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 first quarter of fiscal 2010 was $15.0 million, representing a 19% increase compared to the fourth quarter of fiscal 2009 and a 23% decrease compared to the first quarter of fiscal 2009. The increase in revenue in our first quarter of fiscal 2010 compared to the fourth quarter of fiscal 2009 reflects the recovery of the semiconductor market in general.

Royalty revenue in the first quarter of fiscal 2010 was $9.8 million, a 27% increase compared to the fourth quarter of fiscal 2009 and a decrease of 16% compared to the first quarter of fiscal 2009. Total royalty units shipped in the first quarter of fiscal 2010 were 106 million, a 30% increase compared to our fourth quarter of fiscal 2009 and a 5% decrease from our first quarter of fiscal 2009. As our royalty revenue is reported one quarter in arrears, shipments and revenue reported in our first quarter of fiscal 2010 represented our customer shipments from the quarter ended June 30, 2009.

License and contract revenue in the first quarter of fiscal 2010 was $5.2 million, a 6% increase compared to the fourth quarter of fiscal 2009 and a 34% decrease compared to the first quarter of fiscal 2009. We completed six new license agreements in the first quarter of fiscal 2010.

Our operating income for the first quarter of fiscal 2010 was $2.5 million compared to $0.2 million in our fourth quarter of fiscal 2009 and $5.5 million in our first quarter of fiscal 2009. The improvement in operating performance for our first quarter of fiscal 2010 compared to the fourth quarter of fiscal 2009 was primarily due to the increase in royalty revenue we generated in our first quarter of fiscal 2010.

We recorded a tax provision of $1.8 million in the quarter ended September 30, 2009 primarily driven by foreign withholding taxes and our decision to change the legal structure of our foreign operations that will result in the repatriation of undistributed earnings. As a result of this change in legal structure, we accrued $1.0 million in withholding taxes in our first quarter of fiscal 2010.

Our cash and cash equivalents as of September 30, 2009 were $43.5 million compared to $44.5 million at June 30, 2009. The decrease in cash and cash equivalents was primarily due to payments to reduce our debt of $2.2 million and certain administrative and severance payments of approximately $1.4 million relating to our discontinued operations. These negative cash outflows were offset by positive cash flow from operations of approximately $3.0 million.

Discontinued Operations

On May 7, 2009, we entered into a simultaneous sale and close agreement with an unrelated third party to sell our 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 our sale of ABG, we agreed to retain responsibility for certain actual or contingent liabilities and agreed to indemnify the purchaser against certain breaches of representations and warranties and other liabilities. To date, we have not incurred any losses in respect of claims asserted by the purchaser in connection with this transaction. Our potential liability to the purchaser 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. However, there can be no assurance that we will not incur future liabilities to the purchaser in connection with this transaction or that the amount of such liabilities will not be material.

The results from discontinued operations (exclusive of the gain on disposition) are as follows for the quarters ended September 30 (in thousands):

                                                  2009        2008
Revenue                                           $   -     $   6,637
Expenses                                              -       (14,129 )
Restructuring expense                                 -        (4,674 )
  Loss from discontinued operations, before tax       -       (12,166 )
Tax benefit of discontinued operations                -          (233 )
  Loss from discontinued operations, net of tax   $   -     $ (11,933 )

The summarized balance sheet of discontinued operations consisted of the following (in thousands):

                                                               September 30,
                                                                   2009           June 30, 2009
Assets:
Restricted cash                                                $           -     $         4,442
Other current assets                                                       -                  37
Total assets of discontinued operations                        $           -     $         4,479
Liabilities:
Founders escrow liabilities                                    $           -     $         4,442
Accounts payable and other current liabilities                            76               1,496
Total liabilities of discontinued operations                   $          76     $         5,938

The restricted cash balance at June 30, 2009 related to the founder's escrow liability that we incurred with our acquisition of Chipidea in August 2007. As per the terms of our acquisition, in August 2009, this balance was released in full to the founder's of Chipidea. The other liabilities of the discontinued operations at June 30, 2009 primarily related to severance costs. We paid approximately $1.4 million of those costs in the first quarter of fiscal 2010. The payments relating to discontinued operations have been reflected as cash outflows from the discontinued operations in our Statement of Cash Flows in the first quarter of fiscal 2010.

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 periods ended September 30, 2009 and September 30, 2008 was as follows (in thousands, except percentages):

                                          Three Months Ended September 30,
                                  2009               2008            Change in Percent
Revenue
Royalties                       $      9,750       $     11,632                     -16 %
Percentage of Total Revenue               65 %               59 %
License and contract revenue           5,230              7,949                     -34 %
Percentage of Total Revenue               35 %               41 %
Total Revenue                   $     14,980       $     19,581

Royalties. The decrease in royalty revenue is due to a decrease in unit volumes shipped by our royalty paying licensees as well as a decrease in the average selling price of royalty units. The average selling price decreased primarily due to certain customers having lower volume based per unit pricing terms in the first quarter of 2010 as compared to the first quarter of 2009 based on volume or time based discounts as per the terms of their contracts.

License and Contract Revenue. The decrease of 34% in contract revenue compared to the prior year is due to the global economic slowdown and a decrease in our average selling price of licenses. There were 6 new license agreements executed in the first quarter of fiscal 2010 compared to 8 in the first quarter of fiscal 2009. We enter into unlimited use license agreements with some of our customers under which 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 generally range from 4 to 7 years. We recognize all license revenues under these unlimited use license agreements upon execution of the agreement, provided all revenue recognition criteria have been met. Contract revenue from unlimited use license agreements was $2.2 million in first quarter of fiscal 2010 as compared with $4.4 million in first quarter of fiscal 2009.

Cost and Expenses

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


                                         Three Months Ended September 30,
                                 2009               2008           Change in Percent
                                      (in thousands, except for percentages)
Cost and Expenses
Cost of Sales                $         146       $       166                      -12 %
Research and Development     $       5,756       $     5,606                        3 %
Sales and Marketing          $       3,399       $     2,876                       18 %
General and Administrative   $       3,129       $     5,197                      -40 %
Restructuring                $           -       $       257                     -100 %

Cost of Sales. Cost of sales includes costs associated with acquired third party software used in our products.

Our cost of sales expense in the first quarter of fiscal 2010 was relatively flat compared to the comparable period in fiscal 2009.

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 $0.1 million increase in research and development expense for first quarter of fiscal 2010 over the comparable period in fiscal 2009 was primarily due to a $0.2 million increase in supplies and maintenance expense with more utilization of computer aided design tools and a $0.2 million increase in stock compensation expense. These increases in expense were partially offset by lower depreciation expense with more equipment fully depreciated and lower facilities expense as a result of our headquarter office relocation.

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 increase in sales and marketing expense for first quarter of fiscal 2010 over the comparable period in fiscal 2009 was primarily due to $1.6 million increase in expenses reflecting higher salaries and our increased effort in sales and marketing of our products. This increase was partially offset by $0.8 million of employee compensation expenses due to decreased staffing levels 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.

The $2.1 million decrease in general and administrative expense for the first quarter of fiscal 2010 over the comparable period in fiscal 2009 was primarily due to a $1.0 million decrease in outside service expenses, including legal and audit fees, a $0.4 million decrease in salary, bonus, and benefit expenses due to decreased staffing levels, a $0.2 million decrease in consulting expense, a $0.2 million decrease in stock compensation expense and a $0.2 million decrease in depreciation and facilities expenses.

Restructuring. In the first quarter of fiscal 2009 restructuring expenses of $0.3 million were related to the restructuring plan announced in August 2008. There was no restructuring activity in the first quarter of fiscal 2010.

Other Income (Expense), Net. Other Expense, net decreased by $0.3 million for first quarter of fiscal 2010 over the comparable period in fiscal 2009 due to $0.1 million of decreased interest expense as our outstanding debt balances have decreased and a $0.2 million decrease in foreign exchange remeasurement loss due to less international activity and related expenses.

Income Taxes. We recorded an income tax expense of $1.8 million for the three months ended September 30, 2009 and an income tax expense of $0.1 million for the comparable period in fiscal 2009. We continue to recognize a valuation allowance against our net U.S. deferred tax assets as we believe that it is more likely than not that these deferred tax assets will not be recognized.

Our estimated annual income tax for fiscal 2010 primarily consists of US state and foreign income taxes, and withholding taxes. US federal income tax has been offset by tax loss carry forwards and foreign tax credits. Included in the current period income tax expense is $1.0 million of withholding tax pending the repatriation of undistributed earnings from one of our foreign subsidiaries, for which a US foreign tax credit is available. However, our US foreign tax credit is subject to a valuation allowance as consistent with the other U.S. deferred tax assets. Our estimated annual income tax for fiscal 2009 primarily consists of foreign income tax and withholding tax, offset by releases of unrecognized tax benefits that are no longer applicable. The tax expense recognized for the quarter ended September 30, 2009 is higher than that of the comparable period of fiscal 2009 due to California's temporary limitation on use of tax losses and credits, higher withholding taxes in some of our customers' jurisdictions, and withholding tax upon the pending repatriation of undistributed earnings from one of our foreign subsidiaries.

Liquidity and Capital Resources

At September 30, 2009, we had cash and cash equivalents of $43.5 million, a decrease of approximately $1.0 million from June 30, 2009.

At September 30, 2009, we had an outstanding debt balance of $10.6 million relating to a $15 million term loan with Silicon Valley Bank (SVB) that we entered into in July 2008. Remaining monthly payments under the term loan of $0.3 million are due through July 2012. In addition to making payments on the term loan in the quarter ended September 30, 2009, we also repaid the full outstanding balance of $1.2 million that we owed to SVB under a revolving line of credit. We renewed the revolving line of credit in the first quarter of 2010, enabling us to borrow up to $10 million through September 20, 2010. 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.

Operating Activities

Net cash provided by operating activities was $1.6 million for the quarter ended September 30, 2009. The cash generated from operating activities included $3.0 million from continuing operations, partially offset by cash used by discontinued operations of $1.4 million. The cash generated from continuing operations was primarily a result of our positive net income net of non-cash expenses and cash provided from changes in our asset and liability balances. Our net income from continuing operations included the effects of non-cash charges of $0.9 million from stock compensation expense and $0.5 million in depreciation and amortization of intangible assets. In addition, cash generated from operating activities of continuing operations increased primarily as a result of
(i) a $1.4 million decrease in prepaid expenses and other current and long term assets, primarily reflecting the timing of engineering design software license payments as compared to their amortization and (ii) a $0.9 million increase in accounts payable and accrued liabilities, primarily reflecting a $1.0 million withholding tax accrual in connection with change in our foreign legal structure. Those generators of cash were partially offset by an increase in accounts receivable of $1.2 million, reflecting the timing of license sales and customer payments. The negative cash flow from operating activities of discontinued operations was primarily driven by the payment of $1.4 million of cash for restructuring and administrative expenses.

Net cash provided by operating activities was $3.2 million for the three month period ended September 30, 2008. The cash generated from operating activities included $4.8 million from continuing operations, partially offset by cash used by discontinued operations of $1.6 million. The cash generated from continuing operations was primarily due to our net income from continuing operations. Our net income from continuing operations included the effects of non-cash charges of $1.0 million from stock compensation expense and $0.6 million in depreciation and amortization. Cash used by discontinued operations of $1.6 million was a result of a net loss offset by non-cash activities and changes in asset and liability balances.

Investing Activities

Net cash used in investing activities was $0.6 million for the three month period ended September 30, 2009 as a result of capital expenditures in the quarter.

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.

Financing Activities

Net cash used in financing activities was $2.1 million for the three months ended September 30, 2009. Net cash used of $2.2 million related to the principal payments of our debt. In addition, we received $0.1 million from the issuance of common stock options exercises.

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 in July 2008, 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.

Liquidity

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

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

· from time to time we have certain significant payments to suppliers including engineering design software vendors required under long term purchase agreements. These payments vary and can be up to $1.0 million per quarter.

· in connection with our sale of ABG, we agreed to retain responsibility for certain actual or contingent liabilities and agreed to indemnify the purchaser against certain breaches of representations and warranties and other liabilities. To date, we have not incurred any losses in respect of claims asserted by the purchaser in connection with this transaction. Our potential liability to the purchaser 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. However, there can be no assurance that we will not incur future liabilities to the purchaser in connection with this transaction or that the amount of such liabilities will not be material.

· 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 recurring royalty revenues and other terms and conditions described in the loan and security agreement.

· the costs associated with capital expenditures.

We believe that we have sufficient cash and borrowing capabilities 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 September 30, 2009 were as follows:

                                                  Payments due by period (in thousands)
                                                 Less than         1-3           3-5         More than
                                    Total         1 year          years         years         5 years
Operating lease obligations (1)   $   5,568     $       690     $   2,021     $   1,443     $    1, 414
Purchase obligations (2)              9,061           5,391         3,670             -               -
Short Term Debt (3)                   4,156           4,156             -             -               -
Long Term Debt (4)                    7,175               -         7,175             -               -
Other long-term liabilities and
obligations (5)                       1,894               -         1,894             -               -
Total                             $  27,854     $    10,237     $  14,760     $   1,443     $     1,414

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

(2) Our purchase obligations of $9.1 million at September 30, 2009 are relatively flat with our purchase obligations as of June 30, 2009. Of the total, $6.8 million of the obligations relate to engineering design software license contracts that are reflected in the Company's accrued liabilities and other long term liabilities. The remaining $2.3 million relates to outstanding purchase order obligations which will all be received within one year.

(3) Short term debt includes $4.2 million of principal and interest due under our SVB term loan.

(4) Long term debt includes $7.2 million of principal and interest due under the SVB term loan.

(5) Long-term liabilities and obligations include: $1.9 million due to employees under a deferred compensation plan, under which distributions are elected by the employees.

The table above excludes estimated liabilities for uncertainty in income taxes, aggregating $1.3 million 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 2009 Form 10-K.