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

We are a leading supplier of intellectual property (IP) to the global semiconductor industry. Our technology solutions include the high-performance MIPS architecture and related embedded processor cores, which are broadly used in markets such as digital entertainment, wired and wireless communications and networking, office automation, security, microcontrollers, and automotive. With the acquisition of Chipidea Microelectrónica S.A. (Chipidea) on August 27, 2007, we have become the leading supplier of IP to semiconductor companies for analog and mixed signal devices. Our customers include global semiconductor companies, and the annual unit volumes of products incorporating our technologies exceeded 350 million in fiscal year 2007.

Following the acquisition of Chipidea we are organized in two business groups, the Processor Business Group (PBG) and the Analog Business Group (ABG). The PBG provides industry-standard processor architectures and cores for digital consumer and business applications. The ABG includes the Chipidea operation and provides analog and mixed-signal IP that produces cost-efficient System-on Chip (SOC) applications and turnkey solutions.

Revenue in the third quarter of fiscal 2008 increased 43% over the comparable period in fiscal 2007 due to an increase in both royalties and license and contract revenue. The increase in royalties of $1.8 million was primarily due to a 15% increase in PBG royalties. Our licensees reported shipments of approximately 115 million units during the quarter, an increase of 31% over the comparable period in fiscal 2007.

License and contract revenue increased by 77% over the comparable period in fiscal 2007 due to the revenue contribution from ABG of $9.0 million for which there is no comparable fiscal 2007 contribution. The ABG contribution was offset in part by a 30% decline in PBG license revenue.

Our gross margin was $17.9 million compared to $18.6 million in the same quarter of the prior year. Our blended gross margin for the two business units combined was 66% for the quarter, which is a significant decrease from our gross margin percentage before the Chipidea acquisition. . This decrease in gross margin percentage reflects the increase in the proportion of license and contact revenue to total revenue. Revenue from ABG contracts is directly tied to development projects related to customer and project specific requirements, therefore such development costs are recorded as costs of revenue, whereas the majority of revenue from PBG contains a lower percentage of engineering services and a higher percentage of IP which leads to a higher average gross margin.

Total costs and operating expense in the third quarter of fiscal 2008 increased by $13.6 million or 72% over the comparable period in fiscal 2007. The increase was primarily due to the ABG costs and expenses of $7.1 million, not including certain corporate unallocated costs such as general and administrative expenses, selling expenses and the amortization of purchased intangible assets associated with the acquisition of Chipidea. In addition, operating expense included amortization of $1.7 million recorded as compensation expense associated with the Chipidea purchase agreement for the continued employment of certain Chipidea employees. In addition, in the third quarter of fiscal 2008 we recorded approximately $1.3 million in restructuring costs associated with the cost reducing actions implemented in January 2008. We expect our operating expenses for the remainder of fiscal 2008 to be higher than the comparable periods in fiscal 2007 as they now include Chipidea expenses.

Net loss before income tax provision for the third quarter of fiscal 2008 was $6.1 million compared to net income before income tax of $1.9 million in the third quarter of fiscal 2007.

Our cash, cash equivalents and marketable securities remained flat at approximately $15.2 million at March 31, 2008 as we generated cash from operations during the quarter but also paid down certain debts during the quarter.

Results of Operations

Revenue. Total revenue 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 engineering service fees generated from contracts for technology under development or configuration of existing IP. Technology license fees vary based on, among other things, whether a particular technology is licensed for a single application or for multiple or unlimited applications during a specified period, and whether the license granted covers a particular design or a broader architecture.

Our revenue in the three-month and nine-month periods ended March 31, 2008 and March 31, 2007 was as follows (in thousands):

                                Three Months Ended March 31,                      Nine Months Ended March 31,
                                                           Change in                                        Change in
                           2008              2007           Percent          2008              2007          Percent
Revenue
Royalties               $    12,556       $    10,733              17 %   $    35,590       $   33,128               7 %
Percentage of Total
Revenue                          46 %              56 %                            47 %             56 %
License and Contract
Revenue                 $    14,767       $     8,342              77 %   $    40,336       $   26,502              52 %
Percentage of Total
Revenue                          54 %              44 %                            53 %             44 %
Total Revenue           $    27,323       $    19,075              43 %   $    75,926       $   59,630              27 %

Royalties. The increase in royalties in the third quarter of fiscal 2008 from the comparable period in fiscal 2007 is primarily due to a 31% increase in unit volumes shipped by our royalty paying licensees offset in part by a decline in the average selling price of chips sold by our licensees, which leads to lower royalties as many of our royalty contracts are based on royalties as a percentage of licensee net revenue.

Royalties in the first nine months of fiscal 2008 increased from the comparable period in fiscal 2007. The increase is due to the addition of royalties from the ABG of $737,000 following the acquisition of Chipidea in August 2007 and an 18% increase in PBG unit shipments offset in part by a decline in the average selling price of chips sold by our licensees, which leads to lower royalties as many of our royalty contracts are based on royalties as a percentage of licensee net revenue.

License and Contract Revenue. The increase in license and contract revenue in both periods presented is due to the addition of contract revenues from the ABG following the Chipidea acquisition in August 2007. In the third quarter of fiscal 2008, contract revenues from the ABG were $9.0 million. The ABG entered into 26 new contracts in the third fiscal quarter of 2008. Revenue from ABG contracts is generally recognized on a percentage of completion basis over the period of contract performance. The ABG revenue increase was offset in part by a decrease in license revenue generated by the PBG of $2.5 million even though there were two more contracts signed in the quarter compared to the same period in the prior year. There were six new license agreements completed by the PBG in the third quarter of fiscal 2008 compared to four in the third quarter of fiscal 2007. License fees generated by the MIPS 24K core product family decreased $1.4 million, fees generated by the MIPS architecture family decreased $1.0 million and fees generated by the MIPS 4K core family decreased $1.1 million compared to the corresponding period in fiscal 2007. These decreases were partially offset by an increase in fees generated by the MIPS 34K and 74K core product families of $1.4 million.

The increase in license and contract revenues in the first nine months of fiscal 2008 over the comparable period in fiscal 2007 is due to contract revenues from the ABG of $20.5 million. There were 77 new contracts completed by the ABG in the first nine months of 2008 subsequent to our acquisition of Chipidea, and 214 contracts generating ABG revenue as of March 31, 2008 This increase was offset in part by a decrease in license revenue generated by the PBG of $6.7 million. There were seventeen new license agreements completed by the PBG in the first nine months of fiscal 2008 compared to twenty-one in the comparable period of fiscal 2007. Fees generated by the MIPS 24K core product family decreased $5.6 million, fees generated by the MIPS architecture family decreased by $1.4 million and fees generated by the MIPS 4K core product family decreased by $1.1 million in the first nine months of fiscal 2008 over the comparable period in fiscal 2007, offset somewhat by an increase in fees from the MIPS 34K and 74K core product families of $3.0 million.

Cost and Expenses. Our cost and expenses for the three-month and nine-month periods ended March 31, 2008 and March 31, 2007 was as follows (in thousands):

                                    Three Months Ended March 31,                    Nine Months Ended March 31,
                                                              Change in                                     Change in
                                2008             2007          Percent          2008           2007          Percent
Cost and Expenses
Cost of Contract Revenue     $    9,407       $      492           1,812 %   $   22,110      $   1,261           1,653 %
Research and Development     $    9,315       $    8,159              14 %   $   27,821      $  24,185              15 %
Sales and Marketing          $    6,056       $    5,345              13 %   $   17,796      $  15,314              16 %
General and Administrative   $    6,559       $    4,978              32 %   $   21,437      $  13,867              55 %

Cost of Contract Revenue. Cost of contract revenue includes salaries, depreciation, and the amortization of intangible assets primarily associated with the ABG. The increase in cost of contract revenue in the third quarter of fiscal 2008 and the first nine months of fiscal 2008 over the comparable periods in fiscal 2007 is due to the additional cost of revenue associated with Chipidea's analog processor products. The ABG's revenue is generated by projects which include the development of technology that is directly related to the requirements of particular licensees and license agreements. As such, the cost of revenue for the ABG is substantially higher than is the case for the PBG.

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 for the PBG 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. Because of the nature of these expenses, the research and development expenses for the PBG are substantially higher than the research and development expenses of the ABG, where more of the expense incurred for the development of technology is directly related to the requirements of particular licensees and license agreements.

The increase in research and development expenses in the third quarter of fiscal 2008 over the comparable period in fiscal 2007 was primarily due to an increase in compensation expense of $966,000 due to the accrual of payments to be made in association with the Chipidea purchase agreement. These payments are to certain founders of Chipidea and are subject to the continued employment of these employees. The increase was offset in part by a decrease in stock-based compensation expense because of decreases in headcount due to the restructuring actions taken in the third quarter of fiscal 2008 as well as decreases in the valuation of new grants.

The increase in research and development expenses in the first nine months of fiscal 2008 over the comparable period in fiscal 2007 was primarily due to an increase in salary expense of $1.3 million related to the annual merit increase in the processor business group, as well as the addition of $755,000 of salary expense related to the research and development employees in the ABG. Compensation expense further increased by $1.6 million primarily due to the accrual of payments to be made in association with the Chipidea purchase agreement. These payments are to certain founders of Chipidea and are subject to the continued employment of these employees. This increase was somewhat offset by decreases in bonus earned under our PBG bonus plans as we did not meet plan targets in the PBG in the first nine months of fiscal 2008. In addition, depreciation expense increased by $432,000 due to an increase in our computer-aided design tool base and IT infrastructure to support our engineering efforts.

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 increase in sales and marketing expense for the third quarter of fiscal 2008 over the comparable period in fiscal 2007 was primarily due to an increase in salary expense of $703,000 related to the annual merit increase in the processor business group as well as the addition of $343,000 of expense related to the sales and marketing employees in the ABG. In addition, travel expense increased by $108,000 primarily due to the increase in our worldwide sales force from the ABG acquisition. These increases were somewhat offset by a decrease in consulting expense of $361,000 due to the termination of a contract with a sales agent in Taiwan and lower spending on third party marketing projects.

The increase in sales and marketing expense for first nine months of fiscal 2008 over the comparable period in fiscal 2007 was primarily due to an increase in salary expense of $2.3 million related to the annual merit increase in the processor business group as well as the addition of $1.2 million of expense related to the sales and marketing employees in the ABG. In addition, travel expense increased by $494,000 primarily due to the increase in our worldwide sales force from the ABG acquisition and an increase in the cost of our annual sales conference held in the first quarter of the fiscal year. These increases were somewhat offset by a decrease in commission and bonus expense of $445,000 reflecting a decrease in commissions caused by lower revenues in the first nine months of fiscal 2008 and a decrease in bonus earned under our PBG bonus plans as we did not meet plan targets in the first nine months of fiscal 2008. Additionally there was a decrease of $794,000 in consulting expense primarily due to the termination of a contract with a sales agent in Taiwan and lower spending on third party marketing projects.

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 increase in general and administrative expenses in the third quarter of fiscal 2008 over the comparable period in fiscal 2007 was primarily the result of an increase in salary and benefits expense of $634,000 primarily due to expenses for the additional administrative employees in the ABG, an increase in consulting expense of $389,000 as we used contractors to fill resource gaps, and an increase in compensation expense of $380,000 primarily due to the accrual of payments to be made in association with the Chipidea purchase agreement. These payments are to certain founders of Chipidea and are subject to continued employment of these employees.. These increases were somewhat offset by decreases in bonus earned under our PBG bonus plans as we did not meet PBG bonus plan targets in the first nine months of fiscal 2008. In addition, travel expense increased by $210,000 primarily due to the increase in travel associated with the addition of the ABG. These expenses were somewhat offset by a decrease in outside services fees of $309,000 due to lower costs associated with the stock option investigation which was concluded in July 2007.

The increase in general and administrative expenses in the first nine months of fiscal 2008 over the comparable period in fiscal 2007 was the result of an increase in fees related to the integration of the ABG of $2.2 million, an increase in audit and tax fees of $1.1 million and an increase in salary and benefits expense of $1.3 million primarily due to expenses for the additional administrative employees in the ABG. Compensation expense increased by $836,000 primarily due to the accrual of payments to be made in association with the Chipidea purchase agreement. These payments are to certain founders of Chipidea and are subject to continued employment of these employees. These increases were somewhat offset by decreases in bonus earned under our PBG bonus plans as we did not meet plan targets in the first nine months of fiscal 2008. In addition, travel expense increased by $558,000 primarily due to the increase in travel associated with the addition of the ABG and consulting expense increased by $507,000 as we used contractors to fill resource gaps. Also, there was an increase in expenses related to our board of directors of $398,000 related to stock compensation expense from annual renewal grants. These increases were somewhat offset by a decrease of $1.3 million in fees related to the stock option investigation which was concluded in July 2007.

Restructuring. In January 2008 we announced plans to reduce operating costs in the PBG by terminating the employment of certain employees in our United States locations and by closing our research and development center in the United Kingdom. The total charge to restructuring expense recorded in the third fiscal quarter of 2008 was $1.3 million. The restructuring plans will be fully implemented by December 2008.

Acquired In-process Research and Development. In August 2007, we completed the acquisition of Chipidea, a privately held supplier of analog and mixed signal intellectual property, for cash consideration. The fair value of the in-process technology was determined by estimating the present value of the net cash flows we believed would result from the acquired technology. Because technological feasibility of certain of the acquired technology had not been established and no future alternative use for the in-process technology existed at the time of the acquisition, we recorded a charge of $6.4 million in the first nine months of fiscal 2008 for the acquired in-process research and development expense upon completion of the acquisition.

Other Income (Expense), Net. Other income (expense), net, for the third quarter of fiscal 2008 was an expense of $762,000 compared to income of $1.8 million for the comparable period in fiscal 2007. The decrease in other income was primarily due to a decrease in interest income of $1.8 million because of the decrease in our invested balances after the Chipidea acquisition, an increase in interest expense of $584,000 primarily due to interest incurred on our short-term debt, and amortization of $686,000 in loan origination fees related to our revolving credit agreement. These increases were somewhat offset by fluctuations in realized foreign exchange gains of $786,000.

Other income (expense), net, for the first nine months of fiscal 2008 was an expense of $1.5 million compared to income of $4.8 million for the comparable period in fiscal 2007. The decrease in other income was primarily due to a decrease in interest income of $3.7 million because of the decrease in our invested balances after the Chipidea acquisition, an increase in interest expense of $1.4 million primarily due to interest incurred on our short-term debt, and amortization of $1.5 million in loan origination fees related to our revolving credit agreement.

Income Taxes. We recorded an income tax benefit of $1.8 million for the three-month period ended March 31, 2008 and a provision of $0.7 million for the comparable period in fiscal 2007. For the nine-month period ended March 31, 2008, we have recorded an income tax provision of $1.0 million and a tax provision of $3.7 million for the comparable period in fiscal 2007. At the third quarter, we have revised our annual forecast related to the Analog Business Group which has resulted in a true-up of the effective rate in the quarter by recognizing a current period tax benefit in Portugal. For the Processor Business Group, we continued to recognize a valuation allowance against the deferred tax assets in U.S. as we believe that it is more likely than not that the deferred tax assets will not be recognized and expire unutilized.

Our estimated annual income tax before discrete items for fiscal 2008 primarily consists of U.S. state minimum taxes and foreign taxes on income earned in certain foreign jurisdictions and withholding taxes. The actual tax provision for the nine-month period ended March 31, 2008 differs from the estimated annual tax due to differentials between US and foreign country tax rates, inclusion in US income of certain foreign subsidiary income, write-off of in process research and development from the Chipidea acquisition, foreign withholding taxes, foreign tax credits generated, a change in estimate related to tax reserves, increase in the valuation allowance in the US and discrete items recorded during the period. The annual effective tax rate of 38% for fiscal 2007 for the nine-month period ended March 31, 2007 primarily consisted of US federal and state taxes and foreign taxes on income earned in certain foreign jurisdictions and withholding taxes, offset in part by the availability of certain foreign tax credits and general business tax credits.

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with Statement of Financial Accounting Standards 109, Accounting for Income Taxes (SFAS 109). This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation is effective for fiscal years beginning after December 15, 2006.

We adopted the provisions of FIN 48 on July 1, 2007. The cumulative effect of adopting FIN 48 on July 1, 2007 is recognized as a change in accounting principle, recorded as an adjustment to the opening balance of accumulated deficit on the adoption date. As a result of the implementation of FIN 48, we recognized a decrease of approximately $264,000 in the liability for unrecognized tax benefits related to tax positions taken in prior periods, which resulted in a decrease of $264,000 in accumulated deficit.
The total amount of gross unrecognized tax benefits was $3.7 million as of July 1, 2007 (the date of adoption of FIN 48) and $4.3 million as of March 31, 2008. The increase in the gross unrecognized tax benefits from July 1, 2007 to March 31, 2008 was primarily related to amounts assumed in the Chipidea acquisition. Also, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $817,000 as of July 1, 2007 and $835,000 as of March 31, 2008.

We recognize interest and penalties related to uncertain tax positions as a component of provision for income taxes. Accrued interest and penalties relating to the income tax on the unrecognized tax benefits was approximately $150,000 as of July 1, 2007 and approximately $479,000 as of March 31, 2008, with approximately $78,000 being included as a component of provision for income taxes in the nine-month period ended March 31, 2008. The increase in interest and penalties from July 1, 2007 to March 31, 2008 was primarily related to amounts assumed in the Chipidea acquisition.

Although we file U.S. federal, U.S. state, and foreign tax returns, our major tax jurisdictions are the United States and Portugal. Our fiscal 2004 and subsequent tax years remain subject to examination by the IRS for U.S. federal tax purposes, and our calendar 2004 and subsequent tax years remain subject to examination by the appropriate governmental agencies for Portuguese tax purposes.

Financial Condition

As a result of the acquisition of Chipidea by payment of cash, our cash, cash equivalents and marketable securities decreased by approximately $127 million during the first quarter of fiscal 2008. We entered into a short-term revolving loan agreement of $35 million to help fund the acquisition and current operating requirements. The amount available under the revolving loan was reduced by an amendment in February 2008 to $19 million, all of which was outstanding on March 31, 2008. Payments of the revolving loan in the amount of $1 million are due monthly beginning in April 2008, and the remaining principal amounts outstanding under this revolving loan agreement are due and payable in full on August 22, 2008. At March 31, 2008, we had cash, cash equivalents and marketable investments of $15.2 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 statements of cash flows for the nine months ended March 31, 2008 and 2007. For complete statements of cash flows for those periods, see the financial statements in Item 1.

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