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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

FOR THE QUARTERLY PERIOD ENDED September 30, 2004

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

For the transition period from     to     .

Commission file number 000-24487

MIPS Technologies, Inc.
(Exact name of registrant as specified in its charter)

1225 CHARLESTON ROAD, MOUNTAIN VIEW, CA 94043-1353
(Address of principal executive offices)

Registrant's telephone number, including area code: (650) 567-5000

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X ] No [ ]

        As of October 29, 2004, the number of outstanding shares of the Registrant’s common stock, $.001 par value, was 41,576,273.

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PART I - FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

MIPS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

See accompanying notes.

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MIPS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In thousands, except per share data)

See accompanying notes.

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MIPS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)

See accompanying notes.

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MIPS TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

Note 1.   Description of Business and Basis of Presentation

        We are a leading provider of industry-standard processor architectures and cores for digital consumer and business applications. We design and license high performance 32- and 64-bit architectures and cores, which offer smaller dimensions and greater energy efficiency in embedded processors. Our technology is utilized in many high-growth embedded markets including digital set-top boxes, digital televisions, DVD recordable devices, broadband access devices, digital cameras, laser printers and network routers.

        Basis of Presentation. The unaudited results of operations for the interim periods shown in these financial statements are not necessarily indicative of operating results for the entire fiscal year. In our opinion, the condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for each interim period shown.

        The condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. Certain information and footnote disclosures included in financial statements prepared in accordance with generally accepted accounting principles have been omitted in these interim statements as allowed by such SEC rules and regulations. The balance sheet at June 30, 2004 has been derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. However, we believe that the disclosures are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements included in this Form 10-Q should be read in conjunction with the audited consolidated financial statements and related notes for the fiscal year ended June 30, 2004, included in our 2004 Annual Report on Form 10-K.

        Use of Estimates.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.

        Stock-Based Compensation.  We have adopted the disclosure requirements of SFAS No. 123, Accounting for Stock-based Compensation, as amended by SFAS No. 148 — Accounting for Stock-Based Compensation — Transition and Disclosure. As allowed by SFAS No. 123, we account for stock-based employee compensation arrangements under the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). As a result, no expense was recognized for options to purchase our common stock that were granted with an exercise price equal to fair market value at the date of grants and no expense was recognized in connection with purchases under our employee stock purchase plan. For restricted common stock issued at discounted prices, we recognize compensation expense over the vesting period for the difference between the exercise or purchase price and the fair market value on the measurement date. Total compensation expense recognized in our financial statements for stock-based awards under APB 25 was $186,000 for the three-month period ended September 30, 2004 compared to $160,000 for the three-month period ended September 30, 2003.

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        Pro forma information regarding net income (loss) and net income (loss) per share has been determined as if we had accounted for our employee stock options and employee stock purchase plans under the fair value method prescribed by SFAS No. 123. For purposes of pro forma disclosures, the estimated fair value of the stock awards is amortized to expense over the vesting periods of such awards.

        Our pro forma information is as follows (in thousands, except per share data):

        The historical pro forma impact of applying the fair value method prescribed by SFAS No. 123 is not representative of the impact that may be expected in the future due to changes resulting from additional grants in future years.

        On March 31, 2004, the Financial Accounting Standards Board (FASB) issued an Exposure Draft (ED), “Share-Based Payment — An Amendment of FASB Statements No. 123 and 95.” The proposed Statement addresses the accounting for transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The proposed Statement would eliminate the ability to account for share-based compensation transactions using APB 25, and generally would require instead that such transactions be accounted for using a fair-value based method. As proposed, companies would be required to recognize an expense for compensation cost related to share-based payment arrangements including stock options and employee stock purchase plans. As proposed, the new rules would be applied on a modified prospective basis as defined in the ED, and would be effective for us beginning July 1, 2005. We are currently evaluating option valuation methodologies and assumptions in light of the evolving accounting standards related to employee stock options. Current estimates of option values using the Black-Scholes method (as shown above) may not be indicative of results from valuation methodologies ultimately adopted in the final rules.

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Note 2.   Computation of Earnings Per Share

        The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

Note 3.   Comprehensive Income (Loss)

        Total comprehensive income (loss) includes net income (loss) and other comprehensive income, which for us primarily comprises unrealized gains and losses from foreign currency adjustments. Total comprehensive income for the first three months of fiscal 2004 was $3.1 million and total comprehensive loss for the comparable period in the prior year was $5.8 million.

Note 4.   Purchased Intangible Assets

        All of our purchased intangible assets, except goodwill, are subject to amortization. Purchased intangible assets subject to amortization consisted of the following as of September 30, 2004 and June 30, 2004 (in thousands):

        Goodwill, recorded in fiscal year 2003 as a result of the acquisition of Algorithmics, Limited, a tool chain company based in the United Kingdom and an affiliated company, DFS3 Limited, was $248,000 as of September 30, 2004 and June 30, 2004.

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        The estimated future amortization expense of purchased intangible assets as of September 30, 2004 is approximately $412,000, $549,000, $549,000, $549,000 and $341,000 for the remaining nine months of fiscal 2005 and for fiscal years 2006, 2007, 2008 and 2009, respectively, and approximately $387,000 for years following fiscal 2009. Amortization expense for purchased intangible assets was $140,000 in the first quarter of fiscal 2005 and $148,000 in the first quarter of fiscal 2004.

Note 5.   Restructuring Charge

        Restructuring charges consist of multiple actions taken in fiscal 2003.

October 2002 Restructuring Activities

        In the second quarter of fiscal 2003, we closed our Denmark design center to consolidate our research and development activities in our headquarters in California and in our then recently acquired design center in the United Kingdom. We implemented plans to eliminate 67 regular positions or about 30% of our then global workforce across all functions with the objective of reducing our operating expenses. These actions resulted in a restructuring charge in fiscal 2003 of approximately $7.7 million. The restructuring charge included approximately $3.2 million of employee severance and related benefits, $1.7 million of facilities exit costs, primarily related to lease expenses net of anticipated sublease income, $2.5 million in asset write-offs and $299,000 in legal and other costs. The severance and facility related charges were accounted for under EITF Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and other Costs to Exit an Activity. The charges associated with the write-off of assets were accounted for under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. All employees had been terminated as of June 30, 2003.

        A summary of the October 2002 restructuring activities as of September 30, 2004 follows below (in thousands):

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        The $1.7 million estimated charge for vacating our Denmark design center consisted of our future obligations of $6.4 million under the facility operating lease expiring in March 2010, partially offset by estimated sublease income of approximately $4.7 million. We engaged two external local real estate professionals to provide an assessment of comparable commercial properties in the Copenhagen, Denmark real estate market. Based on the input from these real estate professionals, we estimated that a period of 15 months would elapse before we would be able to sublease the facility, entailing a cost of facilities of $1.2 million during this period. We also estimated that we would generate sublease income of $4.7 million over the remaining 7.25 years of the term of the lease with total contractual obligation under the facilities lease of $5.2 million. During the first quarter of fiscal 2004, we revised our estimate of sublease income based upon updated information from real estate professionals on market conditions in Denmark, received subsequent to the first quarter of fiscal 2004. We estimated that an additional 18 months from March 2004 would elapse before we might be able to sublease the facility, and that the amount of sublease income during the remainder of the lease term would be $3.4 million. These revised estimates resulted in a charge to restructuring during the first quarter of fiscal 2004 of $1.4 million. On September 28, 2004, we entered into an agreement with the landlord and a new tenant to terminate our long-term lease obligation in return for a lump sum payment of approximately $1.9 million. This resulted in an additional charge to restructuring in the first quarter of fiscal 2005 of $277,000.

        As part of our restructuring plan, we decided to reduce our investment in research and development, and revised our product development plans. Given constraints on our resources, we determined that we would not seek to integrate into our product plans the developed technology we acquired from Lexra, Inc. in December 2001 and determined that such developed technology had no value and recorded an impairment charge of $1.2 million for the remaining value of this intangible asset in the second quarter of fiscal 2003.

        Other assets written off in fiscal 2003 as a part of the October 2002 restructuring action included leasehold improvements and computer aided design software related to the Denmark facilities. Other costs are composed primarily of legal fees and other restructuring costs. The asset impairments that resulted from these exit activities were accounted for under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

        As of September 30, 2004, the remaining restructuring cost accrual was $76,000, which consists of an accrual for broker commissions and an estimate for unpaid utilities on the leased property through September 28, 2004.

May 2003 Restructuring Activities

        In May 2003, we announced a restructuring plan that included the termination of approximately 57 regular employees and contractors to be completed during fiscal 2004. These activities resulted in a restructuring charge of approximately $2.6 million in fiscal 2003 and an additional restructuring charges of approximately $1.8 million in fiscal 2004. These costs and activities were accounted for under FAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. As of December 31, 2003, all employees and contractors had been terminated and all payments made under this activity.

Note 6.   Interest Income

        Interest income reported under Other income, net was $289,000 for the three-month period ended September 30, 2004 and $201,000 for the three-month period ended September 30, 2003.

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Note 7.   Contingencies

        On April 30, 2003, our Swiss subsidiary, MIPS Technologies International AG, or MIPS AG, through which we conducted our operations in Denmark, terminated the employment of 55 employees in connection with the closure of our Denmark design center. Of these, 45 employees filed claims against MIPS AG in the County Court of Ballerup, Denmark. Subsequently, 13 of these employees agreed to withdraw their claims. On the termination date, the remaining 32 employees of MIPS AG held options to purchase an aggregate of 724,830 shares of our common stock, of which options to purchase 413,552 shares were vested and options to purchase 311,278 shares were unvested. The exercise price of these options ranged from $2.94 to $27.16 per share. Under our stock option plans, unvested options expire upon termination of employment and vested options expire three months after the termination of employment.

        The terminated employees are seeking, primarily, the right to exercise, regardless of the termination of their employment, the options they held as of the date of their termination, which expired on or within three months of the termination date. As such, they are claiming, under alleged principles of Danish employment law, the right to exercise such options, or in the alternative, money damages equal to the difference between the excess of the trading price of our common stock shares over the exercise price of the options on whatever future date the employee designates as an effective exercise date of the option. The employees further claim that these effective rights to exercise should continue for the same period as the respective terms of the options on which they were based, that is, 10 years from the respective grant date of the underlying option.

        Our Swiss subsidiary intends to defend itself vigorously in these matters. Presently, we are unable to assess the probability that this suit will result in a material loss to MIPS AG or us. There is considerable uncertainty in Danish law about the legal issues in dispute. Further, the amount of any loss would presumably depend on the future price of shares of our common stock.

        From time to time, we receive communications from third parties asserting patent or other rights covering our products and technologies. Based upon our evaluation, we may take no action or we may seek to obtain a license. There can be no assurance in any given case that a license will be available on terms we consider reasonable, or that litigation will not ensue.

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

        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 those that address 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 “Factors That May Affect Our Business”, and other risks affecting our business. We undertake no obligation to update any forward-looking statements included in this discussion.

Overview

        We are a leading provider of industry-standard processor architectures and cores for digital consumer and business applications. We design and license high performance 32- and 64-bit architectures and cores, which offer smaller dimensions and greater energy efficiency in embedded processors. Our technology is utilized in many high-growth embedded markets including digital set-top boxes, digital televisions, DVD recordable devices, broadband access devices, digital cameras, laser printers and network routers.

        We entered fiscal 2005 facing the challenge of maintaining our growth and profitability, while establishing new initiatives and executing on our next set of product development offerings. We have made significant progress during the first quarter of fiscal 2005. The demand for our recently introduced high performance MIPS32 24K core family contributed significantly to the 40% year over year revenue growth in the first fiscal quarter of 2005. The completion of nine new license agreements during the quarter, including five agreements for the 24K cores provided the foundation for the 48% growth in contract revenue. We continue to expand our customer base with the addition of three new licensees along with achieving repeat business with six existing customers licensing additional cores from us. The 32% increase in royalties in the first quarter was due to royalties from license agreements signed since our initial public offering in June 1998. Royalties from these agreements contributed to 63% of our total royalties in the quarter, up from 38% in the same quarter of fiscal 2004. We achieved increased profitability for the fourth consecutive quarter. In late September, we completed the negotiation for the termination of the long-term facilities lease obligation for our former Denmark design center.

        Looking forward to the next fiscal quarter, we will need to continue to capitalize on the momentum for the MIPS32 24K core family to grow our contract revenue. We expect that our operating expenses will increase over the next several quarters as we continue to invest in projects and programs to support our future growth.

Results of Operations

        Revenue.  Our revenue consists of royalties and contract revenue earned under contracts with our licensees. Our contracts with our licensees are typically subject to periodic renewal or extension and expire at various dates through June 2018. Although the precise terms of our contracts vary, they typically provide for royalties, technology license fees for currently available technology or engineering service fees for technology under development, and maintenance fees.

        We generate royalties from the sale by our licensees of products incorporating our technology. Royalty revenue is recognized in the quarter in which a report is received from a licensee detailing the shipments of products incorporating our intellectual property, which is in the quarter following the sale of the licensee’s product to its customer. Royalties are calculated either as a percentage of the revenue received by the seller on sales of such products or on a per unit basis. Our ability to diversify our revenue base will depend primarily on the number and variety of design wins we obtain from digital consumer product and business equipment manufacturers, and consumer acceptance of products that incorporate our technology. We generally do not have a direct contractual relationship with digital consumer product manufacturers, and the royalty reports submitted by our licensees generally do not disclose which consumer products include our technology. As a result, it is difficult for us to identify or predict the extent to which our future revenue will depend upon a particular digital consumer product or product manufacturer.

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        We generate contract revenue from technology license fees for currently available technology and engineering service fees for technology under development. Each of these types of contracts is a nonexclusive license for the underlying intellectual property. While we may be required to perform certain services to render the intellectual property suitable for license under an engineering service contract, we continue to own the intellectual property that we develop. The amount of the license fee under an engineering service agreement is primarily a function of our determination of the underlying value of the technology rather than our cost of completing the development of the technology required by the agreement. We also have the right to license to other licensees the intellectual property developed under engineering service agreements. Consistent with Staff Accounting Bulletin (referred to as SAB) No. 104 Revenue Recognition, technology license fees are recorded as revenue upon the execution of the license agreement when there is persuasive evidence of an arrangement, fees are fixed and determinable, delivery has occurred and collectibility is probable. 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. Engineering service fees are related to engineering services contracts, which are performed on a best efforts basis and for which we receive periodic milestone payments. Engineering service fees are recognized as revenue over the estimated development period using a cost-based percentage of completion method. In most instances, the technology under development, including under engineering services contracts, can be licensed to multiple customers.

        Our revenue in the three-month periods ended September 30, 2004 and September 30, 2003 was as follows (in thousands):

        Total revenue increased 40% for the first quarter of fiscal 2005 over the comparable period in fiscal 2004 due to an increase in both royalties and contract revenues. The increase in royalties in the first quarter was due primarily to an increase of $2.4 million in royalties from license agreements signed since our initial public offering in June 1998 as customers under these agreements are shipping more products incorporating our technology. This increase was offset in part by a decrease of $700,000 in royalties from legacy agreements. Contract revenues increased 48% primarily due to an increase of $3.4 million in fees generated from new and existing license agreements for developed technology offset in part by a decrease of $759,000 in fees generated from engineering services contracts for technology under development. The increase in fees for developed technology was primarily due to the completion of nine new license agreements including five new licenses for the recently introduced MIPS32 24K core family. Engineering service fees decreased because we had fewer agreements in place for the development of products than in the prior period.

        Cost and Expenses.  Our cost and expenses for the three-month periods ended September 30, 2004 and September 20, 2003 was as follows (in thousands):

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        Research and Development.  Costs incurred with respect to internally developed technology and engineering services which are not directly related to any particular licensee, license agreement or license fee are included in research and development as they are incurred.

        The decrease in research and development expenses for the first quarter of fiscal 2005 over the comparable period in fiscal 2004 was primarily the result of a reduction in cost of approximately $2.7 million related to the termination of our custom core development team in September 2003 including a decrease in salary and benefits expense of $1.0 million and a decrease in computer aided design tool amortization expense of $1.7 million. In addition, depreciation expense declined $499,000. These decreases were offset in part by an increase in bonus and profit sharing expense of $303,000. We expect our research and development expenses to increase during the remainder of fiscal 2005 as we invest in additional projects to support future growth.

        Sales and Marketing. Sales and marketing expenses for the first quarter of fiscal 2005 increased over the comparable period in fiscal 2004. The increase in sales and marketing expenses was primarily due to an increase in commission and bonus expense of $272,000 due to an increase in contract revenue and the reinstatement of our bonus and profit sharing plans and an increase of $65,000 in marketing communications. This increase was offset in part by a decrease in spending of $175,000 on third party software development tools due to higher requirement for such tools in the first quarter of fiscal 2004. We expect that our sales and marketing expenses will increase during the remainder of fiscal 2005 as we focus additional resources on expanding our market presence.

        General and Administrative.  General and administrative expenses for the first quarter of fiscal 2005 increased over the comparable period in fiscal 2004. The increase in general and administrative expenses was primarily due to an increase in legal expense of $240,000 as a result of increased legal and patent activity, an increase in bonus expense of $193,000 due to the reinstatement of our bonus and profit sharing plans, and an increase in other expense due to the reversal of a bad debt allowance of $177,000 in September 2003 as we were able to collect an outstanding receivable that had previously been determined to be uncollectible. We expect that our general and administrative expenses will remain relatively constant over the next few quarters.

        Restructuring Charge.  We recorded restructuring charges in the first quarter of fiscal 2005 and in the first quarter of fiscal 2004 related to two actions initiated in fiscal 2003. In the second quarter of fiscal 2003, we closed our Denmark design center, which occupied approximately 44,600 square feet of technical office space under a long-term lease arrangement to expire in July 2010. On September 28, 2004, we entered into an agreement with the landlord and a new tenant to terminate our lease obligation in return for a lump sum payment of approximately $1.9 million. This resulted in an additional charge to restructuring in the first quarter of fiscal 2005 of $277,000. The restructuring charge recorded during the first quarter of fiscal 2004 of approximately $1.8 million consisted primarily of employee severance costs related to the phase out initiated in May 2003 of our design efforts with respect to the development of custom cores.

        Other Income, Net.  Other income, net, for the first quarter of fiscal 2005 was $245,000 compared to $208,000 for the comparable period in fiscal 2004. The increase in other income was primarily due to an increase in interest income.

        Income Taxes.  We recorded an income tax provision of $880,000 for the first quarter of fiscal 2005. The estimated annual effective tax rate of 22% in the first quarter of fiscal 2005 is lower than the applicable statutory rate primarily due to the availability of foreign tax credit and general business tax credit carryovers from prior years. We recorded an income tax provision of $567,000 for the first quarter of fiscal 2004 consisting of foreign income taxes and foreign withholding taxes. The estimated annual effective tax rate for the first quarter of fiscal 2004 differs from the expected benefit at the applicable statutory rate due to our inability to benefit our current operating losses.

        A certain transaction reported in our federal income tax return for fiscal year 2002 is currently under examination by the Internal Revenue Service. No adjustment as been proposed at this time. We believe that adequate amounts have been provided for any adjustment that may ultimately result from this examination.

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Financial Condition

        At September 30, 2004, we had cash, cash equivalents and short-term investments of $94.1 million and total working capital of $86.6 million. Our principal requirements for cash are to fund working capital needs, and, to a lesser extent, capital expenditures for equipment purchases, licensing of computer aided design tools used in our development activities and acquisition of technologies and patents. The following table summarizes selected items (in thousands) from our statement of cash flows for the three months ended September 30, 2004 and 2003. For complete statements of cash flows for those periods, see the financial statements in Item 1.

        For the three-month period ended September 30, 2004, our operating activities provided net cash of $664,000 primarily reflecting net income, depreciation and amortization of intangibles. In addition, cash was generated by a decrease in prepaid expenses of $255,000 due to amortization of our business insurance policy, $291,000 related to amortization of our computer aided design time-based licenses and an increase of $880,000 in income taxes payable due to our tax provision for the period, partially offset by foreign withholding taxes on accounts receivable collections. This was partially offset by an increase in accounts receivable due to new balances during the quarter and decreases in other current accrued liabilities from payments under our restructuring plan for our Denmark facility lease termination of $1.9 million and accrued compensation due to $1.5 million in executive bonus payments.

        During the three months ended September 30, 2003, net cash used by operating activities of $2.8 million consisted mainly of our net loss of $5.8 million, offset in part by non-cash charges including depreciation and amortization along with a decrease in accounts receivable due to collection of a large receivable outstanding at June 30, 2003 offset in part by receivables from new agreements during the quarter. In addition, prepaid expenses and other assets decreased due to the receipt of an income tax receivable of $630,000, annual amortization of $330,000 related to our prepaid business insurance, and $1.7 million in amortization of our time-based computer-aided design tool licenses. These were partially offset by decreases in accrued liabilities primarily due to payment of our annual business insurance policy of $1.3 million, lower employee compensation accruals due to fewer employees at the end of the quarter, and payment of accrued restructuring costs of $1.8 million due to the termination of employees during the quarter, partially offset by an additional accrual of $1.4 million related to the closure of our Denmark facility.

        Net cash used in investing activities was $5.0 million for the three months ended September 30, 2004 compared to $7.4 million for the comparable period in the prior year. Net cash used in investing activities during the three-month period ended September 30, 2004 and September 30, 2003 included purchases of short-term investments and purchases of equipment and computer-aided design tools used in our development activities.

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        Net cash provided by financing activities was $74,000 for the three months ended September 30, 2004 compared to net cash provided of $15,000 for the comparable period in the prior year. Net cash provided by financing activities during the three-month period ended September 30, 2004 and September 30, 2003 was attributable to purchases under our employee stock plans.

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

        We believe that we have sufficient cash to meet our projected operating and capital requirements for the foreseeable future. However, we may in the future be required to raise additional funds through public or private financing, strategic relationships or other arrangements. Additional equity financing may be dilutive to holders of our common stock, and debt financing, if available, may involve restrictive covenants. Moreover, strategic relationships, if necessary to raise additional funds, may require that we relinquish our rights to certain of our technologies. Our failure to raise capital when needed could have a material adverse effect on our business, results of operations and financial condition.

Contractual  Obligations

        Our contractual obligations as of September 30, 2004 were as follows:

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Critical Accounting Polices and Estimates

        We prepare our financial statements in conformity with accounting principles generally accepted in the United States, 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.

        Our critical accounting policies relate to revenue recognition, goodwill and purchased intangible assets, impairment of long-lived assets, income taxes and accrued facilities restructuring charges. For a discussion of these critical accounting policies, please see “Critical Accounting Policies and Estimates” in Item 7 of our Annual Report on Form 10-K for the year ended June 30, 2004.

Factors That May Affect Our Business

        Our success is subject to numerous risks and uncertainties, including those discussed below. These factors could hinder our growth, cause us to sustain losses or have other adverse effects on us, all of which could cause our stock price to decline.

        Our quarterly financial results are subject to significant fluctuations that could adversely affect our stock price.  Our quarterly financial results may vary significantly due to a number of factors, many of which are outside of our control. In addition, our revenue components are difficult to predict and may fluctuate significantly from period to period. Because our expenses are largely independent of our revenue in any particular period, it is difficult to accurately forecast our operating results. Our operating expenses are based, in part, on anticipated future revenue and a high percentage of our expenses are fixed in the short term. As a result, if our revenue is below expectations in any quarter, the adverse effect may be magnified by our inability to adjust spending in a timely manner to compensate for the revenue shortfall. Therefore, we believe that quarter-to-quarter comparisons of our revenue and operating results may not be a good indication of our future performance. It is possible that in some future periods our results of operations may be below the expectations of securities analysts and investors. In that event, the price of our common stock may fall.

        Factors that could cause our revenue and operating results to vary from quarter to quarter include:

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        The success of our business depends on maintaining and growing our contract revenue.  Contract revenue consists of technology license fees paid for access to our developed technology and engineering service fees related to technology under development. Our ability to secure the licenses from which our contract revenues are derived depends on our customers, including semiconductor companies, digital consumer and business product manufacturers, adopting our technology and using it in the products they sell. Our contract revenue declined in fiscal 2002 and fiscal 2003 and increased by 5% in fiscal 2004. While we expect that we will continue to grant additional licenses to new licensees and develop new products to license to both new and existing licensees, we cannot predict whether we can maintain our current contract revenue levels or if contract revenue will grow. Our licensees are not obligated to license new or future generations of our products, so past contract revenue may not be indicative of the amount of such revenue in any future period. If we cannot maintain or grow our contract revenue or if our customers do not adopt our technology and obtain corresponding licenses, our results of operations will be adversely affected.

        We depend on royalties from the sale of products incorporating our technology, and we have limited visibility as to the timing and amount of such sales.  Our receipt of royalties from our licenses depends on our customers incorporating our technology into their products, their bringing these products to market, and the success of these products. In the case of our semiconductor customers, we are further dependent upon the sale of products by their customers. Thus, our ability to achieve design wins and enter into licensing agreements does not assure us of future revenue. Any royalties that we are eligible to receive are based on the sales of products incorporating the semiconductors or other products of our licensees, and as a result we do not have direct access to information that will help us anticipate the timing and amount of future royalties. Factors that negatively affect our licensees and their customers could adversely affect our business. The success of our direct and indirect customers is subject to a number of factors, including:

        Because we do not control the business practices of our licensees and their customers, we have little influence on the degree to which our licensees promote our technology and do not set the prices at which products incorporating our technology are sold.

        If we don’t compete effectively in the market for embedded processors, our business will be adversely affected.  Competition in the market for embedded processors is intense. Our products compete with those of other designers and developers of processors and cores, as well as those of semiconductor manufacturers whose product lines include processors for embedded and non-embedded applications. In addition, we may face competition from the producers of unauthorized MIPS-based clones and other technology designs. The market for embedded processors has recently faced downward pricing pressures on products. We cannot assure you that we will be able to compete successfully or that competitive pressure will not materially and adversely affect our business, results of operations and financial condition.

        In order to be successful in marketing our products to semiconductor companies, we must differentiate our processors, cores and related designs from those available or under development by the internal design groups of these companies, including some of our current and prospective licensees. Many of these internal design groups have substantial engineering and design resources and are part of larger organizations with substantial financial and marketing resources. These internal design groups may develop products that compete with ours.

        Some of our existing competitors, as well as a number of potential new competitors, have longer operating histories, greater brand recognition, larger customer bases as well as greater financial and marketing resources than we do. This may allow them to respond more quickly than we can to new or emerging technologies and changes in customer requirements. It may also allow them to devote greater resources than we can to the development and promotion of their technologies and products.

        We depend on design wins to expand our revenue base.  Our ability to generate royalties is uncertain and depends in large part on whether our processors and related designs are selected by our licensees and their customers for design, which we refer to as design wins, into a broader range of both digital consumer and business products. Our ability to achieve design wins is subject to several risks and uncertainties, including:

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        Even if our technology is incorporated into new products, we cannot be certain that any such products will ultimately be brought to market, achieve commercial acceptance or generate meaningful royalties for us.

        Our ability to achieve design wins may be limited unless we are able to develop enhancements and new generations of our intellectual property.  Our future success will depend, in part, on our ability to develop enhancements and new generations of our processors, cores and other intellectual property that satisfy the requirements of specific product applications and introduce these new technologies to the marketplace in a timely manner. If our development efforts are not successful or are significantly delayed, or if the characteristics of our processor, core and related designs are not compatible with the requirements of specific product applications, our ability to achieve design wins may be limited. Our failure to achieve a significant number of design wins would adversely affect our business, results of operations and financial condition.

        Technical innovations of the type critical to our success are inherently complex and involve several risks, including:

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

        We depend on our key personnel to succeed.  Our success depends to a significant extent on the continued contributions of our key management, technical, sales and marketing personnel, many of whom are highly skilled and difficult to replace. We cannot assure you that we will retain our key officers and employees. Competition for qualified personnel, particularly those with significant experience in the semiconductor and processor design industries, remains intense. The loss of the services of any of our key personnel or our inability to attract and retain qualified personnel in the future could make it difficult to meet key objectives, such as timely and effective project milestones and product introductions which could adversely affect our business, results of operations and financial condition. In addition, our recent restructurings may have an adverse effect on employee morale and create concern among existing employees about job security and, as a result, key employees may be more likely to seek other employment opportunities.

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        Changes in effective tax rates or adverse outcomes from examination of our income tax returns could adversely affect our results.  Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries with low statutory tax rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or the interpretation of tax laws. In addition, we are currently under examination by the Internal Revenue Service regarding our federal income tax return for fiscal year 2002. Although no adjustment has been proposed at this time and we believe that adequate amounts have been provided for any adjustment that may ultimately result from this examination, the outcome of the examination is currently unclear. We operate in countries other than the United States and occasionally face inquiries and examinations regarding tax matters in these countries. There can be no assurance that the outcomes from our current examination or any other examinations will not have an adverse effect on our operating results and financial condition.

        We may encounter difficulties with future acquisitions, which could harm our business.  As part of our business strategy, in the future we may seek to acquire or invest in businesses or technologies that we believe can complement or expand our business, enhance our technical capabilities or that may otherwise offer growth opportunities. Any future acquisitions may require debt or equity financing, or the issuance of shares in the transaction, any of which could increase our leverage or be dilutive to our existing stockholders. We may not be able to complete acquisitions or strategic customer transactions on terms that are acceptable to us, or at all. We may incur charges related to acquisitions or investments that are completed. For instance, we recorded an in-process research and development charge in the first quarter of fiscal 2003 and the second quarter of fiscal 2002 as a result of our acquisition of certain technology. We will also face challenges integrating acquired businesses and operations and assimilating and managing the personnel of the acquired operations. Geographic distances may further complicate the difficulties of this integration. The integration of acquired businesses may not be successful and could result in disruption to other parts of our business. Acquisitions involve a number of other risks and challenges, including:

        Any of these and other factors could harm our ability to realize the anticipated benefits of an acquisition.

        Our intellectual property may be misappropriated and we may be unable to obtain or enforce intellectual property rights.  Policing the unauthorized use of our intellectual property is difficult, and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. As part of our business strategy, we license our technology in multiple geographies including in countries whose laws do not provide as much protection for our intellectual property as the laws of the United States and where we may not be able to enforce our rights. In addition, we cannot be certain that we will be able to prevent other parties from designing and marketing unauthorized MIPS-Based products or that others will not independently develop or otherwise acquire the same or substantially equivalent technologies as ours. Moreover, cross licensing arrangements, in which we license certain of our patents but do not generally transfer know-how or other proprietary information, may facilitate the ability of cross-licensees, either alone or in conjunction with others, to develop competitive products and designs. We also cannot assure you that any of our patent applications to protect our intellectual property will be approved. In addition, effective trade secret protection may be unavailable or limited in certain countries. If we are unable to protect or enforce our intellectual property rights, our technology may be used without the payment of license fees and royalties, which could weaken our competitive position, reduce our operating results and increase the likelihood of costly litigation.

        We may be subject to claims of infringement.  We cannot assure you that any of the patents or other intellectual property rights that we own or use will not be challenged, invalidated or circumvented by others or be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Significant litigation regarding intellectual property rights exists in our industry. As we grow our business and expand into new markets that other companies are developing in, the risk that our technology may infringe upon the intellectual property rights of others increases. We cannot be certain that third parties will not make a claim of infringement against us, our licensees, or our licensees’ customers in connection with use of our technology. Any claims, even those without merit, could be time consuming to defend, result in costly litigation and/or require us to enter into royalty or licensing agreements. These royalty or licensing agreements, if required, may not be available on acceptable terms to us or at all. A successful claim of infringement against us or one of our licensees in connection with its use of our technology could adversely affect our business.

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        We have recorded long-lived assets, and our results of operations would be adversely affected if their value becomes impaired.  In both the first and second quarters of fiscal 2003 and the second quarter of fiscal 2002, we acquired certain core and developed technologies and patent and patent applications, and the purchase price of these long-lived assets is being amortized over schedules based on their useful lives. If we complete additional acquisitions in the future, our purchased intangible assets amortization charge could increase, and we may be required to record substantial amounts of goodwill. We evaluate our long-lived assets, including purchased assets, for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable from its estimated future cash flows. In the second quarter of fiscal 2003, we recorded an impairment charge of $1.2 million for purchased developed technology acquired in December 2001. We recorded additional research and development expense of $1.7 million in fiscal 2004 and $696,000 in fiscal 2003 related to the accelerated amortization and depreciation of certain computer aided design tool and software assets whose estimated useful lives were reduced because of the restructuring actions announced in the fourth quarter of fiscal 2003.

        In the future, if we determine that our long-lived assets are impaired, we will have to recognize additional charges for this impairment. We cannot be sure that we will not be required to record additional long-lived asset impairment charges in the future.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are exposed to interest rate risk on investments of our excess cash. The primary objective of our investment activities is to preserve capital. To achieve this objective and minimize the exposure due to adverse shifts in interest rates, we invest in high quality short-term maturity commercial paper, municipal bonds, and money market funds operated by reputable financial institutions in the United States. Due to the nature of our investments, we believe that we do not have a material interest rate risk exposure.

        We are exposed to fluctuations in currency exchange rates because a substantial portion of our revenue has been, and is expected to continue to be, derived from customers outside the United States. To date, substantially all of our revenue from international customers has been denominated in U.S. dollars. Because we cannot predict the amount of non-U.S. dollar denominated revenue earned by our licensees, we have not historically attempted to mitigate the effect that currency fluctuations may have on our revenue, and we do not presently intend to do so in the future.

ITEM 4.    CONTROLS AND PROCEDURES

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PART II — OTHER INFORMATION

ITEM 6.   EXHIBITS

ITEMS 1, 2, 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: November 8, 2004

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