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, product and patent rights, as well as royalties based on processor unit shipments.

We reported first quarter fiscal year 2013 revenue of $13.9 million, representing a 19% decrease compared to first quarter of fiscal year 2012. Royalty revenue in the first quarter of fiscal year 2013 was $10.5 million, a 19% decrease compared to the first quarter of fiscal year 2012. Total royalty units reported in the first quarter of fiscal year 2013 were 182 million, a 5% increase from our first quarter of fiscal year 2012. As our royalty revenue is reported one quarter in arrears, shipments and revenue reported in our first quarter of fiscal year 2013 represented our customer shipments from the quarter ended June 30, 2012. License and contract revenue in the first quarter of fiscal year 2013 was $3.5 million, an 18% decrease compared to the first quarter of fiscal year 2012.

Our total operating expense in the first quarter of fiscal year 2013 increased to $18.7 million, as compared to $16.3 million in the first quarter of fiscal year 2012. This increase in operating expense for our first quarter of fiscal year 2013 compared to the same period of fiscal year 2012 was primarily due to the Company's exploration of options related to patent monetization and other opportunities for increasing shareholder value and professional services fees related thereto.

We recorded a tax benefit of $0.4 million in first quarter of fiscal year 2013 compared to a tax provision of $0.5 million in fiscal year 2012. Our tax provision consists mainly of U.S. federal and state taxes, foreign tax, and withholding tax expenses and refunds. In the first quarter of fiscal year 2013, we received withholding tax refunds of $0.7 million.

Our cash, cash equivalents and short term investments as of September 30, 2012 were $130.3 million compared to $110.9 million at June 30, 2012.

Results of Operations

Revenue. Total revenue primarily consists of royalties and license 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 patents, associated maintenance agreements and engineering service fees generated from contracts for technology under development. 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, and whether the license granted covers a particular design or a broader architecture.

Our revenue in the three-month periods ended September 30, 2012 and September 30, 2011 was as follows (in thousands, except percentages):

                                     Three Months Ended September 30,
                                                                   Change in
                                  2012               2011           Percent
Revenue
Royalties                       $     10,473       $     12,979            -19 %
Percentage of Total Revenue               75 %               75 %
License and Contract Revenue    $      3,470       $      4,238            -18 %
Percentage of Total Revenue               25 %               25 %
Total Revenue                   $     13,943       $     17,217            -19 %

Royalties. Our royalty revenue in the first quarter of fiscal year 2013 decreased by 19% from the comparable period in fiscal year 2012. Total royalty units reported by our customers in the first quarter of fiscal year 2013 were 182 million, a 5% increase from our first quarter of fiscal year 2012. The royalty per unit for the current quarter was 5.8 cents compared to 7.5 cents in the year ago period. The decline in royalty per unit was due to certain licensees reaching timing and volume tiers in their licenses that triggered lower royalty rates, a decline in average selling price for customers whose royalties are calculated as a percentage of their revenue, shifts in product mix at several of our licensees, and consolidation in the industry as certain of our smaller customers were acquired by larger customers with lower royalty rates.

License and Contract Revenue.

We license our embedded processor intellectual property in the form of both architectures and specific processor cores and in some cases our patents. 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 13 active architecture customers. We recognize all license revenues under limited and unlimited use license agreements 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 18% in the first quarter of fiscal year 2013 from the comparable period in fiscal year 2012. There was one new license agreements executed in the first quarter of fiscal year 2013 compared to three in the first quarter of fiscal year 2012. Unlimited use licenses accounted for $2.6 million of our license and contract revenue in our first quarter of fiscal year 2013, and had terms ranging from 5 to 9 years with an average term of approximately 7 years. Contract revenue from unlimited use license agreements was $2.9 million in the same period of fiscal year 2012.

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 September 30,
                               2012            2011      Change in Percent
                                (in thousands, except for percentages)
Cost and Expenses
Cost of Sales                $     362       $     261                 39%
Research and Development     $   8,298       $   7,906                  5%
Sales and Marketing          $   4,425       $   4,831                 -8%
General and Administrative   $   5,566       $   3,264                 71%

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 first quarter of fiscal year 2013 over the same period in fiscal year 2012 was primarily due to increased amortization of purchased third party software licenses in fiscal year 2013.

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 $0.4 million increase in research and development expense for the first quarter of fiscal year 2013 over the comparable period in fiscal year 2012 was primarily due to a $0.5 million increase in incentive compensation resulting from the Company meeting certain financial targets in the first quarter of fiscal year 2013. There was also a $0.2 million increase in stock compensation expense related to timing and mix of grants to employees. These increases were partially offset by a $0.3 million decrease in research and development porting projects in the first quarter of fiscal year 2013 over the comparable period in fiscal year 2012.

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 $0.4 million decrease in sales and marketing expense for first quarter of fiscal year 2013 over the comparable period in fiscal year 2012 was due to a mix of increases and decreases in various expenses, including (i) a $0.5 million decrease in consulting expenses, (ii) a $0.3 million decrease in severance costs, (iii) a $0.2 million increase in incentive compensation resulting from the Company meeting certain financial targets in the first quarter of fiscal year 2013, and (iv) a $0.2 million increase in ecosystem development activities.

General and Administrative. General and administrative expenses comprise salaries, outside professional service fees, 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, 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 $2.3 million increase in our general and administrative expense for the first quarter of fiscal year 2013 over the comparable period in fiscal year 2012 was due to increases of (i) $1.9 million in connection with the Company's exploration of options related to patent monetization and other opportunities for increasing shareholder value (ii) $0.1 million stock compensation expense primarily resulting from the timing and mix of employee stock grants, and (iii) $0.3 million in incentive compensation resulting from the Company meeting certain financial targets in the first quarter of fiscal year 2013.

Other Income (Expense), Net. Other Income (Expense) was relatively flat at less than $0.1 million for the first quarter of fiscal year 2013 and the same period in fiscal year 2012.

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

We recorded an income tax benefit of $0.4 million for the three-month period ended September 30, 2012 compared to an income tax expense of $0.5 million for the comparable period in fiscal year 2012 primarily as a result of receiving $0.7 million of withholding tax refunds in the first quarter of fiscal year 2013. We continue to recognize a partial valuation allowance against net U.S. deferred tax assets as we believe that it is more likely than not that the majority of our deferred tax assets will not be recognized. The portion of our U.S. net deferred tax assets that has no offsetting valuation allowance is recognized solely as an offset to liabilities recorded with respect to certain unrecognized tax benefits.

Liquidity and Capital Resources

At September 30, 2012, we had cash, cash equivalents and short term investments of $130.3 million, an increase of approximately $19.4 million from June 30, 2012.

Operating Activities

Net cash provided by operating activities was $19.6 million for the three months ended September 30, 2012. Our net loss included the effects of non-cash charges of $1.9 million from stock compensation expense and $0.5 million in depreciation and amortization of intangible assets. In addition, cash generated from operating activities increased primarily as a result of a $24.5 million decrease in accounts receivable, reflecting timing of customer billings and payments received, and an $0.4 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 the amortization of the associated licenses. These increases in cash were offset by cash used as a result of (i) a $0.5 million decrease in long term liabilities, primarily reflecting timing of engineering design software design software license payments, (ii) a $2.4 million decrease in accounts payable and accrued liabilities, primarily due to the payment of our fiscal year 2012 incentive compensation in the first quarter of fiscal year 2013, and (iii) a $0.5 million decrease in deferred revenue, reflecting timing of customer payments compared to timing of revenue recognition.

Net cash used in operating activities was $2.6 million for the three months ended September 30, 2011. The cash used in operations was primarily a result of our positive net income net of non-cash expenses offset by net changes in our asset and liability balances. Our net income included the effects of non-cash charges of $1.5 million from stock compensation expense and $0.3 million in depreciation and amortization of intangible assets. We used cash in operating activities primarily as a result of (i) a $3.2 million decrease in accrued liabilities, primarily due to the payment of our fiscal year 2011 bonus and commissions in the first quarter of fiscal year 2012, (ii) a $1.8 million increase in accounts receivable, reflecting timing of customer billings and payments received and (iii) a $0.6 million decrease in accounts payable, due to the timing of vendor payments. These decreases were partially offset by cash provided by a $0.6 million decrease in prepaid expenses and other current and long term assets, primarily reflecting the timing of engineering design software license payments as compared to their amortization.

Investing Activities

Net cash used in investing activities was $0.5 million for the three months ended September 30, 2012 as a result of $0.6 million used to purchase property, furniture and equipment partially offset by proceeds of $0.1 million from the net purchases of available-for-sale securities.

Net cash used in investing activities was $9.3 million for the three months ended September 30, 2011 as a result of usage of $8.8 million for the net purchases of available-for-sale securities and $0.4 million used to purchase property, furniture and equipment.

Financing Activities

Net cash provided by financing activities was $0.5 million for the three months ended September 30, 2012. This cash generated from financing activities resulted from $0.4 million from stock option exercises and $0.1 million of cash provided by excess tax benefits from options exercised.

Net cash provided by financing activities was $0.4 million for the three months ended September 30, 2011. This cash generated from financing activities resulted from stock option exercises.

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;

• 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 the Company's exploration of options related to patent monetization and other opportunities for increasing shareholder value;

• the costs associated with capital expenditures.

Our short term investments are liquid, and in the event we need to access these funds, we will be able to do without a material loss.

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 September 30, 2012 were as follows (in thousands):

                                                         Less than 1
                                             Total           year          1-3 years       3-5 years
Operating lease obligations (1)            $   4,164     $        993     $     2,194     $       977
Purchase obligations (2)                      12,986            8,428           4,033             525
Other long-term liabilities and
obligations (3)                                1,425                -           1,425               -
Total                                      $  18,575     $      9,421     $     7,652     $     1,502

(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 approximately $13 million at September 30, 2012 decreased from our purchase obligations as of June 30, 2012 by $2.5 million. Of the total, $5.8 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 remaining $7.2 million of purchase obligations includes approximately $6.0 million due by September 30, 2013 with the balance to be completed within four years.

(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 aggregate of $2.8 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 2012 Form 10-K.