31, 2009 decreased by 43% compared to operating loss of $53.0 million in the same period of fiscal 2008. These losses are primarily driven by intangible asset amortization costs, general and administrative costs, selling costs, IT costs, certain corporate marketing costs, stock compensation costs and Chipidea acquisition costs. The decrease in costs in fiscal 2009 as compared to the comparable periods in fiscal 2008 is primarily due to the substantial amount of non-recurring outside service and integration costs we incurred in fiscal 2008 in connection with the Chipidea acquisition, as well as reduced corporate expenses in fiscal 2009 as a result of restructuring efforts and cost saving measures that the company has put in place.

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 and nine-month periods ended March 31, 2009 and March 31, 2008 was as follows (in thousands, except percentages):

                               Three Months Ended March 31,                     Nine Months Ended March 31,
                                                         Change in                                       Change in
                           2009             2008          Percent          2009             2008          Percent
Revenue
  Royalties             $    10,901       $  12,556            (13) %        35,686       $  35,590               0 %
Percentage of Total
Revenue                          48 %            46 %                            47 %            47 %
  Contract Revenue      $    11,805       $  14,767            (20) %        39,635       $  40,336             (2) %
Percentage of Total
Revenue                          52 %            54 %                            53 %            53 %

Royalties. The decrease in royalties in the third quarter of fiscal 2009 from the comparable period in fiscal 2008 is primarily due to a 7% decrease in unit volumes shipped by our royalty paying licensees. This decrease is a result of the weakness of the general economy.

Royalties in the first nine months of fiscal 2009 were relatively flat from the comparable period in fiscal 2008.

Contract Revenue. The 20% decrease in contract revenue was due to decrease of ABG revenue in the quarter ended March 31, 2009 as compared to the third quarter of fiscal 2008, partially offset by an increase in PBG contract revenue in the same period. In the third quarter of fiscal 2009, ABG contract revenues were $4.8 million compared to $9.0 million in third quarter of fiscal 2008. Revenue from ABG contracts is generally recognized on a percentage of completion basis over the period of contract performance. The ABG revenue decrease was offset in part by a $1.2 million increase in PBG contract revenue. There were 8 new PBG license agreements in the third quarter of fiscal 2009 compared to 6 in the third quarter of fiscal 2008.

Contract revenue for the nine months ended March 31, 2009 was down 2% from the comparable period in fiscal 2008. The decrease was the net effect of an increase of $2.9 million in PBG contract revenue due to the favorable size and timing of PBG deals that closed in 2009 as compared to 2008, and a decrease of $3.6million in ABG contract revenue primarily due to the weakness of the worldwide economy.

In our Processor Business Group, 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 unchanged at $2.1 million in third quarter of fiscal 2009 and $2.1 million in third quarter of fiscal 2008. Contract revenue from unlimited use license agreements was $8.3 million in the first nine months of fiscal 2009 as compared with $7.9 million in same period 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
                                                       March 31,
                                                                           Change
                                                                             in
                                        2009               2008            Percent
                                        (in thousands, except for percentages)
       Cost of Sales                $      4,325       $      9,407            (54) %
       Gross Margin                 $     18,381       $     17,916               3 %
       Gross Margin Percentage                81 %               66 %
       Research and Development     $      7,809       $      9,315            (16) %
       Sales and Marketing          $      4,211       $      6,056            (30) %
       General and Administrative   $      4,744       $      6,559            (28) %
       Restructuring                $        959       $      1,279            (25) %

                                                                     Nine Months Ended
                                                                         March 31,
                                                                                              Change
                                                                                                in
                                                         2009                2008            Percent
                                                          (in thousands, except for percentages)
Cost of Sales                                        $      17,761       $     22,110             (20) %
Gross Margin                                         $      57,560       $     53,816                7 %
Gross Margin Percentage                                         76 %               71 %
Research and Development                             $      21,955       $     27,821             (21) %
Sales and Marketing                                  $      13,610       $     17,796             (24) %
General and Administrative                           $      15,693       $     21,437             (27) %
Acquired in-process research & development           $           -       $      6,350            (100)  %
Restructuring                                        $       6,438       $      1,279              403  %

Cost of Sales. 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. 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. Cost of sales generally include salaries and related employee costs, depreciation, and the amortization of intangible assets.

Due to the impairment write-off we completed in June 2008, our intangible asset amortization costs have decreased in fiscal 2009 as compared to fiscal 2008. In addition, due to our restructuring efforts and other cost cutting measures, our headcount and expenses have decreased in fiscal 2009 as compared to 2008, resulting in lower cost of sales expenses in fiscal 2009.

Gross Margin. Gross margin as a percentage of net revenue increased to 81% in the third quarter of fiscal 2009 compared to 66% in the comparable quarter in fiscal 2008. Gross margin for nine months ended March 31, 2009 as a percentage of net revenue increased to 76% compared to 71% percent in the comparable period in fiscal 2008. The increase in gross margin for both periods was primarily due to the decrease in ABG revenue as a percentage of total revenue. In addition, our intangible asset amortization costs are lower in fiscal 2009, and we also have lower headcount attributed to cost of sales in fiscal 2009 due to our restructuring efforts.

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 $1.5 million decrease in research and development expenses for the third quarter of fiscal 2009 compared to the same period in fiscal 2008 was primarily due to $1.0 million decrease in stock compensation expense and $0.5 million decrease in salary expense.

The $5.9 million decrease in research and development expenses for the nine months ended March 31, 2009 compared to the same period in fiscal 2008 was primarily due to $3.2 million decrease in salary and benefit expenses, $1.2 million decrease in stock compensation expense, $1.0 million decrease in depreciation expenses, $0.9 decrease in outside services and consulting fees, and $0.2 million decrease in travel expenses, partially offset by a $0.3 million increase in deferred purchase price consideration amounts due to the founders of Chipidea and a $0.3 million increase in bonus expense.

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 $1.8 million decrease in sales and marketing expense for third quarter of fiscal 2009 over the comparable period in fiscal 2008 was primarily due to $1.1 million decrease in salary, benefits and bonus expense, $0.3 million decrease in stock compensation expense, $0.2 million decrease in travel and entertainment . . .