Tessera (TSRA) 10-Q 2007 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

OR

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

Commission File Number: 000-50460

TESSERA TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	16-1620029
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
3099 Orchard Drive, San Jose, California	95134
(Address of Principal Executive Offices)	(Zip Code)

(408) 894-0700

(Registrant’s Telephone Number, Including Area Code)

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨    No  x.

As of November 6, 2007, 47,854,063 shares of the registrant’s common stock were outstanding.

TESSERA TECHNOLOGIES, INC.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTER ENDED SEPTEMBER 30, 2007

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets – September 30, 2007 and December 31, 2006	3
	Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2007 and 2006	4
	Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2007 and 2006	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risks	21
Item 4.	Controls and Procedures	21
	PART II
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Submission of Matters to a Vote of Security Holders	31
Item 5.	Other Information	31
Item 6.	Exhibits	31
Signatures		32
Exhibit Index		33

2 of 33

PART I – FINANCIAL INFORMATION

Item  1. Financial Statements (unaudited)

TESSERA TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for par value)

(unaudited)

	September 30, 2007			December 31, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	230,596		$	194,076
Short-term investments		35,223			—
Accounts receivable, net of allowance for doubtful accounts of $60 and $75		9,008			6,783
Inventories		2,056			1,548
Short-term deferred tax assets		4,814			4,814
Other current assets		3,310			13,434
Total current assets		285,007			220,655
Property and equipment, net		27,493			24,705
Intangible assets, net		53,225			27,529
Goodwill		35,425			35,425
Long-term deferred tax assets		1,162			12,530
Other assets		1,238			444
Total assets	$	403,550		$	321,288
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,775		$	3,895
Accrued legal fees		4,877			3,166
Accrued liabilities		7,282			7,350
Deferred revenue		1,028			646
Income tax payable		21,888			376
Total current liabilities		37,850			15,433
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock: $0.001 par value; 10,000 shares authorized and no shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively		—			—
Common stock: $0.001 par value; 150,000 shares authorized; 48,327 and 47,214 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively		48			47
Additional paid-in capital		273,569			245,019
Treasury stock at cost: 15 shares of common stock in 2007		(544	)		—
Accumulated other comprehensive loss		(298	)		—
Retained earnings		92,925			60,789
Total stockholders’ equity		365,700			305,855
Total liabilities and stockholders’ equity	$	403,550		$	321,288

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3 of 33

TESSERA TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Revenues:
Royalty and license fees	$	41,383	$	25,916	$	113,377	$	64,817
Past production payments		415		76,000		2,167		77,633
Product and service revenues		7,356		8,625		27,104		16,014
Total revenues		49,154		110,541		142,648		158,464
Operating expenses:
Cost of revenues		3,603		6,201		13,917		13,623
Research, development and other related costs		9,920		5,317		27,106		12,589
Selling, general and administrative		17,655		20,116		51,598		54,091
Total operating expenses		31,178		31,634		92,621		80,303
Operating income		17,976		78,907		50,027		78,161
Other income, net		3,080		1,677		8,686		4,401
Income before taxes		21,056		80,584		58,713		82,562
Provision for income taxes		9,874		33,229		26,577		35,048
Net income	$	11,182	$	47,355	$	32,136	$	47,514
Basic and diluted net income per share:
Net income per share - basic	$	0.23	$	1.02	$	0.68	$	1.04
Net income per share - diluted	$	0.23	$	0.98	$	0.66	$	0.99
Weighted average number of shares used in per share calculations - basic		47,688		46,252		47,423		45,892
Weighted average number of shares used in per share calculations - diluted		48,586		48,422		48,554		48,131

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4 of 33

TESSERA TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	September 30,
	2007			2006
Cash flows from operating activities:
Net income	$	32,136		$	47,514
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation and amortization		9,909			4,701
Gain from sale of fixed assets		(2	)		(8	)
Stock-based compensation		13,212			10,950
Excess tax benefit from stock-based compensation		(488	)		(423	)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net		(2,098	)		(1,484	)
Inventories		(508	)		655
Deferred income tax, net		(20	)		—
Other assets		10,002			(11,954	)
Accounts payable		(1,417	)		(577	)
Accrued legal fees		1,711			(1,158	)
Accrued liabilities		(448	)		(3,281	)
Deferred revenue		382			529
Income tax payable		21,513			31,429
Net cash provided by operating activities		83,884			76,893
Cash flows from investing activities:
Purchases of property and equipment		(6,930	)		(1,677	)
Proceeds from sale of fixed assets		12			8
Purchases of short-term investments		(62,110	)		—
Proceeds from maturities and sales of short-term investments		25,919			—
Acquisitions, net of cash acquired		(19,538	)		(54,517	)
Net cash used in investing activities		(62,647	)		(56,186	)
Cash flows from financing activities:
Excess tax benefit from stock-based compensation		488			423
Proceeds from exercise of stock options		13,323			6,857
Proceeds from employee stock purchase program		2,016			1,203
Repurchases of common stock		(544	)		—
Net cash provided by financing activities		15,283			8,483
Net increase in cash and cash equivalents		36,520			29,190
Cash and cash equivalents at beginning of period		194,076			127,594
Cash and cash equivalents at end of period	$	230,596		$	156,784

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5 of 33

TESSERA TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION

Tessera Technologies, Inc. (together with its subsidiaries, herein referred to as “Tessera” or the “Company”), is a developer and licensor of miniaturization technologies for the electronics industry and micro-optics technologies for the consumer optics industry. The Company provides a broad range of advanced packaging, interconnect, and consumer optics technologies which are widely adopted in high-growth markets including consumer, computing, communications, medical and defense electronics. The Company enables improvements in the size, performance and cost of its customers’ products by applying its expertise in the electrical, thermal and mechanical properties of semiconductor materials, and in the design and manufacturing of micro-optics. Micro-optics technologies include proprietary lens design and algorithms that enhance image quality for applications such as custom depth of focus and zoom. The Company’s intellectual property includes approximately 1,100 domestic and international issued patents and patent applications, covering a broad range of advanced semiconductor packaging, substrate, interconnect and micro-optics technology. The Company licenses its chip packaging technology to its customers on a worldwide basis, enabling them to produce semiconductor chips that are smaller and faster, and that incorporate more features. These semiconductors are utilized in a broad range of electronics products, including digital audio players, digital cameras, personal computers, PDAs, video game consoles and mobile phones.

The consolidated financial statements include the accounts of Tessera Technologies, Inc. and each of its wholly owned subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.

The accompanying interim unaudited condensed consolidated financial statements as of September 30, 2007 and 2006, and for the three and nine months then ended, have been prepared by the Company in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). The amounts as of December 31, 2006 have been derived from the Company’s annual audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the financial position of the Company and its results of operations and cash flows as of and for the periods presented. These financial statements should be read in conjunction with the annual audited financial statements and notes thereto as of and for the year ended December 31, 2006, included in the Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2006.

The results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2007 or any future period and the Company makes no representations related thereto.

The Company’s fiscal year ends on December 31. For quarterly reporting, the Company employs a four-week, four-week, five-week reporting period. The current three-month period ended on Sunday, September 30, 2007 and the prior year comparative three-month period ended on Sunday, October 1, 2006. For presentation purposes, the financial statements and notes have been presented as ending on the last day of the nearest calendar month.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no significant changes in our significant accounting policies during the three and nine months ended September 30, 2007, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2006.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates and assumptions that require management’s most significant, difficult, and subjective judgment include the recognition and measurement of current and deferred income tax assets and liabilities, the valuation of inventory, the assessment of recoverability of long-lived assets, the valuation of goodwill and identified intangible assets and the valuation and recognition of stock-based compensation. Actual results experienced by the Company may differ from management’s estimates.

Cash equivalents and short-term investments

All investments purchased with an original maturity of three months or less are considered to be cash equivalents. All of the Company’s short-term investments are classified as available-for-sale. Cash equivalents consist primarily of money market funds. Short-term investments consist primarily of corporate bonds, mortgage-backed and asset-backed securities. The Company accounts for its investment portfolio at fair value. The investments classified as available-for-sale are recorded at fair value based upon quoted market prices, and any material temporary difference between the amortized cost and fair value of an investment is presented as a separate component of accumulated other comprehensive income. The specific identification method is used to determine the realized gains and losses on investments.

Fair value of financial instruments

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts for cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued legal fees and accrued liabilities approximate their respective fair values because of the short-term maturity of these items.

Inventories

Inventories are stated at standard cost adjusted to approximate the lower of cost on average or first-in, first-out method or market. The Company evaluates inventory levels quarterly against sales forecasts on a product family basis to evaluate its overall inventory risk. Inventory is determined to be saleable based on a sales forecast within a specific time period, generally for a period not to exceed one year. Inventory in excess of saleable amounts is not valued.

Income taxes

Deferred income taxes are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. The provision for income taxes comprises the Company’s current tax liability and change in deferred income tax assets and liabilities. See Note 10 — “Income Taxes” for additional information.

6 of 33

The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, the Company is required to make many subjective assumptions and judgments regarding its income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations are subject to change over time. As such, changes in the Company’s subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income. See Note 10— “Income Taxes” for additional details.

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157 (“SFAS No. 157”), “Fair Value Measurements.” This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States, and expands disclosure about fair value measurements. This pronouncement applies under other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company will be required to adopt SFAS No. 157 in the first quarter of fiscal year 2008. The Company is currently evaluating the requirements of SFAS No. 157 and has not yet determined the impact on its financial statements.

In February 2007, the FASB issued SFAS No. 159 (“SFAS No. 159”), “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The FASB’s objective in this statement is to provide reporting entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company will be required to adopt SFAS No. 159 in the first quarter of fiscal year 2008. The Company is currently evaluating the requirements of SFAS No. 159 and has not yet determined the impact on its financial statements.

NOTE 4 – COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

Inventories consisted of the following (in thousands):

	September 30, 2007		December 31, 2006
Raw materials	$	601	$	247
Work in process		564		407
Finished goods		891		894
	$	2,056	$	1,548

Other current assets consisted of the following (in thousands):

	September 30, 2007		December 31, 2006
Prepaid expenses	$	841	$	1,878
Foreign taxes withholding refund		2,469		11,556
	$	3,310	$	13,434

Property and equipment consisted of the following (in thousands):

	September 30, 2007			December 31, 2006
Furniture and equipment	$	29,943		$	23,153
Land and buildings		17,391			16,607
		47,334			39,760
Less: Accumulated depreciation and amortization		(19,841	)		(15,055	)
	$	27,493		$	24,705

NOTE 5 – BUSINESS COMBINATIONS

Eyesquad GmbH

In February 2007, Tessera completed its acquisition of Eyesquad GmbH (“Eyesquad”), a private limited liability company organized under the laws of the Federal Republic of Germany and operates in Israel. The purchase consideration of $20.3 million included a cash payment of $19.5 million for all outstanding shares of capital stock and vested stock options, and transaction costs of $0.8 million. The purchase price included approximately $2.0 million of cash acquired. Approximately $2.3 million of the purchase consideration was held in escrow and is subject to forfeiture to satisfy indemnification obligations of the former stockholders of Eyesquad, if any. The escrow will expire in August 2009. All interest and other income earned from the escrow will be allocated and distributed to the former stockholders of Eyesquad.

Eyesquad developed and designed digital auto-focus and optical zoom solutions for camera phones and other electronic products that integrate cameras. This acquisition enabled the Company to provide a complete optical product offering to complement its acquisition of Shellcase Ltd. in 2005.

The Company accounted for this transaction using the purchase accounting method and as an asset acquisition in accordance with SFAS No. 141, “Business Combinations,” and Emerging Issue Task Force (“EITF”) 98-3, “Determining Whether a Non Monetary Transaction Involves Receipt of a Productive Asset or a Business.”

There was no acquired in-process research and development or goodwill.

Purchase price allocation

In accordance to SFAS No. 141, “Business Combinations,” the purchase price of the acquisition was approximately $20.3 million, which has been determined as follows (in thousands):

Cash	$	19,492
Transaction costs		790
Total purchase price	$	20,282

7 of 33

Under the purchase accounting method, the total purchase price as shown in the table above is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values, which is allocated as follows (in thousands):

	Amount			Estimated Useful Life
				(in years)
Acquired tangible assets and liabilities:
Current assets	$	2,783		N/A
Property and equipment, net		173		N/A
Other Assets		130		N/A
Liabilities assumed		(677	)	N/A
Deferred tax liability		(11,387	)	N/A
		(8,978	)
Identified intangible assets:
Existing technology		25,762		9
Patents/core technology		1,798		8
Non-competition agreements		1,400		2
Assembled workforce		300		4
		29,260
Total purchase price	$	20,282

Approximately $2.4 million of the purchase price has been allocated to acquire net tangible assets consisting of cash, property and equipment, short term investments, accounts receivable and various liabilities, excluding deferred tax liability.

A deferred tax liability was created on the date of purchase of Eyesquad as there was no allocation of the purchase price to the intangible asset for tax purposes, and the foreign subsidiary’s tax basis in the intangible asset remained at zero. EITF Issue No. 98-11 (“EITF 98-11”), “Accounting for Acquired Temporary Differences in Certain Purchase Transactions That Are Not Accounted for as Business Combinations,” requires the recognition of the deferred tax impact of acquiring an asset in a transaction that is not a business combination when the amount paid exceeds the tax basis of the asset on the acquisition date. In accordance with EITF 98-11, the amounts assigned to the intangible assets and the related deferred tax liability of $11.4 million were determined using the simultaneous equations method.

Digital Optics Corporation

In July 2006, Tessera completed its acquisition of Digital Optics Corporation (“Digital Optics”), a Delaware corporation, a leader in the development and design of micro-optical solutions. In March 2007, the legal name of Digital Optics was changed to Tessera North America, Inc. The Digital Optics personnel and key technology became components in Tessera’s development of low-cost, miniaturized imaging solutions for high-volume consumer optics applications, such as camera phones, next-generation DVD players and automotive applications. Tessera acquired Digital Optics with the intent of furthering its core manufacturing business and of extending its technology and intellectual property in building a larger technology-licensing business in micro-optics for the consumer electronics industry. These factors contributed to a purchase price in excess of the fair value of the underlying net tangible and intangible assets acquired from Digital Optics and, as a result, the Company has recorded goodwill in connection with this transaction.

Under the terms of the agreement, Digital Optics became a wholly owned subsidiary of Tessera in a transaction accounted for using the purchase accounting method. The purchase price of $59.8 million includes cash of $58.6 million for all outstanding shares of capital stock and vested stock options, and transaction costs of $1.2 million. In allocating the purchase price based on fair values, the Company recorded $31.7 million in net tangible assets, consisting of inventory, property and equipment and various assumed assets and liabilities, $16.9 million in identified intangible assets and $11.2 million in goodwill.

North Corporation

In May 2005, Tessera entered into a number of agreements with North Corporation (“North”), which included the acquisition of 100% ownership of all United States patents and patent applications filed by North, joint ownership of patents and applications filed in other jurisdictions and the right to sublicense certain other patents owned by North, for approximately $6.1 million. Tessera has recorded these patents and license rights as identified intangible assets, and is amortizing them over their respective useful lives, which is estimated at 15 years.

8 of 33

In February 2007, the Company purchased the remaining interests in all patent assets and applications, trademark assets and certain license agreements along with certain tangible assets from North, for $1.7 million. Tessera has recorded these patents, trademark and license rights as identified intangible assets, and is amortizing them over their respective useful lives, which is estimated at approximately 13 years.

NOTE 6 – GOODWILL AND IDENTIFIED INTANGIBLE ASSETS

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and identified intangible assets acquired. The amounts and useful lives assigned to intangible assets acquired, other than goodwill, impact the amount and timing of future amortization, and the amount assigned to in-process research and development, if any, is expensed immediately. The value of the Company’s identified intangible assets and goodwill could be impacted by future adverse changes such as: (i) any future declines in the Company’s operating results, (ii) a decline in the valuation of technology company stocks, including the valuation of the Company’s common stock, (iii) significant slowdown in the worldwide economy or the semiconductor industry, or (iv) any failure to meet the performance projections included in the Company’s forecasts of future operating results.

The allocation of goodwill to segments is reflected below (in thousands):

	Intellectual Property		Services		Total
December 31, 2006	$	24,196	$	11,229	$	35,425
September 30, 2007	$	24,196	$	11,229	$	35,425

Identified intangible assets consisted of the following (in thousands):

	Average Life (Years)	September 30, 2007							December 31, 2006
		Gross Assets		Accumulated Amortization			Net		Gross Assets		Accumulated Amortization			Net
Acquired patents	7-15	$	14,586	$	(1,848	)	$	12,738	$	11,273	$	(888	)	$	10,385
Existing technology	5-10		39,161		(4,174	)		34,987		13,400		(1,127	)		12,273
Trade name	10		3,320		(400	)		2,920		3,320		(151	)		3,169
Customer contracts	4		1,900		(554	)		1,346		1,900		(198	)		1,702
Non-competition agreements	2		1,400		(421	)		979		—		—			—
Assembled workforce	4		300		(45	)		255		—		—			—
		$	60,667	$	(7,442	)	$	53,225	$	29,893	$	(2,364	)	$	27,529

Amortization expense for the three and nine months ended September 30, 2007 and 2006 amounted to $1.9 million, $5.1 million, $0.7 million and $1.2 million, respectively.

As of September 30, 2007, the estimated future amortization expense of purchased identified intangible assets is as follows (in thousands):

2007 (remaining 3 months)	$	1,889
2008		7,555
2009		6,959
2010		6,657
2011		6,307
Thereafter		23,858
	$	53,225

9 of 33

NOTE 7 – NET INCOME (LOSS) PER SHARE

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Numerator:
Net income	$	11,182		$	47,355		$	32,136		$	47,514
Denominator:
Weighted average common shares outstanding		48,064			46,579			47,742			46,219
Less: Unvested common shares subject to repurchase		(376	)		(327	)		(319	)		(327	)
Total shares—basic		47,688			46,252			47,423			45,892
Effect of dilutive securities
Stock awards and warrants		826			1,846			1,034			1,915
Restricted stock		72			324			97			324
Total shares—diluted		48,586			48,422			48,554			48,131
Net income per common share—basic	$	0.23		$	1.02		$	0.68		$	1.04
Net income per common share—diluted	$	0.23		$	0.98		$	0.66		$	0.99

Basic net income per share is computed using the weighted average number of common shares outstanding during the period, excluding any unvested restricted shares that are subject to repurchase. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares include unvested restricted stock and the incremental common shares issuable upon the exercise of stock options and warrants, using the treasury stock method.

For the three and nine months ended September 30, 2007, approximately 1.9 million and 1.3 million options to purchase common stock, respectively, were excluded from the computation of diluted net income per share as they were anti-dilutive. For the three and nine months ended September 30, 2006, a total of 2.1 million and 1.7 million options to purchase common stock were excluded from the computation of diluted net income per share as they were anti-dilutive.

NOTE 8 – STOCKHOLDERS’ EQUITY

Stock Repurchase Programs

In August 2007, the Company’s Board of Directors authorized a plan to repurchase up to a maximum total of $100 million of the Company’s outstanding shares of common stock dependent on market conditions, share price and other factors. The Company repurchased 15,000 shares of common stock at a cost of $544,000 under the plan in the three months ended September 30, 2007.

Stock Option Plans

The 1996 Plan and the 1999 Plan

In December 1996, the Company adopted the 1996 Stock Option Plan (“1996 Plan”). In February 1999, the Company adopted the 1999 Stock Option Plan (“1999 Plan”) which was approved by the stockholders in May 1999. Under the 1996 Plan and the 1999 Plan, incentive stock options may be granted to the Company’s employees at an exercise price of no less than 100% of the fair value on the date of grant, and nonstatutory stock options may be granted to the Company’s employees, non-employee directors and consultants at an exercise price of no less than 85% of the fair value. In both cases, when the optionees own stock representing more than 10% of the voting power of all classes of stock of the Company, the exercise price shall be no less than 110% of the fair value on the date of grant. For options granted with an exercise price below fair market value, a stock-based compensation charge has been determined. Options granted under these plans generally have a term of ten years from the date of grant and vest over a four-year period. Shares issued in connection with the exercise of unvested options are subject to repurchase by the Company until such options vest. After February 1999, no further options were granted from the 1996 Plan. After December 2000, no further options were granted from the 1999 Plan. The Company has no intention of issuing additional grants under these plans. As of September 30, 2007, there were no shares reserved for grant under these plans.

The 2003 Plan

In February 2003, the board of directors adopted and the Company stockholders approved the 2003 Equity Incentive Plan (“2003 Plan”). Under the 2003 Plan, incentive stock options may be granted to the Company’s employees at an exercise price of no less than 100% of the fair value on the date of grant, and nonstatutory stock options may be granted to the Company’s employees, non-employee directors and consultants at an exercise price of no less than 85% of the fair value. In both cases, when the optionees own stock representing more than 10% of the voting power of all classes of stock of the Company, the exercise price shall be no less than 110% of the fair value on the date of grant. For options granted with an exercise price below fair market value, a stock-based compensation charge has been determined. Options granted under this plan generally have a term of ten years from the date of grant and vest over a four-year period. The 2003 Plan permits the granting of restricted stock either alone, in addition to, or in tandem with any options granted thereunder. As of September 30, 2007, there were 1,491,000 shares reserved for grant under this plan.

10 of 33

The activities under the Company’s stock option plans are summarized below (in thousands, except per share amounts):

			Options Outstanding
	Shares Available		Number of Shares		Weighted Average Exercise Price
Balance at December 31, 2006	2,623		4,188		$	22.25
Additional shares authorized	—		—			—
Restricted stock granted	(233	)	—			—
Restricted stock cancelled	45		—			—
Options granted	(1,057	)	1,057			37.79
Options exercised	—		(819	)		16.22
Options cancelled	238		(238	)		29.22
Options forfeited / expired	(125	)	—			—
Balance at September 30, 2007	1,491		4,188		$	26.98

Information with respect to outstanding restricted stock awards as of September 30, 2007 was as follows (in thousands, except per share amounts):

	Restricted Stock
	Number of Shares		Weighted Average Grant Date Fair Value
Unnvested at December 31, 2006	353		$	32.46
Awards granted	233			38.67
Awards vested	(78	)		41.28
Awards cancelled / forfeited	(45	)		34.50
Unnvested at September 30, 2007	463		$	35.29

Employee Stock Purchase Plan

In August 2003, the Company adopted the 2003 Employee Stock Purchase Plan (“ESPP”) and the Company’s stockholders approved the ESPP in September 2003. The ESPP is designed to allow eligible employees to purchase shares of common stock, at semi-annual intervals, with their accumulated payroll deductions.

The Company initially reserved 200,000 shares of common stock for issuance under the ESPP. The reserve will automatically increase on the first day of each fiscal year during the term of the ESPP by an amount equal to the lesser of (1) 200,000 shares, (2) 1.0% of the Company’s outstanding shares on such date or (3) a lesser amount determined by the board of directors.

The ESPP will have a series of consecutive, overlapping 24-month offering periods. The first offering period commenced February 1, 2004, the effective date of the ESPP, as determined by the board of directors.

Individuals who own less than 5% of the Company’s voting stock, are scheduled to work more than 20 hours per week and whose customary employment is for more than five months in any calendar year may join an offering period on the first day of the offering period or the beginning of any semi-annual purchase period within that period. Individuals who become eligible employees after the start date of an offering period may join the ESPP at the beginning of any subsequent semi-annual purchase period.

Participants may contribute up to 20% of their cash earnings through payroll deductions, and the accumulated deductions will apply to the purchase of shares on each semi-annual purchase date. The purchase price per share will equal 85% of the fair market value per share on the participant’s entry date into the offering period or, if lower, 85% of the fair market value per share on the semi-annual purchase date.

An eligible employee’s right to buy the Company’s common stock under the ESPP may not accrue at a rate in excess of $25,000 of the fair market value of such shares per calendar year for each calendar year of an offering period.

If the fair market value per share of the Company’s common stock on any purchase date is less than the fair market value per share on the start date of the two-year offering period, then that offering period will automatically terminate and a new 24-month offering period will begin on the next business day. All participants in the terminated offering will be transferred to the new offering period.

In the event of a proposed sale of all or substantially all of the Company’s assets, or merger with or into another company, the outstanding rights under the ESPP will be assumed or an equivalent right substituted by the successor company or its parent or subsidiary. If the successor company or its parent refuses to assume the outstanding rights or substitute an equivalent right, then all outstanding purchase rights will automatically be exercised prior to the effective date of the transaction. The purchase price will equal 85% of the market value per share on the participant’s entry date into the offering period in which an acquisition occurs or, if lower, 85% of the fair market value per share on the date the purchase rights are exercised.

The ESPP will terminate no later than the tenth anniversary of the ESPP’s initial adoption by the board of directors.

As of September 30, 2007 and 2006, there were 550,000 and 425,000 shares, respectively, reserved for grant under the ESPP.

NOTE 9 – STOCK-BASED COMPENSATION

On January 1, 2006, the Company adopted SFAS No. 123(R) (“SFAS No. 123(R)”), “Share Based Payment,” under which the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors, including employee stock options, restricted stock awards and employee stock purchases under the ESPP based on estimated fair values, was required. SFAS No. 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees,” for periods beginning in fiscal year 2006. SFAS No. 123(R) requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods. The Company elected to adopt the modified prospective application method as

11 of 33

provided by SFAS No. 123(R) under which prior periods are not revised for comparative purposes. The valuation provisions of SFAS No. 123(R) apply to new grants. Estimated compensation for grants that were outstanding as of the effective date will be recognized over the remaining service period using the compensation cost estimated for the SFAS No. 123 pro forma disclosures.

The effect of recording stock-based compensation for the three and nine months ended September 30, 2007 and 2006 is as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Cost of revenues	$	425	$	709	$	1,722	$	2,319
Research, development & other related costs		712		334		1,831		443
Selling, general & administrative		3,247		2,798		9,659		8,188
Total stock-based compensation	$	4,384	$	3,841	$	13,212	$	10,950

The stock-based compensation categorized by various equity components is summarized in the table below (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Employee stock options	$	3,103	$	2,878	$	9,297	$	8,763
Restricted stock awards		1,154		661		3,270		1,705
Employee stock purchase plan		127		302		645		482
Total stock-based compensation	$	4,384	$	3,841	$	13,212	$	10,950

The Company granted 790,000 and 1.1 million stock options, respectively, during the three and nine months ended September 30, 2007, with an estimated total grant-date fair value of $10.3 million and $14.1 million, respectively, before estimated forfeitures. As of September 30, 2007, the unrecognized stock-based compensation balance after estimated forfeitures related to stock options was $23.6 million to be recognized over an estimated weighted average amortization period of 2.5 years and an additional $12.7 million related to restricted stock awards to be recognized over an estimated weighted average amortization period of 2.9 years. The Company granted 415,000 and 1.2 million stock options, respectively, during the three and nine months ended September 30, 2006 with an estimated total grant-date fair value of $7.2 million and $18.8 million, respectively, before estimated forfeitures. As of September 30, 2006, the unrecognized stock-based compensation balance related to stock options was $23.4 million after estimated forfeitures and an additional $8.9 million related to restricted stock awards to be recognized over an estimated weighted average amortization period of 4.0 years.

The following assumptions were used to value the options granted:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Expected life (in years)	4.0		4.0		4.0		4.0
Risk-free interest rate	4.4	%	5.1	%	4.5	%	4.9	%
Dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Expected volatility	36.7	%	40.0	%	36.8	%	54.2	%

NOTE 10 – INCOME TAXES

Effective January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes,” which provisions included a two-step approach to recognizing, de-recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109 (“SFAS No. 109”), “Accounting for Income Taxes.” As a result of the implementation of FIN No. 48, the Company recognized an increase of approximately $3.2 million in the liability for unrecognized tax benefits and a decrease in the related reserve of the same amount. Therefore upon implementation of FIN No. 48, the Company recognized no material adjustment to the January 1, 2007 balance of retained earnings. As of September 30, 2007, unrecognized tax benefits approximated $3.2 million, all of which would affect the effective tax rate if recognized.

The Company adopted a policy to classify accrued interest and penalties as part of the accrued FIN No. 48 liability in the provision for income taxes. For the three and nine months ended September 30, 2007, the Company did not recognize any interest or penalties related to unrecognized tax benefits. At September 30, 2007, the 2003 through 2006 tax years were open and may be subject to potential examination in one or more jurisdictions. The Company is not currently under federal, state or foreign income tax examination.

Income tax provision for the three and nine months ended September 30, 2007 was $9.9 million and $26.6 million, respectively, and was comprised of domestic income tax and foreign income and withholding tax. Income tax provision for the three and nine months ended September 30, 2006 was $33.2 million and $35.0 million, respectively, and was comprised of domestic income tax and foreign income and withholding tax. The decrease in the income tax provision for the three and nine months ended September 30, 2007 is primarily attributable to the decrease in pre-tax income.

NOTE 11 – COMMITMENTS AND CONTINGENCIES

Lease Commitments

During the third quarter of 2007, the Company believes there were no significant changes in its payments due under lease commitments as previously disclosed in the Annual Report on Form 10-K, as amended, for the year ended December 31, 2006.

Litigation

Tessera, Inc. v. Micron Technology, Inc. et al, Civil Action No. 02-05cv-94 (E.D. Tex.)

12 of 33

In July 2006, the Company entered into definitive agreements to settle its lawsuit against Micron Technology, Inc. and its subsidiaries (collectively “Micron”), and against Infineon Technologies AG (“Infineon”), and its subsidiaries including Qimonda AG (“ Qimonda”), in the United States District Court for the Eastern District of Texas. As initially filed on March 1, 2005, and subsequently amended, this lawsuit alleged Micron’s and Infineon’s infringement of Tessera’s U.S. Patent Nos. 5,852,326, 5,679,977, 6,433,419, 6,465,893 and 6,133,627; as well as Micron’s and Infineon’s violations of federal antitrust law, Texas antitrust law, and Texas common law. On July 20, 2006, Tessera and Micron entered into a Settlement Agreement and a TCC License Agreement that resolved all outstanding litigation between them. On July 31, 2006, Tessera, Infineon and Qimonda each entered into a Settlement Agreement and TCC License Agreements that resolved all outstanding litigation between them.

Micron Technology, Inc. et al. v. Tessera, Inc., Civil Action No. 02-05cv-319 (E.D. Tex.)

On July 20, 2006, Tessera and Micron entered into a Settlement Agreement and a TCC License Agreement that resolved all outstanding litigation between them. Under the terms of Tessera’s License Agreements with Micron, Infineon and Qimonda (collectively “Defendants”), Defendants collectively paid Tessera $80 million in cash for a world-wide, non-exclusive, royalty-bearing license to Tessera’s Compliant Chip (“TCC”) technology. The $80 million payment included Defendants’ payment of past royalties through September 30, 2006 on the use of the TCC technology. In addition, under each of their License Agreements, Defendants shall pay royalties to Tessera on a quarterly basis in the future with respect to the use of the TCC technology. Each License Agreement expires on May 22, 2012, subject to an option to extend the agreement for one additional five-year term at half the current royalty rate.

Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal)

On October 7, 2005, the Company filed a complaint for patent infringement against Advanced Micro Devices, Inc. (“AMD”) and Spansion LLC (“Spansion”) in the United States District Court for the Northern District of California, alleging infringement of Tessera’s U.S. Patent Nos. 5,679,977, 5,852,326, 6,433,419 and 6,465,893 arising from AMD’s and Spansion’s respective manufacture, use, sale, offer to sell and/or importation of certain packaged semiconductor components and assemblies thereof. Tessera seeks to recover damages, up to treble the amount of actual damages, together with attorney’s fees, interest and costs. The Company also seeks other relief, including enjoining AMD and Spansion from continuing to infringe these patents.

On December 16, 2005, Tessera filed a first amended complaint to add Spansion Inc. and Spansion Technology, Inc. to the lawsuit.

On January 31, 2006, the Company filed a second amended complaint to add claims of breach of contract and/or patent infringement against several new defendants, including Advanced Semiconductor Engineering, Inc. ASE (U.S.) Inc., ChipMOS Technologies, Inc., ChipMOS U.S.A., Inc., Siliconware Precision Industries Co. Ltd, Siliconware USA Inc., STMicroelectronics N.V., STMicroelectronics, Inc., STATS ChipPAC Ltd., STATS ChipPAC, Inc. and STATS ChipPAC Ltd. (BVI). The defendants in this action have asserted affirmative defenses to the Company’s claims, and some of them have brought related counterclaims alleging that the Tessera patents at issue are not infringed, invalid and unenforceable and/or that Tessera is not the owner of the patents.

On May 24, 2007, the parties stipulated to temporarily stay this action pending completion of a concurrent proceeding before the International Trade Commission (“ITC”). During the stay, the Company expects that potential damages will continue to accrue. Upon completion of the ITC action, the proceeding can continue, and Tessera may seek to recover its damages attributable to the alleged infringement.

On September 12, 2007, the ASE, ChipMOS, Siliconware and STATS defendants (the “subcontractor defendants”) moved for a temporary restraining order and preliminary injunction to bar Tessera from filing suit, or in any manner seeking relief, outside of California against each of the subcontractor defendants, allegedly based on forum selection clauses contained in limited license agreements between Tessera and the subcontractor defendants. On September 21, 2007, Tessera opposed the motion, explaining that Tessera had not filed any action against the subcontractor defendants, and if and when it did, such action would not include any products within the scope of the subcontractor defendants’ limited licenses. The court initially granted a temporary restraining order against Tessera pending an October 23, 2007 hearing of the matter. After the hearing, on November 1, 2007, the court issued an order granting in part and denying in part the preliminary injunction requested by the subcontractor defendants. Pursuant to the order, among other things, Tessera is permitted to file a complaint against the subcontractor defendants in the International Trade Commission, or elsewhere, as to products not arguably within the scope of the subcontractor defendants’ limited license agreements, provided that the subcontractor defendants are given ten days’ notice of the filing and do not take the position that the products subject to the complaint are covered by their licenses. Tessera may not file any action outside of California against licensed products or products that the subcontractor defendants assert are covered by their licenses.

The Company cannot predict the outcome of these proceedings. An adverse decision in any of these proceedings could significantly harm the Company’s business and financial condition.

Tessera, Inc. v. Amkor Technology, Inc.

On March 2, 2006, the Company submitted a request for arbitration with Amkor Technology, Inc. (“Amkor”) regarding Amkor’s failure to pay royalties under its license agreement with Tessera. On November 1, 2006, the arbitration tribunal issued a provisional timetable specifying a seven-day tribunal hearing starting October 1, 2007. On April 17, 2007, Tessera provided notice to Amkor of Tessera’s termination of the license agreement, which may allow Tessera to seek remedies for patent infringement outside of the arbitration. After a hearing on October 8, 2007, the arbitration panel determined that it will decide the effect of Tessera’s termination notice at the hearing beginning in March 2008.

On May 9, 2007, the tribunal recommended to the International Chamber of Commerce that the hearing be reset for March 31, 2008, and Tessera expects that trial is likely to go forward on or around that recommended date. The fact discovery period in the action is now completed. Tessera has submitted expert reports regarding Amkor’s infringement and damages due from Amkor, and is seeking a substantial monetary recovery from Amkor. Amkor has submitted an expert report contending that Tessera’s patents are invalid. The parties’ rebuttal expert reports are due to be served on December 10, 2007.

The Company cannot predict the outcome of this proceeding. An adverse decision in this proceeding could significantly harm the Company’s business and financial condition.

Tessera Technologies, Inc. v. Hynix Semiconductor Inc. et. al, Case No. 106CV-076688

On December 18, 2006, the Company filed a complaint against Hynix Semiconductor Inc. and Hynix Semiconductor America, Inc. (collectively, “Hynix”) in the Superior Court of the State of California, for the county of Santa Clara, alleging violations of California antitrust law and California common law based on Hynix’s alleged anticompetitive actions in markets related to synchronous DRAM. The Company also seeks other relief, including enjoining Hynix from continuing their alleged anticompetitive actions. On June 1, 2007, the Superior Court overruled the demurrer to Tessera’s Cartwright Act claims against Hynix, thus allowing the claims to proceed. On September 14, 2007, the court overruled another demurrer to Tessera’s claim for interference with contract and business relations, allowing those claims to proceed as well. Discovery is proceeding in this case and the Company cannot predict the outcome of this proceeding. An adverse decision in this proceeding could significantly harm the Company’s business and financial condition.

In re Certain Semiconductor Chips With Minimized Chip Package Size and Products Containing Same

On April 17, 2007, the Company filed a complaint with the ITC, requesting that the ITC commence an investigation under Section 337 of the Tariff Act of 1930, as amended. The ITC officially instituted an investigation as requested by Tessera on May 21, 2007. The respondents are ATI Technologies, Inc., Freescale Semiconductor, Inc., Motorola, Inc., Qualcomm, Inc., Spansion, Inc., Spansion, LLC and ST Microelectronics N.V. The ITC will, among other things, investigate infringement of U.S. Patent Nos. 5,852,326 and 6,433,419, and consider Tessera’s request for issuance of an order excluding from entry into the United States infringing packaged semiconductor components, assemblies thereof, and products containing the same, as well as cease and desist orders directing the respondents with domestic inventories to desist from activities with respect to infringing products.

13 of 33

On June 11, 2007, the respondents filed a motion to stay the investigation pending the completion of reexamination proceedings relating to the asserted Tessera patents. Tessera has opposed the motion, which has not been ruled on by the ITC. On July 11, 2007, the assigned Administrative Law Judge ordered that the “target date” for completing the ITC investigation be August 21, 2008.

On September 7, 2007, Tessera sought leave to modify the protective order in the action for the purpose of using information obtained during discovery to file a new ITC complaint against STATS ChipPAC, Ltd., ASE, Inc., Siliconware Precision Industries, Ltd., ChipMOS Technologies, Inc., and certain affiliates of those companies (the “proposed respondents”). Tessera requested, in the alternative, that it be permitted leave to add the proposed respondents as parties in the existing investigation. On September 12, 2007, the proposed respondents moved to intervene in the investigation for the purpose of opposing Tessera’s motion. Tessera and the ITC staff have opposed the proposed respondents’ request. The request has not been ruled upon by the ITC. Also on September 12, 2007, the proposed respondents filed a motion with Judge Wilken in the Northern District of California requesting the court to enjoin Tessera from moving forward against them in the ITC on the basis of the forum selection clauses in their respective Tessera license agreements. As discussed in more detail above underTessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal), Judge Wilken has ruled that Tessera may proceed in the ITC against these proposed respondents, provided that, among other things, the products implicated in the ITC complaint are not products asserted by the proposed respondents to be covered by their licenses. Any disputes involving products the proposed respondents assert are covered by their licenses would need to be resolved, at least in the first instance, in the Northern District of California.

On September 19, 2007, the ITC issued an order setting key dates for the investigation, including for the ITC hearing which is scheduled to run from February 25, 2008 to February 29, 2008. On October 17, 2007, the investigation was assigned to Administrative Law Judge Theodore Essex.

The Company cannot predict the outcome of these proceedings. An adverse decision in any of these proceedings could significantly harm the Company’s business and financial condition.

Tessera, Inc. v. Motorola, Inc., et. al, Case No. 2:07cv143 (E.D. Tex.)

On April 17, 2007, the Company filed a complaint against Motorola, Inc., Qualcomm, Inc., Freescale Semiconductor, Inc., and ATI Technologies, Inc. in the United States District Court for the Eastern District of Texas, alleging infringement of Tessera’s U.S. Patent Nos. 5,852,326 and 6,433,419, arising from, among other things, the defendants’ respective manufacture, use, sale, offer to sell and/or importation of certain packaged semiconductor components and assemblies thereof. The Company seeks to recover damages, up to treble the amount of actual damages, together with attorney’s fees, interest and costs. The Company also seeks other relief, including enjoining the defendants from continuing to infringe these patents. The defendants have not yet answered Tessera’s complaint, and have filed a motion to stay the district court action pending completion of the concurrent ITC proceedings. The parties have agreed that the case will be temporarily stayed pending a ruling regarding the motion to stay the ITC investigation titledIn re Certain Semiconductor Chips With Minimized Chip Package Size and Products Containing Same. The Company cannot predict the outcome of these proceedings. An adverse decision in any of these proceedings could significantly harm the Company’s business and financial condition.

Reexamination Proceedings

On February 9, 2007 and February 15, 2007, Silicon Precision Industries Co., Ltd. and Siliconware USA, Inc. (collectively, “Siliconware”) filed with the United States Patent & Trademark Office (“PTO”) requests for inter partes reexamination relating to U.S. Patent Nos. 6,433,419 and 6,465,893, and ex parte reexamination relating to U.S. Patent Nos. 5,679,977, 6,133,627 and 5,852,326. On April 19, 2007, the PTO granted the requests for ex parte reexamination. On May 4, 2007, the PTO granted the requests for inter partes reexamination. The PTO denied the Company’s petition to vacate the inter partes reexamination proceeding on the ground that the request did not name the real party in interest, and a related request for reconsideration of that decision. The PTO issued a non-final Official Action in connection with the inter partes reexamination of U.S. Patent No. 6,465,893 initially rejecting a number of patent claims on May 4, 2007, to which a response was filed on July 5, 2007. The PTO issued a non-final Official Action in connection with the inter partes reexamination of U.S. Patent No. 6,433,419 initially rejecting a number of the patent claims on June 5, 2007, to which a response was filed on August 6, 2007. On September 5, 2007, Siliconware filed comments in response to the Company’s August 6, 2007 response. On March 14, 2007, Siliconware filed a second request for ex parte reexamination of U.S. Patent No. 5,679,977. The PTO granted this request on June 12, 2007. On May 21, 2007, Amkor filed a request for ex parte reexamination of U.S. Patent No. 5,861,666. On July 26, 2007, the PTO granted this request. On June 11, 2007, Amkor filed additional requests for reexamination regarding U.S. Patent Nos. 5,679,977 and 6,133,627. The PTO granted the request for reexamination as to the 5,679,977 patent on August 15, 2007, and the PTO granted the requests for reexamination as to the 6,133,627 patent on August 13, 2007. The Company cannot predict the outcome of these proceedings. An adverse decision in any of these proceedings could significantly harm the Company’s business and financial condition.

On or about January 3, 2006, Koninklijke Phillips Electronics N.V. and Philips Semiconductors B.V. (“Philips”), MICRON Semiconductor Deutschland GmbH (“Micron GmbH”), Infineon and STMicroelectronics, Inc. (“STM”) filed oppositions to Tessera’s European Patent No. EP1111672 (the “EP672 Patent”) before the European Patent Office (the “EPO”). Micron GmbH and Infineon withdrew their oppositions on July 24, 2006 and August 7, 2006, respectively. On October 10, 2006, Tessera filed its response to the remaining oppositions with the EPO. On December 4, 2006, Phillips withdrew its opposition. The EPO continues to consider STM’s opposition of the EP672 Patent. The Company cannot predict the outcome of this proceeding. If the opposition results in a limitation or a revocation of the EP672 Patent, this could significantly harm the Company’s business and financial condition.

NOTE 12 – SEGMENT AND GEOGRAPHIC INFORMATION

The Company operates in two reportable operating segments: Intellectual Property and Services. The Intellectual Property segment consists primarily of the Licensing Business and the Emerging Markets and Technologies Group. The Services segment consists primarily of the Product Division. Operational functions of the Product Division may also be reported in the Intellectual Property segment. In addition to these reportable segments, the Corporate Overhead division includes certain operating expenses and credits that are not allocated to the reportable operating segments because these operating expenses and credits are not considered in evaluating the operating performance of the Company’s business segments.

The Chief Operating Decision Maker (“CODM”), as defined by SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” is the Company’s President and Chief Executive Officer. The CODM assesses the performance of the operating segment using information about its revenue and operating income (loss) before other income and income taxes. The CODM is not presented with financial information for each division and the CODM does not evaluate each division separately from the segments when evaluating the operating performance of the business.

The Company does not identify or allocate assets by operating segment, nor does the CODM evaluate operating segments using discrete asset information. Operating segments do not record inter-segment revenue and accordingly there is none to report. The Company does not allocate other income and expense to operating segments. Although the CODM uses operating income to evaluate segments, operating costs included in one segment may benefit other segments.

14 of 33

The following table sets forth the Company’s segments revenue, operating expenses and operating income (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Revenues:
Intellectual Property Segment	$	41,749		$	101,846		$	115,604		$	142,475
Services Segment		7,405			8,695			27,044			15,989
Corporate Overhead		—			—			—			—
Total revenues		49,154			110,541			142,648			158,464
Operating expenses:
Intellectual Property Segment		12,896			15,007			36,806			42,604
Services Segment		9,924			10,250			32,537			18,723
Corporate Overhead		8,358			6,377			23,278			18,976
Total operating expenses		31,178			31,634			92,621			80,303
Operating income (loss)
Intellectual Property Segment		28,853			86,839			78,798			99,871
Services Segment		(2,519	)		(1,555	)		(5,493	)		(2,734	)
Corporate Overhead		(8,358	)		(6,377	)		(23,278	)		(18,976	)
Total operating income	$	17,976		$	78,907		$	50,027		$	78,161

A significant portion of the Company’s revenues is derived from licensees headquartered outside of the United States, principally in Asia and Europe, and it is expected that these revenues will continue to account for a significant portion of total revenues in future periods. The table below lists the geographic regions of the headquarters of Company’s customers, revenues and the percentage of revenues derived from each region for the periods indicated (in thousands, except for percentages):

	Three Months Ended September 30,								Nine Months Ended September 30,
	2007				2006				2007				2006
United States	$	10,856	22	%	$	41,495	38	%	$	34,256	24	%	$	61,708	39	%
Asia Pacific		27,171	55			16,565	15			78,148	55			44,275	28
Europe and other		11,127	23			52,481	47			30,244	21			52,481	33
	$	49,154	100	%	$	110,541	100	%	$	142,648	100	%	$	158,464	100	%

During the three and nine months ended September 30, 2007, there were no significant changes to property and equipment, net of depreciation and amortization, by geographic region as disclosed in the Annual Report on Form 10-K, as amended, for the year ended December 31, 2006.

NOTE 13 – RELATED PARTY TRANSACTION

From November, 2005 through April 2007, the Company engaged in consulting services with a company which is owned 100% by one of the Company’s employee. No services were performed for the three months ended September 30, 2007. For the nine months ended September 30, 2007, the Company recognized approximately $0.3 million of consulting expenses. For the three and nine months ended September 30, 2006, the Company recognized $0.3 million and $1.2 million, respectively, of consulting expenses.

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the attached condensed unaudited consolidated financial statements and notes thereto, and with our audited financial statements and notes thereto for the fiscal year ended December 31, 2006 found in our Annual Report on Form 10-K filed on March 1, 2007, as amended by an amendment on Form 10-K/A filed on March 21, 2007.

This Quarterly Report (including the following section regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations) contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Quarterly Report. Additionally, statements concerning future matters such as the development of new products, enhancements or technologies, sales levels, expense levels and other statements regarding matters that are not historical are forward-looking statements.

Although forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed under the heading “Risk Factors” below, as well as those discussed elsewhere in this Quarterly Report. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

Corporate Information

Our principal executive offices are located at 3099 Orchard Drive, San Jose, California 95134. We also have offices, research and development and manufacturing facilities in other locations. Our telephone number is (408) 894-0700. We maintain a website at www.tessera.com. The reference to our website address does not constitute incorporation by reference of the information contained on this website.

We own or have rights to trademarks and trade names that we use in conjunction with the operation of our business, including Tessera and Tessera Technologies. This Quarterly Report also includes trademarks and trade names of other parties.

In this Quarterly Report, the “Company,” “Tessera,” “we,” “us” and “our” refer to Tessera Technologies, Inc. and, for periods prior to our corporate restructuring in January 2003 or if the context otherwise requires, Tessera, Inc., which is our wholly-owned subsidiary.

15 of 33

Overview

Tessera is a developer and licensor of miniaturization technologies for the electronics industry and micro-optics technologies for the consumer optics industries. The Company provides a broad range of advanced packaging, interconnect, and consumer optics technologies which are widely adopted in high-growth markets including consumer, computing, communications, medical and defense electronics. We enable improvements in the size, performance and cost of our customers’ products by applying our expertise in the electrical, thermal and mechanical properties of semiconductor materials, and in the design and manufacturing of micro-optics. Micro-optics technologies include proprietary lens design and algorithms that enhance image quality for applications such as custom depth of focus and zoom. Our intellectual property includes approximately 1,100 domestic and internationally issued patents and patent applications, covering a broad range of advanced semiconductor packaging, substrate, interconnect and micro-optics technology. We license our chip packaging technology to our customers on a worldwide basis, enabling them to produce semiconductor chips that are smaller and faster, and that incorporate more features. These semiconductors are utilized in a broad range of electronics products, including digital audio players, digital cameras, personal computers, personal digital assistants, video game consoles and mobile phones. In addition, by using our technology, we believe that our customers are also able to reduce the time to market, and the development costs of their semiconductors.

Our patented chip packaging technology and associated chip-scale packages (“CSP”) substrate technology enables our customers to assemble semiconductor chips into CSPs that are almost as small as the chip itself. Our multi-chip packaging (“MCP”) technology and associated MCP substrate technology extends this benefit by enabling multiple semiconductors to be stacked vertically in a single three-dimensional multi-chip package that occupies almost the same circuit board area as a CSP. Our technology allows several semiconductor chips and passive components to be densely combined in ultra-compact electronics modules. By reducing the size of the semiconductor package and shortening electrical connections between the chip and the circuit board, our technology allows further miniaturization and increases in performance and functionality for electronic products. We achieve these benefits without sacrificing reliability by allowing movement within the package, thus addressing critical problems associated with thermally-induced stress which can occur when packages decrease in size.

We license most of our CSP and MCP technology under a license agreement that we refer to as Tessera’s Compliant Chip Technology (“TCC”) license. Our TCC license grants a worldwide royalty-bearing right under the licensed patent claims to assemble, use and sell certain CSPs and MCPs. We generally license semiconductor material suppliers under our Tessera Compliant Mounting Tape (“TCMT”) license. Our TCMT license calls for a one-time license fee and, unlike most of our other licenses, does not require ongoing royalty payments.

Our semiconductor chip packaging technology has been widely adopted and is currently licensed to more than 60 companies, including Intel Corporation, Renesas Technology Co., Samsung Electronics Co., Ltd., Sharp Corporation, Texas Instruments, Inc. and Toshiba Corporation. We believe that more than 100 companies across the semiconductor supply chain have invested in the materials, equipment and assembly infrastructure needed to manufacture products that incorporate our packaging technology. As a result, our technology has been incorporated into more than 15 billion semiconductors worldwide.

We have a significant consumer optics technology portfolio that includes image sensor packaging, wafer-level camera manufacturing technology, camera assembly technology and technology for custom depth of focus and zoom. According to market research firm Prismark, the market for consumer electronic devices that contain cameras, including mobile phones, notebook computers, security systems and automotive electronics, will increase to approximately 2.25 billion units in 2011. We believe that we are well-positioned to take advantage of this expected significant growth in consumer optics. We have an ongoing effort to develop and license optical technologies for the mobile phone market. This market is growing rapidly, with nearly 1.0 billion cameras expected to be incorporated in mobile phones in 2010.

Our interconnectivity technology includes the MicroPILR Interconnect platform, a highly innovative technology family that is designed to revolutionize the interconnect within semiconductor packages, substrates, printed circuit boards (“PCBs”) and other electronic components. Offering finer pitch, lower profile, improved reliability, greater coplanarity and competitive cost, Tessera’s MicroPILR platform has the potential to become a fundamental building block of next-generation mobile, computing and consumer electronic products as it addresses many of the technical limitations of current generation interconnect. According to the market research firm Prismark, the interconnect market (including multilayer PCBs and advanced package assembly) will grow from approximately $34 billion in 2006 to $51 billion in 2011.

We generate revenues from:

• royalties and license fees based on our intellectual property, which represent the majority of our revenues and consist of royalties on semiconductors shipped by our licensees that employ our patented technologies; and

• products and services, which utilize or further develop our technology offerings.

We recognize revenue when the earnings process is complete, as evidenced by an agreement with the customer, transfer of title, and acceptance, if applicable, as well as fixed or determinable pricing and reasonably assured collectibility.

Our licensees pay a non-refundable license fee. Revenues from license fees are generally recognized once the license agreement has been executed by both parties. In some instances, we provide training to our licensees under the terms of the license agreement but the amount of training we provide is limited and is incidental to the licensed technology. Accordingly, in instances where training is provided under the terms of a license agreement, a portion of the license fee is deferred until the training has been provided. The amount of revenues deferred is based on the price we charge for similar services when they are sold separately.

Semiconductor manufacturers and assemblers pay on-going worldwide royalties on their production or shipment of semiconductors incorporating our intellectual property. Royalty payments for our CSP technologies are primarily based upon the number of electrical connections to the semiconductor chip in a package covered by our technology, although we also have arrangements in which royalties are paid based upon a percent of the net sales price. Our licensees report royalties quarterly, and most also pay on a quarterly basis. As there is no reliable basis on which to estimate our royalty revenues prior to obtaining these reports from our licensees, we recognize royalty revenues when we receive a royalty report from our customer. We generally receive these reports the quarter after the semiconductors that incorporate our technology have been produced or shipped.

From time to time, we receive payments through license negotiations or through the resolution of patent disputes. These license negotiations and dispute resolutions generally include amounts for royalties related to previous periods based on historical production volumes. These amounts are reported as “past production payments” revenues in the statement of operations. Past production payments will vary significantly on a quarterly basis.

Product and service revenues include sales of wafer level and micro-optics products, and engineering product development services. Product revenue principally consists of micro-optics products, which include the diffractive optical lens elements sold principally to the semiconductor photolithography industry, as well as other specialized optical elements, sold for telecommunications and photonic applications. We recognize revenue from product sales when fundamental criteria are met, such as title, risk and rewards of product ownership are transferred to the customer, price and terms are fixed and the collection of the resulting receivable is reasonably assured. Service revenue principally consists of engineering, assembly and infrastructure services, provided primarily to government agencies, which we believe accelerate the incorporation of our intellectual property into our customers’ products and aid in our understanding of the electronic industry future packaging requirements. Revenues from services are recognized utilizing either the percentage-of-completion method or completed contract method of accounting, depending on the nature of the project. Under the percentage-of-completion method, revenues recognized are that portion of the total contract price equal to the ratio of costs expended to date to the anticipated final total costs based on current estimates of total costs to complete the projects. If total estimated costs to complete a project were to exceed the total contract amount, indicating a loss, the entire anticipated loss would be recognized immediately. Revenues under the completed contract method are recognized upon acceptance by the customer or in accordance with the contract specifications. Revenues from services related to training are recognized when services are performed

16 of 33

We derive a significant portion of our revenues from licensees headquartered outside of the United States, principally in Asia and Europe. For the three and nine months ended September 30, 2007, these revenues accounted for 78% and 76%, respectively, of our total revenues. For the three and nine months ended September 30, 2006, these revenues accounted for 63% and 61%, respectively, of our total revenues. We expect that these revenues will continue to account for a significant portion of revenues in future periods. All of our revenues are denominated in U.S. dollars. For the three and nine months ended September 30, 2007, two customers each accounted for over 10% of revenue. For the three and nine months ended September 30, 2006, two customers each accounted for over 10% of revenue.

Cost of revenues consists primarily of direct compensation, materials, patent amortization, supplies and equipment depreciation costs. Cost of revenues primarily relates to product and service revenues as the cost of revenues associated with intellectual property revenues is de minimis. Consequently, cost of revenues as a percentage of total revenues will vary based on the percentage of our revenues that is attributable to product and service revenues.

Research, development and other related costs consist primarily of compensation and related costs for personnel as well as costs related to patent applications and examinations, amortization of intangible assets, materials, supplies and equipment depreciation. Our research and development is conducted primarily in-house and targets CSP, multi-chip and wafer level packaging (“WLP”) technology. All research, development and other related costs are expensed as incurred. We believe that a significant level of research, development and other related costs will be required for us to remain competitive in the future. We have increased our research and development personnel to 181 at September 30, 2007 from 161 at September 30, 2006, and expect to continue to increase our research and development personnel in the future.

Selling expenses consist primarily of compensation and related costs for sales and marketing personnel, marketing programs, public relations, promotional materials, travel and related trade show expenses. General and administrative expenses consist primarily of compensation and related costs for: general management, information technology, finance and accounting personnel, litigation expenses and related fees, facilities costs and professional services. Our general and administrative expenses are not allocated to other expense line items. We anticipate that our selling, general and administrative expenses will increase as a result of our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002, related regulations and ongoing revisions to disclosure and governance practices. Excluding litigation expenses, we expect that as a percentage of revenues, these expenses will decrease over time. However, we expect that litigation expenses will continue to be a material portion of our general and administrative expenses in future periods, and may increase significantly in some periods, because of our ongoing litigation, as described below in Part II, Item 1—Legal Proceedings, and because we expect that we will become involved in other litigation from time to time in the future in order to enforce and protect our intellectual property rights.

Critical Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make certain judgments, estimates and assumptions that could 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 based our estimates and assumptions on historical experience and on various other assumptions believed to be applicable, and evaluated them on an on-going basis to ensure they remained reasonable under current conditions. Actual results could differ significantly from those estimates.

Our fiscal year ends on December 31. For quarterly reporting, we employ a four-week, four-week, five-week reporting period. The current three-month period ended on Sunday, September 30, 2007 and the prior year comparative three-month period ended on Sunday, October 1, 2006. For presentation purposes, the financial statements and notes have been presented as ending on the last day of the nearest calendar month.

There have been no significant changes in our critical accounting estimates during the three and nine months ended September 30, 2007 with the exception to the paragraph below as compared to the critical accounting estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K/A for the year ended December 31, 2006.

On January 1, 2007, we accounted for uncertain tax positions in accordance with FIN No. 48 “Accounting for Uncertainty in Income Taxes,” an interpretation of SFAS No. 109, “Accounting for Income Taxes.” The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations are subject to change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of operations. See Note 10 – “Income Taxes” of the Notes to the Condensed Consolidated Financial Statements for additional detail.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157 (“SFAS No. 157”), “Fair Value Measurements.” This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America, and expands disclosure about fair value measurements. This pronouncement applies under other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We will be required to adopt SFAS No. 157 in the first quarter of fiscal year 2008. We are currently evaluating the requirements of SFAS No. 157 and have not yet determined the impact on our financial statements.

In February 2007, the FASB issued SFAS No. 159 (“SFAS No. 159”), “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The FASB’s objective in this statement is to provide reporting entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We will be required to adopt SFAS No. 159 in the first quarter of fiscal year 2008. We are currently evaluating the requirements of SFAS No. 159 and have not yet determined the impact on our financial statements.

17 of 33

Results of Operations

The following table sets forth our operating results for the periods indicated as a percentage of revenues:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Revenues:
Royalty and license fees	84	%	23	%	79	%	41	%
Past production payments	1		69		2		49
Product and service revenues	15		8		19		10
Total revenues	100		100		100		100
Operating expenses:
Cost of revenues	7		6		10		9
Research, development and other related costs	20		5		19		8
Selling, general and administrative costs	36		18		36		34
Total operating expenses	63		29		65		51
Operating income	37		71		35		49
Other income, net	6		2		6		3
Income before taxes	43		73		41		52
Provision for income taxes	20		30		18		22
Net income	23	%	43	%	23	%	30	%

Revenues

The following table sets forth our revenues by type (in thousands, except for percentages):

	For the Three Months Ended September 30,								Increase/ (Decrease)			% Change
	2007				2006
Royalty and license fees	$	41,383	84	%	$	25,916	23	%	$	15,467		60	%
Past production payments		415	1			76,000	69			(75,585	)	(99	)
Product and service revenues		7,356	15			8,625	8			(1,269	)	(15	)
Total revenues	$	49,154	100	%	$	110,541	100	%	$	(61,387	)	(56	)%
	For the Nine Months Ended September 30,								Increase/ (Decrease)			% Change
	2007				2006
Royalty and license fees	$	113,377	79	%	$	64,817	41	%	$	48,560		75	%
Past production payments		2,167	2			77,633	49			(75,466	)	(97	)
Product and service revenues		27,104	19			16,014	10			11,090		69
Total revenues	$	142,648	100	%	$	158,464	100	%	$	(15,816	)	(10	)%

Revenues for the three months ended September 30, 2007 were $49.2 million as compared to $110.5 million for the three months ended September 30, 2006, a decrease of $61.4 million, or 56%. Revenues for the nine months ended September 30, 2007 were $142.6 million as compared to $158.5 million for the nine months ended September 30, 2006, a decrease of $15.8 million, or 10%. The overall decrease in the three months ended September 30, 2007 as compared to 2006 is primarily due to the decrease in past production payments of $75.6 million partially offset by an increase in royalty and license fees of $15.5 million. The decrease for the nine months ended September 30, 2007 as compared to 2006 is primarily due to a decrease in past production payments of $75.5 million partially offset by an increase of $48.6 million in royalty and license fees. The decrease in both the three and nine month results is primarily attributable to $77.6 million earned upon settlement of patent litigation in the third quarter of 2006.

Cost of Revenues

Cost of revenues primarily relates to product and service revenue as the cost of revenues associated with intellectual property revenues is de minimis. For the three and nine months ended September 30, 2007, cost of revenues represented 49% and 51% of product and service revenues, respectively. For the three and nine months ended September 30, 2006, cost of revenues represented 72% and 85% of product and service revenues, respectively. For each associated period, cost of revenues as a percentage of total revenues varies based on the product and service revenues component of total revenues.

Cost of revenues for the three months ended September 30, 2007 decreased by $2.6 million or 42% to $3.6 million as compared to $6.2 million for the three months ended September 30, 2006. Cost of revenues for the nine months ended September 30, 2007 remained substantially flat at $13.9 million as compared to $13.6 million for the nine months ended September 30, 2006. The majority of the decrease in the three month period was attributable to lower government-funded R&D.

Research, Development and Other Related Costs

Research, development and other related (“R&D”) costs for the three months ended September 30, 2007 was $9.9 million, an increase of $4.6 million, or 87%, as compared to $5.3 million for the three months ended September 30, 2006. For the nine months ended September 30, 2007, R&D costs were $27.1 million, an increase of $14.5 million, or 115%, as compared to $12.6 million for the nine months ended September 30, 2006. The increase for both three and nine month periods is primarily due to an increase in research and development headcount from 161 employees at September 30, 2006 to 181 employees at September 30, 2007, an increase in the amortization expense of identified intangible assets, and the inclusion and subsequent growth of R&D costs of subsidiaries acquired in the third quarter of 2006 and in the first quarter of 2007.

We believe that a significant level of research and development efforts will be required for us to remain competitive in the future, therefore we expect R&D costs to increase in absolute dollars.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses for the three months ended September 30, 2007 were $17.7 million, a decrease of $2.4 million, or 12%, as compared to $20.1 million for the three months ended September 30, 2006. The decrease is primarily due to a decrease in litigation expense of $4.4 million and a decrease in SG&A headcount from 124 employees at September 30, 2006, to 107 employees at September 30, 2007, offset by an increase in stock-based compensation expense of $0.4 million. For the nine months ended September 30, 2007, SG&A expenses were $51.6 million, a decrease of $2.5 million, or 5%, as compared to $54.1 million for the nine months ended September 30, 2006. The decrease is primarily due to a decrease in litigation expense of $11.0 million, offset by an increase in stock-based compensation expense of $1.5 million, the inclusion of SG&A expenses of $2.3 million related to subsidiaries acquired in the third quarter of 2006 and in the first quarter of 2007, an increase in professional service spending, and an increase in headcount.

Excluding litigation expense, we expect that, as a percentage of revenues, our SG&A expense may decrease over time as our revenues continue to grow. However, we expect that litigation expenses may continue to be a material portion of our SG&A expense in future periods, and may fluctuate significantly in some periods, because

18 of 33

of our ongoing litigation, as described below in Part II, Item 1 – Legal Proceedings, and because we expect that we will become involved in other litigation from time to time in the future in order to enforce and protect our intellectual property rights.

Stock-based Compensation

The following table sets forth our stock-based compensation for the periods indicated (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Cost of revenues	$	425	$	709	$	1,722	$	2,319
Research, development & other related costs		712		334		1,831		443
Selling, general & administrative		3,247		2,798		9,659		8,188
Total stock-based compensation	$	4,384	$	3,841	$	13,212	$	10,950

Stock-based compensation awards included employee stock options, restricted stock awards and employee stock purchases under our 2003 Employee Stock Purchase Plan. As of September 30, 2007, the amount of unrecognized stock-based compensation after estimated forfeitures estimated to be expensed from the remainder of 2007 to 2011 related to unvested stock options at September 30, 2007 was $23.6 million to be recognized over an estimated weighted average amortization period of 2.5 years and an additional $12.7 million related to restricted stock awards to be recognized over an estimated weighted average amortization period of 2.9 years. Stock-based compensation for the three months ended September 30, 2007, was $4.4 million, of which $3.1 million related to employee stock options, $1.2 million related to issuances of shares of restricted stock and $0.1 million related to employee stock purchases. For the nine months ended September 30, 2007, stock-based compensation was $13.2 million, of which $9.3 million related to employee stock options, $3.3 million related to issuances of shares of restricted stock and $0.6 million related to employee stock purchases. For the three months ended September 30, 2006, stock-based compensation was $3.8 million, of which $2.9 million related to employee stock options, $0.7 million related to issuances of shares of restricted stock and $0.3 million related to employee stock purchases. For the nine months ended September 30, 2006, stock-based compensation was $11.0 million, of which $8.8 million related to employee stock options, $1.7 million related to issuances of shares of restricted stock and $0.5 million related to employee stock purchases. The overall increase is primarily related to an increase in grants of stock awards to employees based on our compensation incentive program and an increase in expense related to employee stock purchases and certain stock awards for employees that transitioned to consultants whose awards were accounted for under variable accounting. Future stock-based compensation expense and unrecognized stock-based compensation will increase as we grant additional stock awards.

Interest and Other Income, Net

Interest and other income, net for the three and nine months ended September 30, 2007 was $3.1 million and $8.7 million, respectively, as compared to $1.7 million and $4.4 million, for the three and nine months ended September 30, 2006, respectively. The increase is primarily related to income earned from investment and money market funds on higher cash balances as a result of positive cash flow generated from operations. Our cash, cash equivalents and short-term investments at September 30, 2007 were $265.8 million as compared to $156.8 million at September 30, 2006.

Provision for Income Taxes

Our estimated effective tax rate is based on tax law in effect at September 30, 2007 and current expected income which may be affected by the closing of acquisitions or divestitures; the jurisdictions in which profits are determined to be earned and taxed; changes in estimates of credits, benefits, and deductions; the resolution of issues arising from tax audits, if any, with various tax authorities, including payment of interest and penalties; and the ability to realize deferred tax assets. The overall tax rate reflects taxes in U.S. and foreign tax jurisdictions which may change over time as the amount or mix of income and taxes changes.

Income tax provision for the three and nine months ended September 30, 2007 was $9.9 million and $26.6 million, respectively, and was comprised of domestic income tax and foreign income and withholding taxes. For the three and nine months ended September 30, 2006, the income tax provision was $33.2 million and $35.0 million, respectively, and was comprised of domestic income tax and foreign income and withholding taxes. The decrease in the income tax provision for the three and nine months ended September 30, 2007 is primarily attributable to a decrease in profit.

Segment Operating Results

We operate in two reportable operating segments: Intellectual Property and Services. The Intellectual Property segment consists primarily of the Licensing Business and the Emerging Markets and Technologies Group. The Services segment consists primarily of the Product Division. Operational functions of the Product Division may also be reported in the Intellectual Property segment. In addition to these reportable segments, the Corporate Overhead division includes certain operating expenses and credits that are not allocated to the reportable operating segments because these operating expenses and credits are not considered in evaluating the operating performance of the Company’s business segments.

Intellectual Property segment is primarily composed of the following:

Licensing Business. Our licensing business is focused on licensing technologies in our core markets, including DRAM, Flash, SRAM, DSP, ASIC, ASSP, micro-controllers, general purpose logic and analog devices and imaging and micro-optics solutions. Key functions of this division include licensing, intellectual property management and marketing.

Emerging Markets and Technologies Group. Our Emerging Markets and Technologies Group focuses on expanding our technology portfolio into areas outside of our core markets that represent long-term growth opportunities through application of products and technologies, research and development of new technologies for high growth markets and applications such as packaging, imaging, interconnect and materials. The Emerging Markets and Technologies Group also focuses on long-term growth opportunities through new partnerships, ventures and acquisitions of complementary technology.

Our Services segment is composed of our Product Division, which performs key research and development and drives our production development services revenues. This division also addresses the challenges of electronic products miniaturization from a system perspective, through the dense interconnection of components, extensive use of three-dimensional packaging technologies, and the use of micro-optics technologies. This division provides a vehicle for transitioning our research efforts into fully developed technologies both internally and externally with partners that can be licensed.

19 of 33

The following table sets forth our segments’ revenues, operating expenses and operating income (loss) (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Revenues:
Intellectual Property Segment	$	41,749		$	101,846		$	115,604		$	142,475
Services Segment		7,405			8,695			27,044			15,989
Corporate Overhead		—			—			—			—
Total revenues		49,154			110,541			142,648			158,464
Operating expenses:
Intellectual Property Segment		12,896			15,007			36,806			42,604
Services Segment		9,924			10,250			32,537			18,723
Corporate Overhead		8,358			6,377			23,278			18,976
Total operating expenses		31,178			31,634			92,621			80,303
Operating income (loss)
Intellectual Property Segment		28,853			86,839			78,798			99,871
Services Segment		(2,519	)		(1,555	)		(5,493	)		(2,734	)
Corporate Overhead		(8,358	)		(6,377	)		(23,278	)		(18,976	)
Total operating income	$	17,976		$	78,907		$	50,027		$	78,161

The revenues and operating income amounts in this section have been presented on a basis consistent with accounting principles generally accepted in the United States applied at the segment level. Corporate overhead expenses which have been excluded are primarily support services, human resources, legal, finance, IT, corporate development, procurement activities, insurance and board fees. For the three and nine months ended September 30, 2007, corporate overhead expenses were $8.4 million and $23.3 million, respectively, compared to $6.4 million and $19.0 million, respectively, for the three and nine months ended September 30, 2006. The increases from the three and nine months ended September 30, 2006 are primarily attributable to an increase in headcount and the related compensation expense due to the acquisition of a subsidiary in the third quarter of 2006.

Intellectual Property Segment

Intellectual property revenues for the three months ended September 30, 2007 were $41.7 million as compared to $101.8 million for the three months ended September 30, 2006, which represented a decrease of $60.1 million or 59%. For the nine months ended September 30, 2007 intellectual property revenues were $115.6 million as compared to $142.5 million for the nine months ended September 30, 2006, a decrease of $26.9 million or 19%. The decrease to both periods is primarily attributed to the past production payments earned upon settlement of litigation in the amount of $77.6 million in the third quarter of 2006.

Intellectual property revenues currently are attributable primarily to royalties received from our TCC licensees. Such royalty revenues are distributed between two primary market segments: DRAM (Dynamic Random Access Memory) and Wireless. In 2005, we provided two major DRAM manufacturers with first-mover pricing advantages in respect of royalties due us under their respective TCC licenses, based on several factors including volumes. The effect of the volume pricing adjustments may be to cause, at certain high shipment volumes and for these two DRAM manufacturers only, our aggregate annual DRAM royalty revenue to grow less rapidly than annual growth in overall unit shipments in the DRAM segment. An additional effect may be to cause, depending on the relative DRAM market share enjoyed by these two DRAM manufacturers in a given calendar quarter and their royalty payments within a calendar year, some quarter-to-quarter fluctuations in growth in our revenues from the DRAM segment. The Company has no other contracts that provide volume-based pricing adjustments.

Operating expenses for the three months ended September 30, 2007 were $12.9 million and consisted primarily of R&D costs of $5.2 million and SG&A costs of $7.7 million. Included in R&D costs were $3.4 million in costs related to our research and development centers in Hungary and Israel. Included in SG&A costs were $5.0 million in litigation expenses. Operating expenses for the three months ended September 30, 2007 of $12.9 million represented a decrease of $2.1 million as compared to $15.0 million for the three months ended September 30, 2006, which is primarily attributable to a decrease of $4.7 millions in SG&A costs offset by an increase of $2.6 million in R&D costs. The decrease in SG&A costs is primarily due to a decrease in litigation costs of $4.5 million and the increase in R&D costs is primarily due to the increase in personnel and the inclusion and subsequent growth of R&D efforts related to entities acquired in the third quarter of 2006 and first quarter of 2007.

Operating expenses for the nine months ended September 30, 2007 were $36.8 million and consisted primarily of R&D costs of $13.8 million and SG&A costs of $22.5 million. Included in the R&D costs were $8.7 million in costs related to our research and development centers in Hungary and Israel. Included in SG&A costs were $14.2 million in litigation expenses. Operating expenses for the nine months ended September 30, 2007 of $36.8 million represented a decrease of $5.8 million as compared to $42.6 million for the nine months ended September 30, 2006, which is primarily attributable to a decrease of $10.5 millions in SG&A costs partially offset by an increase of $4.3 million in R&D costs. The decrease in SG&A costs is primarily due to a $11.0 million decrease in litigation costs and the increase in R&D costs is primarily due to the increase in personnel and the inclusion and subsequent growth of R&D efforts related to entities acquired in the third quarter of 2006 and the first quarter of 2007.

We expect that litigation costs will become a material portion of the Intellectual Property segment’s SG&A costs in future periods, and may increase significantly in some periods, because of our ongoing legal actions, as described in Part II, Item 1 – Legal Proceedings, below, and because we expect that we will become involved in other litigation from time to time in the future in order to enforce and protect our intellectual property rights.

Operating income for the three and nine months ended September 30, 2007 was $28.9 million and $78.8 million, respectively, as compared to $86.8 million and $99.9 million for the three and nine months ended September 30, 2006, a decrease of $57.9 million and $21.1 million, or 67% and 21%, respectively. This overall decrease from the three and nine months ended September 30, 2006 is primarily attributable to $77.6 million earned upon settlement of patent litigation in the third quarter of 2006 and increased R&D costs related to the inclusion of the entities acquired in the third quarter of 2006 and the first quarter of 2007, partially offset by increased royalty and license fees and decreased litigation costs.

Services Segment

Service revenues for the three and nine months ended September 30, 2007 was $7.4 million and $27.0 million, respectively, as compared to $8.7 million and $16.0 million for the three months ended September 30, 2006. This is a decrease of $1.3 million, or 15%, from the three months ended September 30, 2006, and an increase of $11.0 million, or 69%, from the nine months ended September 30, 2006. For the three months ended September 30, 2007, the decrease in service revenues was primarily related to slower conditions in the broader photolithography industry in the second quarter of 2007 and lower government-funded R&D. For the nine months ended September 30, 2007, the increase in services revenues was primarily driven by the inclusion and subsequent growth of the subsidiary acquired in the third quarter of 2006.

Operating expenses for the three months ended September 30, 2007 were $9.9 million and consisted primarily of costs of revenue of $3.6 million, R&D costs of $4.7 million and SG&A costs of $1.6 million. Included in these costs were $1.3 million in stock-based compensation. The operating expenses for the three months ended September 30, 2007 of $9.9 million represented a decrease of $0.4 million, or 4%, from the three months ended September 30, 2006 of $10.3 million. The decrease is

20 of 33

primarily due to a decrease in cost of revenue of $2.6 million related to lower product and service revenues, offset by an increase in R&D and SG&A costs of $2.3 million related to inclusion and subsequent growth of acquisitions completed in the third quarter of 2006 and the first quarter in 2007.

Operating expenses for the nine months ended September 30, 2007 were $32.5 million and consisted primarily of costs of revenue of $13.5 million, R&D costs of $13.3 million and SG&A costs of $2.0 million. Included in these costs were $4.2 million in stock-based compensation. The operating expenses for the nine months ended September 30, 2007 of $32.5 million represented an increase of $13.8 million, or 74%, from the nine months ended September 30, 2006 of $18.7 million. The increase is primarily due to an increase of $1.2 million in stock-based compensation and increases in R&D and SG&A costs of $12.6 million related to inclusion and subsequent growth of acquisitions completed in the third quarter of 2006 and the first quarter in 2007.

Operating loss for the three and nine months ended September 30, 2007 was $2.5 million and $5.5 million, respectively, as compared to operating loss of $1.6 million and $2.7 million for the three and nine months ended September 30, 2006. The increase in operating loss of $0.9 million and $2.8 million, respectively, from the three and nine months ended September 30, 2006 was primarily attributable to the increase in stock-based compensation expense and an increase in operating expenses, offset by increased revenue.

Liquidity and Capital Resources

Cash, cash equivalents and short-term investments were $265.8 million at September 30, 2007, an increase of $71.7 million from $194.1 million at December 31, 2006. Cash and cash equivalents were $230.6 million at September 30, 2007, an increase of $36.5 million from $194.1 million at December 31, 2006. The increase was primarily the result of $83.9 million in cash provided by operating activities and $15.3 million in net proceeds provided by financing activities, offset by $62.6 million net cash used in investing activities.

Net cash provided by operating activities was $83.9 million for the nine months ended September 30, 2007, primarily due to net income of $32.1 million, adjusted for non-cash items of depreciation and amortization and stock-based compensation of $22.6 million, a decrease in other assets of $10.0 million related to foreign tax refund received and an increase in income tax payable of $21.5 million.

Net cash provided by operating activities was $76.9 million for the nine months ended September 30, 2006, primarily due to net income of $47.5 million adjusted for non-cash items of depreciation, amortization and stock-based compensation of $15.2 million and an increase in income tax payable of $31.4 million partially offset by an increase in other assets of $12.0 million and a decrease in accrued liabilities and litigation expense of $4.4 million.

Net cash used in investing activities was $62.6 million in the nine months ended September 30, 2007, primarily related to purchases of short-term investments of $62.1 million, purchases of property and equipment of $6.9 million, consideration paid for the acquisition of certain tangible and intangible assets of $19.5 million, offset by proceeds from maturities and sales of short-term investments of $25.9 million. Net cash used in investing activities for the nine months ended September 30, 2006 was $56.2 million, primarily related to the acquisition completed in the third quarter of 2006.

Net cash provided by financing activities was $15.3 million and $8.5 million, respectively, for the nine months ended September 30, 2007 and September 30, 2006, resulting primarily from the issuance of common stock under our employee stock option programs and employee stock purchase plans.

We believe that based on current levels of operations and anticipated growth, our cash from operations, together with cash currently available, will be sufficient to fund our operations for at least the next twelve months. Poor financial results, unanticipated expenses, unanticipated acquisitions of technologies or businesses or unanticipated strategic investments could give rise to additional financing requirements sooner than we expect. There can be no assurance that equity or debt financing will be available when needed or, if available, that such financing will be on terms satisfactory to us and not dilutive to our then-current stockholders.

Contractual Cash Obligations

During the third quarter of 2007, we believe there were no significant changes in our payments due under contractual obligations as disclosed in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2006.

Our principal corporate administrative, sales, marketing and research and development facilities occupy approximately 51,000 square feet in San Jose, California, under a lease that expires on May 31, 2011. We own a research and development and manufacturing facility in Charlotte, North Carolina, which occupies approximately 100,000 square feet in one building on approximately 18 acres of land. We also have research and development facilities in Jerusalem, Israel, Tel Aviv, Israel and Yokohama, Japan that occupy approximately 2,400 square feet, 2,000 square feet and 10,500 square feet, respectively, under leases that expire on January 31, 2011, October 15, 2007 and October 31, 2009, respectively. In addition, we have a sales representative office in Chupei, Hsinchu, Taiwan that occupies approximately 1,000 square feet under a lease that expires on January 15, 2009. We believe our existing facilities are adequate for our current needs.

Off-Balance Sheet Arrangements

As of September 30, 2007, we did not have any off-balance sheet arrangements as defined in item 303(a)(4)(ii) of Regulation S-K.

Item  3. Quantitative and Qualitative Disclosures About Market Risks

The primary objective of our investment activities is to preserve principal while maximizing the income we receive from our investments without significantly increasing risk of loss. We maintain a portfolio of cash equivalents and short-term investments with high ratings and short maturities, including investments in commercial paper, money market funds, corporate bonds, asset-backed and mortgage-backed securities. Our exposure to market risks is minimal due to the short average maturity, quality and broad diversification of our holdings. We do not hold or issue derivative, derivative commodity instruments or other financial instruments for trading purposes.

The risk associated with fluctuating interest rates is limited to our investment portfolio. We do not believe that a 10% change in interest rates would have a significant impact on our results of operations or cash flows.

Item  4. Controls and Procedures

Attached as exhibits to this Form 10-Q are certifications of Tessera’s Chief Executive Officer and Chief Financial Officer, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the Exchange Act). This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.

21 of 33

Evaluation of controls and procedures. Tessera maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report (the evaluation date). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures were effective such that the information relating to Tessera, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to Tessera’s management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Change in Internal Control over Financial Reporting. There have been no changes in Tessera’s internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), during Tessera’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, Tessera’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item  1. Legal Proceedings

Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal)

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended July 1, 2007, on October 7, 2005, the Company filed a complaint for patent infringement against Advanced Micro Devices, Inc. (“AMD”) and Spansion LLC (“Spansion”) in the United States District Court for the Northern District of California, alleging infringement of Tessera’s U.S. Patent Nos. 5,679,977, 5,852,326, 6,433,419 and 6,465,893 arising from AMD’s and Spansion’s respective manufacture, use, sale, offer to sell and/or importation of certain packaged semiconductor components and assemblies thereof. Tessera seeks to recover damages, up to treble the amount of actual damages, together with attorney’s fees, interest and costs. The Company also seeks other relief, including enjoining AMD and Spansion from continuing to infringe these patents.

On December 16, 2005, Tessera filed a first amended complaint to add Spansion Inc. and Spansion Technology, Inc. to the lawsuit.

On January 31, 2006, the Company filed a second amended complaint to add claims of breach of contract and/or patent infringement against several new defendants, including Advanced Semiconductor Engineering, Inc., ASE (U.S.) Inc., ChipMOS Technologies, Inc., ChipMOS U.S.A., Inc., Siliconware Precision Industries Co. Ltd, Siliconware USA Inc., STMicroelectronics N.V., STMicroelectronics, Inc., STATS ChipPAC Ltd., STATS ChipPAC, Inc. and STATS ChipPAC Ltd. (BVI). The defendants in this action have asserted affirmative defenses to the Company’s claims, and some of them have brought related counterclaims alleging that the Tessera patents at issue are not infringed, invalid and unenforceable and/or that Tessera is not the owner of the patents.

On May 24, 2007, the parties stipulated to temporarily stay this action pending completion of a concurrent proceeding before the International Trade Commission (“ITC”). During the stay, the Company expects that potential damages will continue to accrue. Upon completion of the ITC action, the proceeding can continue, and Tessera may seek to recover its damages attributable to the alleged infringement.

On September 12, 2007, the ASE, ChipMOS, Siliconware and STATS defendants (the “subcontractor defendants”) moved for a temporary restraining order and preliminary injunction to bar Tessera from filing suit, or in any manner seeking relief, outside of California against each of the subcontractor defendants, allegedly based on forum selection clauses contained in limited license agreements between Tessera and the subcontractor defendants. On September 21, 2007, Tessera opposed the motion, explaining that Tessera had not filed any action against the subcontractor defendants, and if and when it did, such action would not include any products within the scope of the subcontractor defendants’ limited licenses. The court initially granted a temporary restraining order against Tessera pending an October 23, 2007 hearing of the matter. After the hearing, on November 1, 2007, the court issued an order granting in part and denying in part the preliminary injunction requested by the subcontractor defendants. Pursuant to the order, among other things, Tessera is permitted to file a complaint against the subcontractor defendants in the International Trade Commission, or elsewhere, as to products not arguably covered by the subcontractor defendants’ limited license agreements, provided that the subcontractor defendants are given ten days’ notice of the filing and do not take the position that the products subject to the complaint are covered by their licenses. Tessera may not file any action outside of California against licensed products or products that the subcontractor defendants assert are covered by their licenses.

The Company cannot predict the outcome of these proceedings. An adverse decision in any of these proceedings could significantly harm the Company’s business and financial condition.

Tessera, Inc. v. Amkor Technology, Inc.

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended July 1, 2007, on March 2, 2006, the Company submitted a request for arbitration with Amkor Technology, Inc. (“Amkor”) regarding Amkor’s failure to pay royalties under its license agreement with Tessera. On November 1, 2006, the arbitration tribunal issued a provisional timetable specifying a seven-day tribunal hearing starting October 1, 2007. On April 17, 2007, Tessera provided notice to Amkor of Tessera’s termination of the license agreement, which may allow Tessera to seek remedies for patent infringement outside of the arbitration. After a hearing on October 8, 2007, the arbitration panel determined that it will decide the effect of Tessera’s termination notice at the hearing beginning in March 2008.

On May 9, 2007, the tribunal recommended to the International Chamber of Commerce that the hearing be reset for March 31, 2008, and Tessera expects that trial is likely to go forward on or around that recommended date. The fact discovery period in the action is now completed. Tessera has submitted expert reports regarding Amkor’s infringement and damages due from Amkor, and is seeking a substantial monetary recovery from Amkor. Amkor has submitted an expert report contending that Tessera’s patents are invalid. The parties’ rebuttal expert reports are due to be served on December 10, 2007.

The Company cannot predict the outcome of this proceeding. An adverse decision in this proceeding could significantly harm the Company’s business and financial condition.

Tessera Technologies, Inc. v. Hynix Semiconductor Inc. et. al, Case No. 106CV-076688

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended July 1, 2007, on December 18, 2006, the Company filed a complaint against Hynix Semiconductor Inc. and Hynix Semiconductor America, Inc., (collectively, “Hynix”) in the Superior Court of the State of California, for the county of Santa Clara, alleging violations of California antitrust law and California common law based on Hynix’s alleged anticompetitive actions in markets related to synchronous DRAM. The Company also seeks other relief, including enjoining Hynix from continuing their alleged anticompetitive actions. On June 1, 2007, the Superior Court overruled the demurrer to Tessera’s Cartwright Act claims against Hynix, thus allowing the claims to proceed. On September 14, 2007, the court overruled another demurrer to Tessera’s claim for interference with contract and business relations, allowing those claims to proceed as well. Discovery is proceeding in this case and the Company cannot predict the outcome of this proceeding. An adverse decision in this proceeding could significantly harm the Company’s business and financial condition.

22 of 33

In re Certain Semiconductor Chips With Minimized Chip Package Size and Products Containing Same

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended July 1, 2007, on April 17, 2007, the Company filed a complaint with the ITC, requesting that the ITC commence an investigation under Section 337 of the Tariff Act of 1930, as amended. The ITC officially instituted an investigation as requested by Tessera on May 21, 2007. The respondents are ATI Technologies, Inc., Freescale Semiconductor, Inc., Motorola, Inc., Qualcomm, Inc., Spansion, Inc., Spansion, LLC and ST Microelectronics N.V. The ITC will, among other things, investigate infringement of U.S. Patent Nos. 5,852,326 and 6,433,419, and consider Tessera’s request for issuance of an order excluding from entry into the United States infringing packaged semiconductor components, assemblies thereof, and products containing the same, as well as cease and desist orders directing the respondents with domestic inventories to desist from activities with respect to infringing products.

On June 11, 2007, the respondents filed a motion to stay the investigation pending the completion of reexamination proceedings relating to the asserted Tessera patents. Tessera has opposed the motion, which has not been ruled on by the ITC. On July 11, 2007, the assigned Administrative Law Judge ordered that the “target date” for completing the ITC investigation be August 21, 2008.

On September 7, 2007, Tessera sought leave to modify the protective order in the action for the purpose of using information obtained during discovery to file a new ITC complaint against STATS ChipPAC, Ltd., ASE, Inc., Siliconware Precision Industries, Ltd., ChipMOS Technologies, Inc., and certain affiliates of those companies (the “proposed respondents”). Tessera requested, in the alternative, that it be permitted leave to add the proposed respondents as parties in the existing investigation. On September 12, 2007, the proposed respondents moved to intervene in the investigation for the purpose of opposing Tessera’s motion. Tessera and the ITC staff have opposed the proposed respondents’ request. The request has not been ruled upon by the ITC. Also on September 12, 2007, the proposed respondents filed a motion with Judge Wilken in the Northern District of California requesting the court to enjoin Tessera from moving forward against them in the ITC on the basis of the forum selection clauses in their respective Tessera license agreements. As discussed in more detail above underTessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal), Judge Wilken has ruled that Tessera may proceed in the ITC against these proposed respondents, provided that, among other things, the products implicated in the ITC complaint are not products asserted by the proposed respondents to be covered by their licenses. Any disputes involving products the proposed respondents assert are covered by their licenses would need to be resolved, at least in the first instance, in the Northern District of California.

On September 19, 2007, the ITC issued an order setting key dates for the investigation, including for the ITC hearing which is scheduled to run from February 25, 2008 to February 29, 2008. On October 17, 2007, the investigation was assigned to Administrative Law Judge Theodore Essex.

The Company cannot predict the outcome of these proceedings. An adverse decision in any of these proceedings could significantly harm the Company’s business and financial condition.

Tessera, Inc. v. Motorola, Inc., et. al, Case No. 2:07cv143 (E.D. Tex.)

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended July 1, 2007, on April 17, 2007, the Company filed a complaint against Motorola, Inc., Qualcomm, Inc., Freescale Semiconductor, Inc., and ATI Technologies, Inc. in the United States District Court for the Eastern District of Texas, alleging infringement of Tessera’s U.S. Patent Nos. 5,852,326 and 6,433,419, arising from, among other things, the defendants’ respective manufacture, use, sale, offer to sell and/or importation of certain packaged semiconductor components and assemblies thereof. The Company seeks to recover damages, up to treble the amount of actual damages, together with attorney’s fees, interest and costs. The Company also seeks other relief, including enjoining the defendants from continuing to infringe these patents. The defendants have not yet answered Tessera’s complaint, and have filed a motion to stay the district court action pending completion of the concurrent ITC proceedings. The parties have agreed that the case will be temporarily stayed pending a ruling regarding the motion to stay the ITC investigation titledIn re Certain Semiconductor Chips With Minimized Chip Package Size and Products Containing Same. The Company cannot predict the outcome of these proceedings. An adverse decision in any of these proceedings could significantly harm the Company’s business and financial condition.

Reexamination Proceedings

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended July 1, 2007, on February 9, 2007 and February 15, 2007, Silicon Precision Industries Co., Ltd. and Siliconware USA, Inc. (collectively, “Siliconware”) filed with the United States Patent & Trademark Office (“PTO”) requests for inter partes reexamination relating to U.S. Patent Nos. 6,433,419 and 6,465,893, and ex parte reexamination relating to U.S. Patent Nos. 5,679,977, 6,133,627 and 5,852,326. On April 19, 2007, the PTO granted the requests for ex parte reexamination. On May 4, 2007, the PTO granted the requests for inter partes reexamination. The PTO denied the Company’s petition to vacate the inter partes reexamination proceeding on the ground that the request did not name the real party in interest, and a related request for reconsideration of that decision. The PTO issued a non-final Official Action in connection with the inter partes reexamination of U.S. Patent No. 6,465,893 initially rejecting a number of patent claims on May 4, 2007, to which a response was filed on July 5, 2007. The PTO issued a non-final Official Action in connection with the inter partes reexamination of U.S. Patent No. 6,433,419 initially rejecting a number of the patent claims on June 5, 2007, to which a response was filed on August 6, 2007. On September 5, 2007, Siliconware filed comments in response to the Company’s August 6, 2007 response. On March 14, 2007, Siliconware filed a second request for ex parte reexamination of U.S. Patent No. 5,679,977. The PTO granted this request on June 12, 2007. On May 21, 2007, Amkor filed a request for ex parte reexamination of U.S. Patent No. 5,861,666. On July 26, 2007, the PTO granted this request. On June 11, 2007, Amkor filed additional requests for reexamination regarding U.S. Patent Nos. 5,679,977 and 6,133,627. The PTO granted the request for reexamination as to the 5,679,977 patent on August 15, 2007, and the PTO granted the requests for reexamination as to the 6,133,627 patent on August 13, 2007. The Company cannot predict the outcome of these proceedings. An adverse decision in any of these proceedings could significantly harm the Company’s business and financial condition.

On or about January 3, 2006, Koninklijke Phillips Electronics N.V. and Philips Semiconductors B.V. (“Philips”), MICRON Semiconductor Deutschland GmbH (“Micron GmbH”), Infineon and STMicroelectronics, Inc. (“STM”) filed oppositions to Tessera’s European Patent No. EP1111672 (the “EP672 Patent”) before the European Patent Office (the “EPO”). Micron GmbH and Infineon withdrew their oppositions on July 24, 2006 and August 7, 2006, respectively. On October 10, 2006, Tessera filed its response to the remaining oppositions with the EPO. On December 4, 2006, Phillips withdrew its opposition. The EPO continues to consider STM’s opposition of the EP672 Patent. The Company cannot predict the outcome of this proceeding. If the opposition results in a limitation or a revocation of the EP672 Patent, this could significantly harm the Company’s business and financial condition.

Item 1A. Risk Factors

Any invalidation or limitation of our key patents could significantly harm our business.

Our patent portfolio contains some patents that are particularly significant to our ongoing revenues and business. If any of these key patents are invalidated, or if a court or an administrative body such as the United States Patent and Trademark Office (“PTO”) limits the scope of the claims in any of these key patents, the likelihood that companies will take new licenses and that current licensees will continue to agree to pay under their existing licenses could be significantly reduced. The resulting reduction in license and royalties fees could significantly harm our business. As discussed below and in Part II, Item 1— Legal Proceedings, we are currently involved in litigation and administrative proceedings involving some of our key patents. Any adverse rulings relating to the infringement, validity or enforceability of these key patents could significantly harm our business.

23 of 33

We are currently involved in litigation and administrative proceedings involving some of our key patents.

As more fully described in Part II, Item 1—Legal Proceedings, we are currently involved in litigation involving some of our key patents in the United States. These litigations challenge the validity, scope, enforceability and ownership of patents which we license to generate the substantial portion of our revenues. In addition, reexamination requests have also been filed against us with respect to a key patent in the PTO and oppositions have been filed against us with respect to key patents in the European Patent Office. Some of the patents subject to the reexamination requests are currently being asserted by Tessera in our litigation and arbitration proceedings, and are important to the growth and continuation of our business. Under a reexamination proceeding and upon completion of the proceeding, the PTO may leave the patent in its present form, narrow the scope of the patent or cancel all of the claims of the patent.

Furthermore, regardless of the merits of any claim, the continued maintenance of these legal and administrative proceedings may result in substantial legal expenses and could also result in the diversion of our management’s time and attention away from our other business operations, which could significantly harm our business. Moreover, our enforcement proceedings historically have been protracted and complex and we have experienced significant delays in certain of these proceedings. There are myriad procedural and substantive motions in these proceedings, and we cannot predict the outcome of any of these motions, nor can we expect to prevail in all such motions. The complexity of our litigations, their disproportionate importance to our business compared to other companies, the propensity for delay in patent litigations, and the potential for losing particular motions as well as the overall litigations all could cause significant volatility in our stock price and ultimately could materially adversely affect our business and financial condition.

We cannot predict the outcome of any of these proceedings. In the event that there is an adverse ruling in any legal or administrative proceeding relating to the infringement, validity, enforceability or ownership of any of our key patents, we could be prevented from enforcing or earning future revenues from our key patents, and our licensing program would be materially adversely impacted. The occurrence of any of these events could significantly harm our business and financial condition.

We are currently, and may in the future be involved in material litigation with our licensees, potential licensees or strategic partners, which could harm our business.

Our current legal actions, as described above in Part II, Item 1—Legal Proceedings, are examples of significant disputes and litigation that impact our business. Any similar dispute in the future could cause an existing licensee or strategic partner to cease making royalty or other payments to us and could substantially damage our relationship with the licensee or strategic partner on both business and technical levels. Any litigation stemming from such a dispute could be very expensive and may reduce or eliminate our profits. Litigation could also severely disrupt or shut down the business operations of our licensees or strategic partners, which in turn would significantly harm our ongoing relations with them and cause us to lose royalty revenues. Any such litigation could also harm our relationships with other licensees or our ability to gain new customers, who may postpone licensing decisions pending the outcome of the litigation. We are not able to predict the outcome of any of these legal actions and an adverse decision in any of these legal actions could significantly harm our business and financial condition. Moreover, even if we settle our legal actions, significant contingencies will exist to their final resolution, including our receipt of any payments owed and the dismissal of the legal action by the relevant court, none of which are completely within our control.

In addition, many semiconductor and package assembly companies maintain their own internal design groups and have their own package design and manufacturing capabilities. If we believe these groups have designed technologies that infringe upon our intellectual property, and if they subsequently fail to enter into a license agreement with us or pay for licensed technology, then it may become necessary for us to commence legal proceedings against them.

If we fail to protect and enforce our intellectual property rights, our business will suffer.

We rely primarily on a combination of license, development and nondisclosure agreements and other contractual provisions and patent, trademark, trade secret and copyright laws to protect our intellectual property rights. If we fail to protect our intellectual property rights, our licensees and others may seek to use our technology 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. The growth of our business depends in large part on our ability to convince third parties of the applicability of our intellectual property to their products, and our ability to enforce our intellectual property rights against them.

In certain instances, we attempt to obtain patent protection for portions of our intellectual property, and our license agreements typically include both issued patents and pending patent applications. If we fail to obtain patents or if the patents issued to us do not cover all of the claims included in our patent applications, others could use portions of our intellectual property without the payment of license fees and royalties. We also rely on trade secret laws rather than patent laws to protect other portions of our proprietary technology. However, trade secrets can be difficult to protect. We protect our proprietary technology and processes, in part, through confidentiality agreements with our employees, consultants and customers. We cannot be certain that these contracts have not been and will not be breached, that we will have adequate remedies for any breach or that our trade secrets will not otherwise become known or be independently discovered by competitors. If we fail to use these mechanisms to protect our intellectual property, or if a court fails to enforce our intellectual property rights, our business will suffer. We cannot be certain that these protection mechanisms can be successfully asserted in the future or will not be invalidated or challenged.

We may not be able to protect our confidential information, and this could adversely affect our business.

We generally enter into contractual relationships with our employees that protect our confidential information. The misappropriation of our trade secrets or other proprietary information could seriously harm our business. In addition, we may not be able to timely detect unauthorized use or transfer of our intellectual property and take appropriate steps to enforce our rights. In the event we are unable to enforce these contractual obligations and our intellectual property rights, our business could be adversely affected.

We may be required to continue to undertake costly legal proceedings to enforce or protect our intellectual property rights and this may harm our business.

In the past we have found it necessary to litigate to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. We currently are involved in litigation regarding our intellectual property rights, as described above in Part II, Item 1— Legal Proceedings, and we expect to be involved in similar litigation in the future. Litigation is inherently uncertain and any adverse decision could result in a loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses from others, limit the value of our licensed technology or otherwise negatively impact our business. Whether or not determined in our favor or settled by us, litigation is costly and diverts our managerial, technical, legal and financial resources from our business operations.

The costs associated with the legal proceedings in which we are involved can be substantial and specific costs are unpredictable and not completely within our control, and unexpected increases in litigation costs could adversely affect our operating results.

As described above in Part II, Item 1—Legal Proceedings, we are currently involved in legal proceedings against a number of different companies. The costs associated with legal proceedings are typically high, relatively unpredictable and not completely within our control. While we do our best to forecast and control such costs, the costs may be materially more than expected, which could adversely affect our operating results. Moreover, we may become involved in unexpected litigation with additional companies at any time, which would increase our aggregate litigation costs and could adversely affect our operating results.

24 of 33

Our revenues may suffer if we cannot continue to license or enforce our intellectual property rights or if third parties assert that we violate their intellectual property rights.

We rely upon patent, copyright, trademark and trade secret laws in the United States and similar laws in other countries, and agreements with our employees, customers, suppliers and other parties, to establish and maintain our intellectual property rights in our technology. However, any of our direct or indirect intellectual property rights could be challenged, invalidated or circumvented. Further, the laws of certain countries do not protect our proprietary rights to the same extent as do the laws of the United States. Therefore, in certain jurisdictions we may be unable to protect our technology adequately against unauthorized third-party use, which could adversely affect our business. Third parties also may claim that we or our customers are infringing upon their intellectual property rights. Even if we believe that the claims are without merit, the claims can be time-consuming and costly to defend and divert management’s attention and resources away from our business. Claims of intellectual property infringement also might require us to enter into costly settlement or license agreements or pay costly damage awards. Even if we have an agreement that provides for a third party to indemnify us against such costs, the indemnifying party may be unable to uphold its contractual obligations to us. If we cannot or do not license the infringed intellectual property at all or on reasonable terms, or substitute similar technology from another source, our business could suffer.

If the U.S. patent laws and regulations are changed, we could be adversely impacted.

Tessera relies on the uniform and historically consistent application of United States patent laws and regulations. Changes to these laws and regulations may occur as a result of decisions and actions of Congress, the PTO, and the courts, including the U.S. Supreme Court. Some of these changes may not be advantageous for us, and may make it more difficult to obtain adequate patent protection or to enforce our patents against parties using them without a license or a payment of royalties. Any such changes could have a deleterious affect on our licensing program and, therefore, the royalties we receive.

We could experience losses due to product liability claims.

We sell products and provide services that may subject us to product liability claims in the future. Although we carry liability insurance in amounts that we believe are appropriate, product liability claims can be costly and any future product liability claim made against us may exceed the coverage limits of our insurance policies, be excluded form coverage under the terms of our policies or cause us to record a self-insured loss. A product liability claim in excess of our insurance policies could have a material adverse effect on our business, financial condition and results of operations. Even if a product liability loss is covered by our insurance policies, such policies contain substantial retentions and deductibles that we would be required to pay. Our existing insurance may not be renewed at a cost and level of coverage comparable to that presently in effect, or at all. The payment of retentions or deductibles for a significant amount of claims could have a material adverse effect on our business, financial condition and results of operations.

A significant amount of our royalty revenues comes from a few market segments and products, and our business could be harmed if these market segments or products decline.

A significant portion of our royalty revenues comes from the manufacture and sale of packaged semiconductor chips for DSP, ASSP, ASIC and memory. In addition, we derive substantial revenues from the incorporation of our technology into mobile phones. If demand for semiconductors in any one or a combination of these market segments or products declines, our royalty revenues may be reduced significantly and our business could be harmed. Moreover, were such declines to occur, our business could become more cyclical in nature.

Our revenue is concentrated in a few customers and if we lose any of these customers our revenues may decrease substantially.

We receive a significant amount of our revenues from a limited number of customers. For the three and nine months ended September 30, 2007, there were two customers that each accounted for 10% or more of total revenue. For the three and nine months ended September 30, 2006, revenues from two customers each accounted for 10% or more of total revenue. We expect that a significant portion of our revenues will continue to come from a limited number of customers for the foreseeable future. If we lose any of these customers or if our revenues from them decline, our revenues may decrease substantially.

Volume pricing incentives in our TCC licenses with two DRAM manufacturers may slow our DRAM royalty growth.

In 2005, we provided two major DRAM manufacturers with first-mover pricing advantages in respect of royalties due us under their respective TCC licenses, based on several factors including volumes. The effect of the volume pricing adjustments may be to cause, at certain high shipment volumes and for these two DRAM manufacturers only, our aggregate annual DRAM royalty revenue to grow less rapidly than annual growth in overall unit shipments in the DRAM segment. An additional effect may be to cause, depending on the relative DRAM market share enjoyed by these two DRAM manufacturers in a given calendar quarter and their royalty payments within a calendar year, some quarter-to-quarter fluctuations in growth in our revenues from the DRAM segment.

Future changes in financial accounting standards or practices or existing taxation rules or practices may cause adverse unexpected revenue and expense fluctuations and affect our reported results of operations.

A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practice have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

We are subject to laws and regulations governing government contracts, and failure to address these laws and regulations or comply with government contracts could harm our business by leading to a reduction in revenue associated with these customers.

We have agreements relating to services provided to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government. The laws governing government contracts differ from the laws governing private contracts. For example, many government contracts contain pricing terms and conditions that are not applicable to private contracts. We are also subject to audits relating to compliance with the regulations governing government contracts. A failure to comply with these regulations might result in suspension of these contracts, debarment from future government contracts, or civil and criminal penalties. In addition, the government may acquire certain intellectual property rights in data produced or delivered under such contracts and inventions made under such contracts.

Our financial and operating results may vary which may cause the price of our common stock to decline.

We currently provide guidance on revenue, expenses and cash taxes on a quarterly and annual basis. Our quarterly operating results have fluctuated in the past and are likely to do so in the future. Because our operating results are difficult to predict, you should not rely on quarterly or annual comparisons of our results of operations as an indication of our future performance. Factors that could cause our operating results to fluctuate during any period include those listed in this “Risk Factors” section of this report and the following:

• the timing and compliance with license or service agreements and the terms and conditions for payment to us of license or service fees under these agreements;

• changes in our royalties caused by changes in demand for products incorporating semiconductors that use our licensed technology;

• the amount of our service revenues;

• changes in the level of our operating expenses;

• delays in our introduction of new technologies or market acceptance of these new technologies through new license agreements;

• our failure to protect or enforce our intellectual property rights or rights under our agreements;

25 of 33

• legal proceedings affecting our patents, patent applications or license agreements;

• the timing of the introduction by others of competing technologies;

• changes in demand for semiconductor chips in the specific markets in which we concentrate—DSP, ASIC, ASSP semiconductors and memory;

• changes in accounting principles; and

• cyclical fluctuations in semiconductor markets generally.

It is difficult to predict when we will enter into license agreements. The time it takes to establish a new licensing arrangement can be lengthy. Delays or deferrals in the execution of license agreements may also increase as we develop new technologies. Because we generally recognize a significant portion of license fee revenues in the quarter that the license is signed, the timing of signing license agreements may significantly impact our quarterly or annual operating results. Under our typical license agreements, we also receive ongoing royalty payments, and these payments may fluctuate significantly from period to period based on manufacture or sales of products incorporating our licensed technology. We expect to continue to expand our business rapidly which will require us to increase our operating expenses. We may not be able to increase revenues in an amount sufficient to offset these increased expenditures, which may lead to a loss for a quarterly period.

Due to fluctuations in our quarterly operating results and other factors, the price at which our common stock will trade is likely to continue to be highly volatile. In future periods, if our revenues or operating results are below our estimates or the estimates or expectations of public market analysts and investors, our stock price could decline. In the past, securities class action litigation has often been brought against companies following a decline in the market price of their securities. Technology companies have experienced greater than average stock price volatility than companies in many other industries in recent years and, as a result, have, on average, been subject to a greater number of securities class action claims. If our stock price is volatile, we may become involved in this type of litigation in the future. Any litigation could result in substantial costs and a diversion of management’s attention and resources that are needed to successfully run our business.

Network outages could disrupt our internal operations, which could adversely affect our revenues, customers and stock price.

Despite our concerted effort to minimize risk to our corporate information systems and to reduce the effect of unscheduled interruptions to the Company through implementation of Business Continuity Plans, our Company may still be exposed to interruptions due to natural disasters, terrorism or acts of war which are beyond our control. Disruptions to these systems could also interrupt operational processes and adversely impact our ability to provide services and support to our customers and fulfill contractual obligations. As a result, the results of our operations, financial position, cash flows and stock price could be adversely affected.

We have a royalty-based business model, which is inherently risky.

Our long-term success depends on future royalties paid to us by licensees. Royalty payments under our TCC licenses are primarily based upon the number of electrical connections to the semiconductor chip in a package covered by our licensed technology, although we do have royalty arrangements in which royalties are paid based upon a percent of the net sales price or in which royalties are paid on a per package basis. We are dependent upon our ability to structure, negotiate and enforce agreements for the determination and payment of royalties, as well as upon our licensees’ compliance with their agreements. We face risks inherent in a royalty-based business model, many of which are outside of our control, such as the following:

• the rate of adoption and incorporation of our technology by semiconductor manufacturers and assemblers;

• the extent to which large equipment vendors and materials providers develop and supply tools and materials to enable manufacturing using our packaging technology;

• the demand for products incorporating semiconductors that use our licensed technology; and

• the cyclicality of supply and demand for products using our licensed technology.

It is difficult for us to verify royalty amounts owed to us under our licensing agreements, and this may cause us to lose revenues.

The standard terms of our license agreements require our licensees to document the manufacture and sale of products that incorporate our technology and report this data to us on a quarterly basis. Although our standard license terms give us the right to audit books and records of our licensees to verify this information, audits can be expensive, time consuming, flawed and potentially detrimental to our ongoing business relationship with our licensees. Our license compliance program randomly audits licensees to independently verify the accuracy of the information contained in their royalty reports in an effort to decrease the likelihood that we will not receive the royalty revenues to which we are entitled to under the terms of our license agreements, but we cannot give assurances that the random audits will be effective to that end.

Failure by our licensees to introduce products using our technology could limit our royalty revenue growth.

Because we expect a significant portion of our future revenues to be derived from royalties on semiconductors that use our licensed technology, our future success depends upon our licensees developing and introducing commercially successful products. Any of the following factors could limit our licensees’ ability to introduce products that incorporate our technology:

• the willingness and ability of materials and equipment suppliers to produce materials and equipment that support our licensed technology, in a quantity sufficient to enable volume manufacturing;

• the ability of our licensees to purchase such materials and equipment on a cost-effective and timely basis;

• the willingness of our licensees and others to make investments in the manufacturing process that supports our licensed technology, and the amount and timing of those investments; and

• our licensees’ ability to design and assemble packages incorporating our technology that are acceptable to their customers.

Failure by the semiconductor industry to adopt next generation high performance DRAM chips that utilize our packaging technology would significantly harm our business.

To date, our packaging technology has been used by several companies for high performance DRAM chips. For example, packaging using our technology is used for DDR2 DRAM and we currently have licensees, including Samsung Electronics, Co., Ltd., Qimonda AG, Hynix Semiconductor Inc. and Micron Technology, Inc., who are paying royalties for DRAM chips in advanced packages.

26 of 33

DRAM manufacturers are also currently developing next generation high performance DRAM chips, including next generation of DDR referred to as DDR3 and DDR4, to meet increasing speed and performance requirements of electronic products. We believe that these next-generation, high performance DRAM chips will require advanced packaging technologies such as CSP.

We anticipate that royalties from shipments of these next-generation, high performance DRAM chips packaged using our technology may account for a significant percentage of our future revenues. If semiconductor manufacturers do not continue to adopt next generation, high performance DRAM packages using our technology and find an alternate viable packaging technology for use with next generation high performance DRAM chips, or if we do not receive royalties from next generation, high performance DRAM chips that use our technology, our future revenues could be adversely affected.

Our technology may be too expensive for certain next generation high performance DRAM manufacturers, which could significantly reduce the adoption rate of our packaging technology in next generation high performance DRAM chips. Even if our package technology is selected for at least some of these next generation high performance DRAM chips, there could be delays in the introduction of products utilizing these chips that could materially affect the amount and timing of any royalty payments that we receive. Other factors that could affect adoption of our technology for next generation high performance DRAM products include delays or shortages of materials and equipment and the availability of testing services.

Failure by the semiconductor industry to adopt broadly wafer level packaging technology could limit our royalty revenue growth.

To date, wafer level packaging (“WLP”) technologies have been adopted for a limited number of semiconductor products, including the use by several companies for complementary metal-oxide semiconductor (“CMOS”) image sensor chips principally for use in camera-equipped mobile phones. We believe that such WLP packages will be useful for image sensors in other applications such as personal digital assistants and digital cameras, and for other applications such as micro-electro-mechanical systems (“MEMS”) devices.

We anticipate that royalties from shipments of chips packaged using our WLP technology may account for a small but increasing percentage of our future revenues. If semiconductor manufacturers do not adopt our WLP technology as quickly as is currently being projected by industry sources or find an alternate viable packaging technology for use with their image sensor and MEMS chips, or if we do not receive royalties from image sensor and MEMS chips that use our technology, our future revenues could be adversely affected. In addition our technology may be too expensive for certain image sensor manufacturers, which could significantly reduce the adoption rate of our WLP packaging technology in image sensor applications. Other factors that could affect adoption of our WLP technology for image sensors and MEMS chips include delays or shortages of materials and equipment.

Competing technologies may harm our business.

We expect that our technologies will continue to compete with technologies of internal design groups of semiconductor manufacturers and assemblers. These internal design groups create their own packaging solutions, and have direct access to their company’s technical information and technology roadmaps, and have capacity, cost and technical advantages over us. If these internal design groups design around our patents, they may not need to license our technology. These groups may design package technology that is less expensive to implement than ours or provides products with higher performance or additional features. Many of these groups have substantially greater resources, financial or otherwise, than us and lower cost structures. As a result, they may be able to bring alternative package technologies solutions to market more easily and quickly. For instance, certain flip chip technologies are being used by large semiconductor manufacturers and assemblers for a variety of semiconductors, including processors and memory. Another example of a competitive technology is the small format lead frame packages that are also gaining popularity. The companies using these technologies are utilizing their current lead frame infrastructure to achieve cost-effective results. Another example of a competitive technology is the chip-on-board technique to package image sensors.

In the future, our licensed technologies may also compete with other package technologies. These technologies may be less expensive than ours and provide higher or additional performance. Companies with these competing technologies may also have greater resources than us. Technological change could render our technologies obsolete, and new, competitive technologies could emerge that achieve broad adoption and adversely affect the use of our intellectual property.

If we do not create and implement new designs to expand our licensable technology portfolio, our competitive position could be harmed and our operating results adversely affected.

We derive a significant portion of our revenues from licenses and royalties from a relatively small number of key technologies. We plan to devote significant engineering resources in order to develop new packaging technologies to address the evolving needs of the semiconductor and the consumer and communication electronics industries. To remain competitive, we must introduce new technologies or designs in a timely manner and the market must adopt them. Developments in packaging technologies are inherently complex, and require long development cycles and a substantial investment before we can determine their commercial viability. We may not be able to develop and market new technologies in a timely or commercially acceptable fashion. Moreover, our currently issued U.S. patents expire at various times from January 25, 2009 through August 23, 2025. We need to develop and patent successful innovations before our current patents expire and our failure to do so could significantly harm our business.

If we do not successfully license the technologies we acquire, our competitive position could be harmed and our operating results adversely affected.

We also attempt to expand our licensable technology portfolio and technical expertise by acquiring technology or developing strategic relationships with others. These strategic relationships may include the right for us to sublicense technology to others. However, we may not be able to acquire or obtain rights to licensable technology in a timely manner or upon commercially reasonable terms. Even if we do acquire such rights, some of the technologies we invest in may be commercially unproven and may not be adopted or accepted by the industry. Moreover, our research and development efforts, and acquisitions and strategic relationships, may be futile if we do not accurately predict the future packaging needs of the semiconductor, consumer and communication electronics industries. Our failure to acquire new technologies that are commercially viable in the semiconductor, consumer and communication electronics industries could significantly harm our business.

Some of our license agreements have fixed terms and, in order to maintain our relationships with licensees under such agreements, we will need to renegotiate some of our existing license agreements in the future.

Some of our license agreements have fixed terms. We will need to renegotiate license agreements with fixed terms prior to the expiration of such license agreements and, based on various factors including the technology and business needs of our licensees, we may not be able to renegotiate such license agreements on similar terms, or at all. In order to maintain existing relationships with some of our licensees, we may be forced to renegotiate license agreements on terms that are more favorable to such licensees, which could harm our results of operations. If we fail to renegotiate our license agreements we would lose existing licensees and our business would be materially adversely affected.

Some of our license agreements may convert to fully paid-up licenses at the expiration of their terms, and we may not receive royalties after that time.

We currently have one license agreement that automatically converts to a fully paid-up license after the expiration of its current term, December 31, 2013, provided that the licensee (Texas Instruments) complies with all terms and conditions of the license agreement up through its expiration. We also have certain other license agreements that each provide the licensee with the option to extend the current term of their agreement for an additional five years with royalty payments throughout the

27 of 33

expiration of the extended term, whereupon such a license automatically converts to a fully paid-up license after the expiration of its extended term. We may not receive further royalties from licensees for any licensed technology under those agreements if they convert to fully paid-up licenses because such licensees will be entitled to continue using some, if not all, of our relevant intellectual property under the terms of the license agreements, even if relevant patents are still in effect. A significant conversion of our license agreements to fully paid-up licenses could materially harm our results of operations following such conversion.

Our licensing cycle is lengthy and costly and our marketing and sales efforts may be unsuccessful.

We generally incur significant marketing and sales expenses prior to entering into our license agreements, generating a license fee and establishing a royalty stream from each licensee. The length of time it takes to establish a new licensing relationship can range from six to 18 months or longer. As such, we may incur significant losses in any particular period before any associated revenues stream begins.

We employ intensive marketing and sales efforts to educate materials suppliers, equipment vendors, licensees, potential licensees and original equipment manufacturers about the benefits of our technologies. In addition, even if these companies adopt our technologies, they must devote significant resources to integrate fully our technologies into their operations. If our marketing and sales efforts are unsuccessful, then we will not be able to achieve widespread acceptance of our packaging technology. In addition ongoing litigation could impact our ability to gain new licensees.

Cyclicality in the semiconductor industry may affect our revenues, and as a result, our operating results could be adversely affected.

The semiconductor industry has historically been cyclical and is characterized by wide fluctuations in product supply and demand. From time to time, this industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product and technology cycles, excess inventories and declines in general economic conditions. This cyclicality could cause our operating results to decline dramatically from one period to the next. Our business depends heavily upon the volume of production by our licensees, which, in turn, depends upon the current and anticipated market demand for semiconductors and products that use semiconductors. Similarly, our services business relies at least in part upon the outsourcing of design and engineering projects by the semiconductor industry. Semiconductor manufacturers and package assembly companies generally sharply curtail their spending during industry downturns and historically have lowered their spending more than the decline in their revenues. As a result, if we are unable to control our expenses adequately in response to lower revenues from our licensees and service customers, our operating results will suffer and we might experience operating losses.

The international nature of our business exposes us to financial and regulatory risks and we may have difficulty protecting our intellectual property in some foreign countries.

We derive a significant portion of our revenues from licensees headquartered outside of the United States, principally in Asia, and these revenues accounted for 78% and 76%, respectively, of our total revenues for the three months and nine months ended September 30, 2007. For the three and nine months ended September 30, 2006, these revenues accounted for 62% and 61%, respectively, of our total revenues. International operations are subject to a number of risks, including the following:

• international terrorism and anti-American sentiment, particularly in the emerging markets;

• laws and business practices favoring local companies;

• withholding tax obligations on license revenues that we may not be able to offset fully against our U.S. tax obligations, including the further risk that foreign tax authorities may re-characterize license fees or increase tax rates, which could result in increased tax withholdings and penalties; and

• Less effective protection of intellectual property than is afforded to us in the United States or other developed countries.

Our intellectual property is also used in a large number of foreign countries. There are many countries, such as India, in which we currently have no issued patents. In addition, effective intellectual property enforcement may be unavailable or limited in some foreign countries. It may be difficult for us to protect our intellectual property from misuse or infringement by other companies in these countries. We expect this to become a greater problem for us as our licensees increase their manufacturing in countries which provide less protection for intellectual property. Our inability to enforce our intellectual property rights in some countries may harm our business.

Our services business may subject us to specific costs and risks that we may fail to manage adequately which could harm our business.

We derive a portion of our revenues from engineering services. Among the engineering services that we offer are customized package design and prototyping, modeling, simulation, failure analysis and reliability testing and related training services. A number of factors, including, among others, the perceived value of our intellectual property portfolio, our ability to convince customers of the value of our engineering services and our reputation for performance under our service contracts, could cause our revenues from engineering services to decline, which would in turn harm our operating results.

Moreover, most of our service revenues are derived from engineering services we provide to government agencies and their contractors to enable the development of new packaging technologies. If demand for our services from government agencies declines, due to changes in government policies or otherwise, our service revenues will be adversely affected.

Under our services contracts we are required to perform certain services, including sometimes delivering designs and prototypes. If we fail to deliver as required under our service contracts, we could lose revenues and become subject to liability for breach of contract.

We provide certain services at below cost in an effort to increase the speed and breadth with which the semiconductor industry adopts our technologies. For example, we provide modeling, manufacturing process training, equipment and materials characterization and other services to assist licensees in designing, implementing, upgrading and maintaining their packaging assembly line. We frequently provide these services as a form of training to introduce new licensees to our technology and existing clients to new technologies, with the aim that these services will help us to generate revenues in the future. We need to monitor these services adequately in order to ensure that we do not incur significant expenses without generating corresponding revenues. Our failure to monitor these services or our design and prototype services adequately may harm our operating results.

Because our services sometimes involve the delivery of package designs and prototypes, we may be subject to claims that we infringed or induced the infringement of patents and other intellectual property rights belonging to others. If such a claim were made, we may have to take a license or stop manufacturing the accused packages, which could cause our services revenues to decrease. If we choose not to take a license, we may be sued for infringement, and may incur significant litigation costs in defending against the lawsuit. If we are found to infringe the intellectual property rights of others, we may have to pay damages and could be subject to an injunction preventing us from continuing to provide the services. Any of these outcomes could harm our business.

28 of 33

We intend to continue to expand our operations which may strain our resources and increase our operating expenses.

We plan to continue the expansion of our operations, domestically and internationally, and may do so through both internal growth and acquisitions. We expect that this expansion will strain our systems and operational and financial controls. In addition, we are likely to incur higher operating costs. To manage our growth effectively, we must continue to improve and expand our systems and controls. If we do fail to do so, our growth would be limited. Our officers have limited experience in managing large or rapidly growing businesses through acquisitions. Further, our officers have limited experience managing companies through acquisitions and technological changes. In addition, our management has limited experience in managing a public company.

We have made and may continue to make acquisitions which could divert management’s attention, cause ownership dilution to our stockholders, be difficult to integrate and adversely affect our financial results.

We have made several acquisitions and it is our current plan to acquire companies and technologies that we believe are strategic to our future business. Integrating newly acquired businesses or technologies could put a strain on our resources, could be costly and time consuming, and might not be successful. Such acquisitions could divert our management’s attention from other business concerns. In addition, we might lose key employees while integrating new organizations. Acquisitions could also result in customer dissatisfaction, performance problems with an acquired company or technology, potentially dilutive issuances of equity securities or the incurrence of debt, the assumption or incurrence of contingent liabilities, possible impairment charges related to goodwill or other intangible assets or other unanticipated events or circumstances, any of which could harm our business. Our plans to integrate and expand upon research and development programs and technologies initiated at each of our operating locations, including image sensor packaging from our operation in Jerusalem, Israel, wafer level optics and camera technology from our operation in Charlotte, North Carolina, image enhancement technology for digital auto focus and optical zoom from our operation in Tel Aviv, Israel, and microelectronics packaging and system integration from our operation in San Jose, California, may result in products or technologies that are not adopted by the market. The market may adopt competitive solutions to our products or technologies. Consequently, we might not be successful in integrating any acquired businesses, products or technologies, and might not achieve anticipated revenues and cost benefits.

There are numerous risks with our recent acquisitions of Eyesquad GmbH, Digital Optics Corporation, and of certain assets from Shellcase, Ltd. and North Corporation

In February 2007, we completed our acquisitions of Eyesquad GmbH, a company based in Munich, Germany and certain assets from North Corporation, a company based in Yokohama, Japan. In July 2006, we completed our acquisition of Digital Optics Corporation, a company based in Charlotte, North Carolina. In December 2005, we completed our acquisition of certain equipment, intellectual property and other intangible assets from Shellcase, Ltd., a company based in Israel. These acquisitions are subject to a number of risks, including the following:

• These acquisitions could fail to produce anticipated benefits, or could have other adverse effects that we currently do not foresee. As a result, either acquisition could result in a reduction of net income per share as compared to the net income per share we would have achieved if these acquisitions had not occurred.

• Following completion of these acquisitions, we may uncover additional liabilities or unforeseen expenses not discovered during our diligence process. Any such additional liabilities or expenses could result in significant unanticipated costs not originally estimated, such as impairment charges of acquired assets and goodwill, and may harm our financial results.

• The integration of Eyesquad GmbH, Digital Optics Corporation and of the Shellcase, Ltd. and the North Corporation assets and personnel will be a time consuming and expensive process that may disrupt our operations if it is not completed in a timely and efficient manner. If our integration efforts are not successful, our results of operations could be harmed, employee morale could decline, key employees could leave, and customer relations could be damaged. In addition, we may not achieve anticipated synergies or other benefits from either acquisition.

• We have incurred substantial direct transaction costs as a result of these acquisitions and anticipate incurring substantial additional costs to support the integration of Eyesquad GmbH, Digital Optics Corporation and the assets of Shellcase, Ltd. and North Corporation. The total cost of the integration may exceed our expectations.

The way we integrate acquired company technology into our products may not be accepted by consumers.

We have devoted, and expect to continue to devote, considerable time and resources to acquiring and integrating new technologies, such as the technologies acquired from Eyesquad GmbH, Digital Optics Corporation, Shellcase, Ltd. and North Corporation, into our products. However, if consumers do not accept the way we have integrated this technology, they may adopt competing solutions. In addition, as we introduce new products, we cannot predict with certainty if and when our customers will transition to those new products. If consumers fail to accept new or upgraded products incorporating our technologies, our financial results could be adversely impacted.

The market for semiconductors and related products is highly concentrated, and we have limited opportunities to sell our products.

The semiconductor industry is highly concentrated in that a small number of semiconductor designers and manufacturers account for a substantial portion of the purchases of semiconductor products generally, including our products and products incorporating technologies that we may acquire. Consolidation in the semiconductor industry may increase this concentration. Accordingly, we expect that sales of our products, including sales of products and technologies that we acquire, will be concentrated with a limited number of customers for the foreseeable future. As we acquire new technologies and integrate them into our product line, we will need to establish new relationships to sell these products. Our financial results depend in significant part on our success in establishing and maintaining relationships with, and effecting substantial sales to, these customers. Even if we are successful in establishing and maintaining such relationships, our financial results will be dependent in large part on these customers’ sales and business results.

If we lose any of our key personnel or are unable to attract, train and retain qualified personnel, we may not be able to execute our business strategy effectively.

Our success depends, in large part, on the continued contributions of our key management, engineering, sales and marketing, legal and finance personnel, many of whom are highly skilled and would be difficult to replace. In particular, the services of Dr. McWilliams, our President, Chief Executive Officer and the Chairman of our Board of Directors, who has led our company since May 1999 and has been the Chairman of our board of directors since February 2002, are very important to our business. None of our senior management, key technical personnel or key sales personnel are bound by written employment contracts to remain with us for a specified period. In addition, we do not currently maintain key person life insurance covering our key personnel. The loss of any of our senior management or other key personnel could harm our ability to implement our business strategy and respond to the rapidly changing market conditions in which we operate.

Moreover, some of the individuals on our management team have been in their current positions for a relatively short period of time. For example, our chief operating officer has been in this current position for less than 12 months. Our future success will depend to a significant extent on the ability of our management team to work together effectively.

29 of 33

In addition, the initial stock options that were granted to many of our senior management and key employees are fully vested. Therefore, these employees may not have sufficient financial incentive to stay with us, we may have to incur costs to replace key employees that leave, and our ability to execute our business model could be impaired if we cannot replace departing employees in a timely manner.

Many of our senior management personnel and other key employees have become, or will soon become, substantially vested in their initial stock options grants. While we often grant additional stock options to management personnel and other key employees after their hire dates to provide additional incentives to remain employed by us, their initial grants are usually much larger than follow-on grants. Employees may be more likely to leave us after their initial option grant fully vests, especially if the shares underlying the options have significantly appreciated in value relative to the option exercise price. If any members of our senior management team leave the company, our ability to successfully operate our business could be impaired. We also may have to incur significant costs in identifying, hiring, training and retaining replacements for departing employees.

Our success also depends on our ability to attract, train and retain highly skilled managerial, engineering, sales, marketing, legal and finance personnel and on the abilities of new personnel to function effectively, both individually and as a group. Competition for qualified senior employees can be intense. For example, we have experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled engineers with appropriate qualifications to support our growth and expansion. Further, we must train our new personnel, especially our technical support personnel, to respond to and support our licensees and customers. If we fail to do this, it could lead to dissatisfaction among our licensees or customers, which could slow our growth or result in a loss of business.

Decreased effectiveness of share-based compensation could adversely affect our ability to attract and retain employees.

We have historically used stock options and other forms of stock-based compensation as key components of our employee compensation program in order to align employees’ interests with the interests of our stockholders, encourage employee retention and provide competitive compensation and benefit packages. In accordance with SFAS 123(R), “Share-Based Payment,” we began recording charges to earnings for stock-based payments on January 1, 2006. As a result, we have incurred increased compensation costs associated with our stock-based compensation programs. Moreover, difficulties relating to obtaining stockholder approval of equity compensation plans could make it harder or more expensive for us to grant stock- based payments to employees in the future. As a result, we may find it difficult to attract, retain and motivate employees, and any such difficulty could materially adversely affect our business.

Failure to comply with environmental regulations could harm our business.

We use hazardous substances in the manufacturing and testing of prototype products and in the development of our technologies in our research and development laboratories. We are subject to a variety of local, state, federal and foreign governmental regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances. Our past, present or future failure to comply with environmental regulations could result in the imposition of substantial fines on us, suspension of production, and alteration of our manufacturing processes or cessation of operations. Compliance with such regulations could require us to acquire expensive remediation equipment or to incur other substantial expenses. Any failure by us to control the use, disposal, removal or storage of, or to adequately restrict the discharge of, or assist in the cleanup of, hazardous or toxic substances, could subject us to significant liabilities, including joint and several liability under certain statues. The imposition of such liabilities could significantly harm our business.

Our corporate headquarters are located in California and, as a result, we are subject to earthquakes and other disasters.

Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel, which are primarily located in or near our principal headquarters in San Jose, California. San Jose exists on or near a known earthquake fault zone. Should an earthquake or other catastrophes, such as fires, floods, power loss, communication failure or similar events disable our facilities, we do not have readily available alternative facilities from which we could conduct our business.

We have business operations located in North Carolina that are subject to natural disasters.

Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel, some of which are located in Charlotte, North Carolina. Should a hurricane or other catastrophes, such a fire, flood, power loss, communication failure or similar event disable our facilities, we do not have readily available alternative facilities from which we could conduct our business.

We have research and development facilities in Yokohama, Japan and in Jerusalem and Tel Aviv, Israel that subject us to risks that may negatively affect our results of operations and financial condition.

Our research and development facilities in Yokohama, Japan and in Jerusalem and TelAviv, Israel may be subject to risks that may limit our ability to design, develop, test or market certain technologies, which could in turn have an adverse effect on our results of operations and financial condition, including:

• security concerns, including crime, political instability, terrorist activity, armed conflict and civil or military unrest;

• local business and cultural factors that differ from our normal standards and practices in the United States;

• regulatory requirements and prohibitions that differ between jurisdictions;

• differing employment practices and labor issues

• limited infrastructure and disruptions, such as large-scale outages or interruptions of service from utilities or telecommunications providers; and

• natural disasters.

We recently conducted our yearly evaluation of our internal controls systems in order to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act of 2002, but we cannot ensure that these practices will satisfy future audits.

We have performed the system and process evaluation and testing required for compliance with the management certification and attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. While we have implemented the requirements relating to internal controls and all other aspects of Section 404 in a timely fashion, we cannot be certain as to the timing of completion of our future evaluations or as to the results of the evaluations. Additionally, there are no assurances that we will be able to continue to comply with the requirements relating to internal controls and all other aspects of Section 404 in a timely fashion in any given period.

30 of 33

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ Stock Market rules, have created uncertainty for companies. These laws, regulations and standards are often subject to varying interpretations. As a result, their application in practice may evolve as new guidance is provided by regulatory and governing bodies, which could result in higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result of our efforts to comply with evolving laws, regulations and standards, we have increased and will likely continue to increase general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. While we believe that we currently have adequate internal control procedures in place, we are still exposed to potential risks from recent legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002. Our efforts to comply with Section 404 and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors’ audit of that assessment has required the commitment of significant financial and managerial resources. We expect these efforts to require the continued commitment of significant resources. Further, our Board members, Chief Executive Officer and Chief Financial Officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which could harm our business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) The following table contains information regarding the Company’s purchase of its common stock during the current quarter.

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans	Dollar Value of Shares that May Yet Be Purchased Under the Plans
August 27, 2007–September 30, 2007	15,000	$	36.21	15,000	$	99,456,913
Total	15,000	$	36.21	15,000	$	99,456,913

The Company announced on August 24, 2007 a plan authorized by the Board of Directors to purchase up to $100 million of its common stock in open market or through private transactions. All purchases during the current quarter were made under this plan. No expiration date has been specified for this plan.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

Exhibit Number	Exhibit Title
2.1	Share Purchase Agreement, dated as of January 30, 2007, among Tessera Technologies Hungary Holding LLC, Eyesquad GmbH, each of the shareholders of Eyesquad GmbH and Sharon A. Amir (filed as Exhibit 2.1 to registrant’s Current Report on Form 8-K, filed on January 31, 2007, and incorporated herein by reference)
3.1	Restated Certificate of Incorporation (filed as an exhibit to registrant’s Registration Statement on Form S-1 (SEC File No. 333-108518), effective November 12, 2003, and incorporated herein by reference)
3.2	Amended and Restated Bylaws (filed as Exhibit 3.1 to registrant’s Current Report on Form 8-K, filed on March 21, 2007, and incorporated herein by reference)
10.1	Tessera Technologies, Inc. 2007 Performance Bonus Plan for Executive Officers and Key Employees (filed as Appendix A to registrant’s Definitive Proxy Statement, filed on April 5, 2007 and incorporated herein by reference)
31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
32.1	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

31 of 33

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, 2007

Tessera Technologies, Inc.
By:	/s/ Charles A. Webster
	Charles A. Webster
	Executive Vice President and Chief Financial Officer

32 of 33

EXHIBIT INDEX

Exhibit	Exhibit Title
2.1	Share Purchase Agreement, dated as of January 30, 2007, among Tessera Technologies Hungary Holding LLC, Eyesquad GmbH, each of the shareholders of Eyesquad GmbH and Sharon A. Amir (filed as Exhibit 2.1 to registrant’s Current Report on Form 8-K, filed on January 31, 2007, and incorporated herein by reference)
3.1	Restated Certificate of Incorporation (filed as an exhibit to registrant’s Registration Statement on Form S-1 (SEC File No. 333-108518), effective November 12, 2003, and incorporated herein by reference)
3.2	Amended and Restated Bylaws (filed as Exhibit 3.1 to registrant’s Current Report on Form 8-K, filed on March 21, 2007, and incorporated herein by reference)
10.1	Tessera Technologies, Inc. 2007 Performance Bonus Plan for Executive Officers and Key Employees (filed as Appendix A to registrant’s Definitive Proxy Statement, filed on April 5, 2007 and incorporated herein by reference)
31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
32.1	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

33 of 33