Tessera 10Q 2008 Q1 Quarterly report

Tessera (TSRA) Inactive 10-Q2008 Q1 Quarterly report

Content analysis

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 March 30, 2008

¨	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, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

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 April 27, 2008, 48,357,033 shares of the registrant’s common stock were outstanding.

TESSERA TECHNOLOGIES, INC.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTER ENDED MARCH 31, 2008

TABLE OF CONTENTS


		Page
	PART I
Item 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets – March 31, 2008 and December 31, 2007	3
	Condensed Consolidated Statements of Operations – Three Months Ended March 31, 2008 and 2007	4
	Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2008 and 2007	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risks	25
Item 4.	Controls and Procedures	26
	PART II
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Submission of Matters to a Vote of Security Holders	37
Item 5.	Other Information	37
Item 6.	Exhibits	38
Signatures		39
Exhibit Index		40

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PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements (unaudited)

TESSERA TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for par value)

(unaudited)


	March 31, 2008			December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	126,827		$	207,158
Short-term investments		92,692			82,566
Accounts receivable, net of allowance for doubtful accounts of $60 and $60		23,554			13,464
Inventories		1,797			1,817
Deferred tax assets		5,681			5,291
Other current assets		4,196			3,544

Total current assets		254,747			313,840
Property and equipment, net		29,693			29,443
Intangible assets, net		74,539			51,336
Goodwill		42,980			35,489
Deferred tax assets		14,844			12,937
Long-term investments		36,674			—
Other assets		1,221			1,391

Total assets	$	454,698		$	444,436

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,877		$	2,301
Accrued legal fees		7,344			4,789
Accrued liabilities		7,655			9,532
Deferred revenue		502			469
Income tax payable		7,378			1,274

Total current liabilities		25,756			18,365
Deferred tax liabilities		10,934			7,747
Other long-term liabilities		1,178			—
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock: $0.001 par value; 10,000 shares authorized and no shares issued and outstanding		—			—
Common stock: $0.001 par value; 150,000 shares authorized; 48,983 and 48,570 shares issued, respectively, and 48,338 and 48,555 shares outstanding, respectively		48			48
Additional paid-in capital		320,709			313,387
Treasury stock at cost: 645 and 15 shares of common stock, respectively		(10,505	)		(544	)
Accumulated other comprehensive loss		(1,575	)		(494	)
Retained earnings		108,153			105,927

Total stockholders’ equity		416,830			418,324

Total liabilities and stockholders’ equity	$	454,698		$	444,436

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

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TESSERA TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended March 31,
	2008		2007
Revenues:
Royalty and license fees	$	50,240	$	37,456
Product and service revenues		9,111		9,363

Total revenues		59,351		46,819

Operating expenses:
Cost of revenues		4,332		4,702
Research, development and other related costs		14,153		8,353
Selling, general and administrative		35,517		16,154

Total operating expenses		54,002		29,209

Operating income		5,349		17,610
Interest and other income, net		2,834		2,758

Income before taxes		8,183		20,368
Provision for income taxes		5,957		9,274

Net income	$	2,226	$	11,094

Basic and diluted net income per share:
Net income per share—basic	$	0.05	$	0.24

Net income per share—diluted	$	0.05	$	0.23

Weighted average number of shares used in per share calculations—basic		48,157		47,001

Weighted average number of shares used in per share calculations—diluted		48,693		48,749

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

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TESSERA TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Three Months Ended March 31,
	2008			2007
Cash flows from operating activities:
Net income	$	2,226		$	11,094
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation and amortization of property and equipment		1,922			1,557
Amortization of intangible assets		2,347			1,301
In-process research and development		2,500			—
Loss on property and equipment		11			2
Stock-based compensation		4,493			3,681
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net		(8,129	)		(7,401	)
Inventories		20			(295	)
Deferred income tax, net		—			(20	)
Other assets		(263	)		11,313
Accounts payable		314			(322	)
Accrued legal fees		2,555			827
Accrued liabilities		(3,132	)		(2,133	)
Deferred revenue		33			(26	)
Income tax payable		4,635			7,871

Net cash provided by operating activities		9,532			27,449

Cash flows from investing activities:
Purchases of property and equipment		(1,720	)		(2,036	)
Proceeds from sale of fixed assets		—			1
Purchases of short-term and long-term investments		(112,493	)		—
Proceeds from maturities and sales of short-term and long-term investments		63,545			—
Acquisitions, net of cash acquired		(32,064	)		(19,539	)

Net cash used in investing activities		(82,732	)		(21,574	)

Cash flows from financing activities:
Proceeds from exercise of stock options		1,519			3,196
Proceeds from employee stock purchase program		1,311			1,112
Repurchases of common stock		(9,961	)		—

Net cash provided by (used in) financing activities		(7,131	)		4,308

Net increase (decrease) in cash and cash equivalents		(80,331	)		10,183
Cash and cash equivalents at beginning of period		207,158			194,076

Cash and cash equivalents at end of period	$	126,827		$	204,259

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

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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 condensed 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 March 31, 2008 and 2007, and for the three 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, 2007 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, 2007, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

The results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2008 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, March 30, 2008 and the prior year comparative three-month period ended on Sunday, April 1, 2007. 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 months ended March 31, 2008, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

Reclassification

Certain prior year amounts have been reclassified to conform to current year presentation in the Consolidated Statements of Operations. These reclassifications did not impact any prior amounts of reported related to consolidated financial position, results of operations or cash flows.

Financial Instruments

Effective January 1, 2008, the Company adopted SFAS No. 157 (“SFAS No. 157”), “Fair Value Measurements,” which defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS No. 157, among other things, requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company carries available-for-sale securities at fair value in accordance with SFAS No. 157. See Note 13— “Fair Value” for disclosures related to fair value measurement.

Investments with original maturities at the date of purchase greater than three months and remaining maturities less than 12 months from the balance sheet date are classified as short-term investments. Investments with original maturities at the date of purchase greater than 12 months are classified as long-term investments. Investments consist primarily of corporate commercial paper, government agency notes, auction rate municipal bonds (“ARS”) and asset-backed securities, including mortgage-backed securities (collectively “ABS”).

At March 31, 2008 and December 31, 2007, the Company had $37.7 million and $45.4 million, respectively, of ARS and ABS recorded at fair value. Previously, ARS and ABS investments were presented as current assets under short-term investments. Given the lack of active markets for those investments, the entire amount of the Company’s ARS and ABS holdings, net of those redeemed after the quarter ended March 31, 2008, have been reclassified from short-term investments to long-term investments. Due to the lack of observable market quotes on the Company’s ARS and ABS investments, the Company utilizes valuation models that rely exclusively on Level 3 inputs including those that are based on a discounted cash flow model and assessments of counterparty credit quality, default risk underlying the security, discount rates and overall capital market liquidity. The valuation of the Company’s investments is subject to uncertainties that are difficult to predict. As of March 31, 2008, the investments held by the Company are of investment grade. The unrealized losses of $1.6 million, net of tax, related to these investments were due primarily to changes in interest rates and market and credit conditions of the underlying securities. Because the Company has the ability and intent to hold these investments to allow for recovery, and continues to receive interest at the maximum contractual rate, these investments are not considered to be other-than-temporarily impaired as of March 31, 2008.

The Company’s cash equivalents, short-term and long-term investments are classified as available-for-sale and are reported at fair value at the valuation date. Unrealized gains and losses on securities, net of tax, are recorded in accumulated other comprehensive loss and reported as a separate component of stockholders’ equity. The cost of securities sold is based on the specific identification method. Interest, dividends and realized gains or losses on securities are included in interest and other income, net.

Revenue recognition

The Company accounts for its revenues under the provisions of Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition in Financial Statements,” Financial Accounting Standard Board’s Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” and AICPA Statement of Position 97-2, “Software Revenue Recognition” and any applicable amendments or modifications. The Company recognizes revenues when there is persuasive evidence of an arrangement, delivery has occurred, the fee is fixed or determinable, and collectibility of the resulting receivable is reasonably assured.

Royalty and license fees

Royalty and license fees revenues include revenues from license fees, royalty payments and royalty payments resulting from license compliance audits. Licensees typically pay a non-refundable license fee and revenues from license fees are generally recognized at the time the license agreement is executed by both parties. In some instances, the Company provides training to its licensees under the terms of the license agreement. The amount of training provided is limited and is incidental to the

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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 such training has been provided. The amount of revenues deferred is the estimated fair value of the services, which is based on the price the Company charges for similar services when they are sold separately. These revenues are reported as service revenues. Semiconductor manufacturers and assemblers pay on-going royalties on their production or shipment of semiconductors incorporating the Company’s intellectual property. Royalties under the Company’s royalty-based technology licenses are generally based upon either unit volumes of semiconductors shipped using the Company’s technology or a percent of the net sales price. Licensees generally report shipment information 30 to 60 days after the end of the quarter in which such activity takes place. As there is no reliable basis on which the Company can estimate its royalty revenues prior to obtaining these reports from the licensees, the Company recognizes royalty revenues on a one-quarter lag. The Company also completes compliance audits of licensees to independently verify the accuracy of the information contained in the licensees’ royalty reports.

While the majority of our revenue transactions contain standard business terms and conditions, there are certain transactions that contain non-standard business terms and conditions. In addition, we may enter into certain sales transactions that involve multiple element arrangements (arrangements with more than one deliverable). We also enter into arrangements to purchase goods and/or services from certain customers. As a result, significant contract interpretation is sometimes required to determine the appropriate accounting for these transactions including: (1) whether an arrangement exists; (2) how the arrangement consideration should be allocated among potential multiple elements; (3) when to recognize revenue on the deliverables; (4) whether all elements of the arrangement have been delivered; and (5) whether we receive a separately identifiable benefit from purchase arrangements with our customers for which we can reasonably estimate fair value.

Past production payments

Past production payment revenues are license and royalty settlement payments from new license agreements. Such negotiations and resolutions arise when it comes to the Company’s attention that a third party is infringing on patents or a current licensee is not paying royalties to which the Company is entitled. Past production payment revenues typically represent the portion of royalty payments received through such license negotiations and resolution of patent disputes that relates to previous periods and are based on historical production volumes.

These revenues are recognized upon execution of the agreement by both parties, provided that the amounts are fixed or determinable, there are no significant Company obligations and collectibility is reasonably assured. The Company does not recognize any revenues prior to execution of the agreement as there is no reliable basis on which the Company can estimate the amounts for royalties related to previous periods or assess collectibility.

Product and service revenues

Product and service revenues include sales of 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. The Company recognizes 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. Shipping terms are freight-on-board shipping point. Service revenue principally consists of engineering, assembly and infrastructure services, provided primarily to government agencies, which the Company believes accelerate the incorporation of the Company’s intellectual property into customers’ products and aid in the Company’s 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.

For certain service arrangements, the Company utilizes the completed-contract and the percentage-of-completion methods of accounting for commercial and government contracts, dependent upon the type of the contract. The completed-contract method of accounting is used for fixed-fee contracts with relatively short delivery times. Revenues from fixed-fee and fixed-priced contracts are recognized upon acceptance of deliverables by the customer or in accordance to the contract specifications, assuming title and risk of loss has transferred to the customer, prices are fixed and determinable, no significant Company obligations remain, and collection of the related receivable is reasonably assured. If the 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, including estimated earned fees, under cost reimbursement-type contracts are recognized as costs are incurred, assuming that the fee is fixed or determinable and collection is reasonably assured.

Claims made for amounts in excess of the agreed contract price are recognized only if it is probable that the claim will result in additional revenue and the amount of additional revenue can be reliably estimated.

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 details.

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 operations. See Note 10 — “Income Taxes” for additional details.

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. On February 12, 2008, the FASB issued FSP FAS 157-2 which delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). This FSP partially defers the effective date of Statement 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. The Company adopted SFAS No. 157 for fiscal 2008, except as it applies to those non-financial assets and non-financial liabilities as described in FSP FAS No. 157-2. See Note 13 for information and related disclosures regarding The Company’s fair value measurements.

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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 adopted SFAS No. 159 for fiscal 2008. However the Company did not elect to apply the fair value option to any financial instruments or other items upon adoption of SFAS No. 159 or during the three months ended March 31, 2008.

In December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS No. 141R”), “Business Combinations.” The objective of SFAS No. 141 is to improve the relevance, representational faithfulness, and comparability of the information that a company provides in its financial reports about a business combination and its effects. Under SFAS No. 141R, a company is required to recognize the assets acquired, liabilities assumed, contractual contingencies, contingent consideration measured at their fair value at the acquisition date. It further required that research and development assets acquired in a business combination that have no alternative future use to be measured at their acquisition-date fair value and then immediately charged to expense, and that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred. Among other changes, this statement also required that “negative goodwill” be recognized in earnings as a gain attributable to the acquisition, and any deferred tax benefits resulted in a business combination are recognized in income from continuing operations in the period of the combination. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We will assess the impact that SFAS No. 141R may have on our consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued Statement No. 160 (“SFAS No. 160”), “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.” The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a company provides in its consolidated financial statements. SFAS No. 160 requires company to clearly identify and present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section but separate from the company’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of operations; changes in ownership interest be accounted for similarly, as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We will assess the impact that SFAS No. 160 may have on our consolidated financial position, results of operations or cash flows.

NOTE 4 – COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

Inventories consisted of the following (in thousands):


	March 31, 2008		December 31, 2007
Raw materials	$	323	$	454
Work in process		836		412
Finished goods		638		951

	$	1,797	$	1,817

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


	March 31, 2008			December 31, 2007
Furniture and equipment	$	32,682		$	30,941
Land and buildings		15,606			15,151
Leasehold improvements		3,253			3,343

		51,541			49,435
Less: Accumulated depreciation and amortization		(21,848	)		(19,992	)

	$	29,693		$	29,443

Accrued liabilities consisted of the following (in thousands):


	March 31, 2008		December 31, 2007
Employee compensation and benefits	$	6,118	$	7,538
Other		1,537		1,994

	$	7,655	$	9,532

Accumulated other comprehensive loss consisted of the following (in thousands):

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NOTE 5 – BUSINESS COMBINATIONS

FotoNation, Inc.

In February 2008, Tessera completed its acquisition of FotoNation, Inc. (“FotoNation”), a Delaware corporation and a leading provider of embedded imaging solutions for digital still camera and mobile phone applications. As a result of the acquisition, FotoNation became a wholly owned subsidiary of the Company. The Company accounted for the acquisition using the purchase method of accounting, with the results of the acquired entity included in the Intellectual Property segment as of the acquisition date. The acquisition of FotoNation enables the Company to expand its imaging and optical technologies, complementing its acquisition of Shellcase Ltd. in 2005, Digital Optics in 2006 and Eyesquad in 2007. These factors contributed to a purchase price in excess of the fair value of the underlying net tangible liabilities and intangible assets acquired from FotoNation and, as a result, the Company has recorded goodwill in connection with this transaction.

The purchase consideration of $34.9 million included a cash payment of $34.0 million for all outstanding shares of capital stock and vested stock options, and transaction costs of $0.9 million, with up to $10.0 million of additional consideration, contingent upon achievement of certain milestones over one year from the date of acquisition. The purchase price includes $2.9 million of cash acquired. Of the purchase consideration, $10.3 million is held in escrow and is subject to forfeiture to satisfy the indemnification obligations, if any, of the former stockholders of FotoNation. The escrow will expire two years following the February 2008 closing date.

Preliminary purchase price allocation

In accordance with SFAS No. 141, “Business Combinations,” the preliminary purchase price of the acquisition is approximately $34.9 million, which has been determined as follows (in thousands):


Cash	$	34,000
Transaction costs		900

Total preliminary purchase price	$	34,900

Under the purchase method of accounting, 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. The preliminary allocation of the purchase price was based upon a preliminary valuation and estimates and assumptions used are subject to change. Based upon the fair values acquired, the purchase price allocation is as follows (in thousands):


	Amount			Estimated Useful Life
				(Years)
Net tangible liabilities:
Current assets	$	4,918		N/A
Property and equipment, net		465		39
Other assets		147		N/A
Current liabilities		(1,323	)	N/A
Income tax payable and other tax liabilities		(2,841	)	N/A
Deferred tax liabilities, net		(1,957	)	N/A

		(591	)
Identified intangible assets:
Existing technology		12,000		6-8
Patents/core technology		4,600		7
Customer contracts and related relationships		8,600		9
Trade name/trademark		300		4
In-process research and development		2,500		N/A
Goodwill		7,491		N/A

		35,491

Total preliminary purchase price	$	34,900

Approximately $0.6 million has been allocated to acquired net tangible liabilities consisting of income tax payable, accounts receivable, property and equipment and various assumed assets and liabilities. Approximately $25.5 million has been allocated to amortizable intangible assets acquired. A net deferred tax liability of $2.0 million was included in the allocation of the purchase price which primarily arises from the difference between the fair value of intangible assets and the foreign subsidiary’s tax basis on these assets.

In-process research and development of $2.5 million was expensed upon acquisition as it represents incomplete FotoNation research and development projects that had not reached technological feasibility and had no alternative future use as of the date of the acquisition.

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 operated in Israel. 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 and Digital Optics in 2006. The Company accounted for this transaction as an asset acquisition in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” and Emerging Issue Task Force (“EITF”) 98-3, “Determining Whether a Non Monetary Transaction Involves Receipt of a Productive Asset or a Business.”

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 $2.5 million of cash acquired. 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. 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.

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.

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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 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 method of accounting. 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 $11.3 million in goodwill.

North Corporation

In February 2007, the Company purchased remaining interests in all patent assets and applications, trademark assets and certain license agreements along with certain tangible assets from North Corporation (“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 and the change to the carrying value is reflected below (in thousands):


	Intellectual Property		Product & Service		Total
December 31, 2007	$	24,196	$	11,293	$	35,489
Goodwill acquired through the FotoNation, Inc. acquisition		7,491		—		7,491

March 31, 2008	$	31,687	$	11,293	$	42,980

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


	Average Life (Years)	March 31, 2008							December 31, 2007
	Average Life (Years)	Gross Assets		Accumulated Amortization			Net		Gross Assets		Accumulated Amortization			Net
Acquired patents	7-15	$	19,236	$	(2,603	)	$	16,633	$	14,586	$	(2,184	)	$	12,402
Existing technology	5-10		51,161		(6,734	)		44,427		39,161		(5,331	)		33,830
Trade name	4-10		3,620		(576	)		3,044		3,320		(483	)		2,837
Customer contracts	4-9		10,500		(911	)		9,589		1,900		(673	)		1,227
Non-competition agreements	2		1,400		(771	)		629		1,400		(596	)		804
Assembled workforce	4		300		(83	)		217		300		(64	)		236

		$	86,217	$	(11,678	)	$	74,539	$	60,667	$	(9,331	)	$	51,336

Amortization expense for the three months ended March 31, 2008 and 2007 amounted to $2.3 million and $1.3 million, respectively.

As of March 31, 2008, the estimated future amortization expense of purchased identified intangible assets is as follows (in thousands):


2008 (remaining 9 months)	$	8,415
2009		10,624
2010		10,322
2011		9,973
2012		9,496
Thereafter		25,709

	$	74,539

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NOTE 7 – NET INCOME PER SHARE

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


	Three Months Ended March 31,
	2008			2007
Numerator:
Net income	$	2,226		$	11,094
Denominator:
Weighted average common shares outstanding		48,559			47,432
Less: Unvested common shares subject to repurchase		(402	)		(431	)

Total shares—basic		48,157			47,001
Effect of dilutive securities
Stock awards and warrants		468			1,317
Restricted stock		68			431

Total shares—diluted		48,693			48,749
Net income per common share—basic	$	0.05		$	0.24
Net income per common share—diluted	$	0.05		$	0.23

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 treasury stock method to calculate the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential dilutive common shares include unvested restricted shares and the incremental common shares issuable upon the exercise of stock options and warrants, less shares from assumed proceeds. The assumed proceeds calculation includes actual proceeds to be received from the employee upon exercise, the average unrecognized compensation cost during the period and any tax benefits that will be credited upon exercise to additional paid in capital.

For the three months ended March 31, 2008 and 2007, options to purchase approximately 2.5 million and 0.9 million shares of common stock, respectively, 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. During the three months ended March 31, 2008, the Company repurchased 630,000 shares of common stock at an average price of $15.78 and a total cost of $10.0 million under the plan. As of March 31, 2008, the Company has repurchased a total of 645,000 shares of common stock at a total cost of $10.5 million under this plan. The shares repurchased are recorded as treasury stock and are accounted for under the cost method. No expiration date has been specified for this plan. As of March 31, 2008, the total amount available for repurchase was $89.5 million. The Company plans to continue to execute authorized repurchases from time to time under the plan.

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 March 31, 2008, 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. Restricted stock, performance awards, dividend equivalents, deferred stock, stock payments and stock appreciation rights may also be granted under the Plan either alone, in addition to, or in tandem with any options granted thereunder. Restricted stock awards and restricted stock units are full-value awards that reduce the number of shares reserved for grant under this plan by one and one-half shares for each share granted. As of March 31, 2008, there were 563,000 shares reserved for grant under this plan.

A summary of the activity is presented below (in thousands, except per share amounts):


	Shares Outstanding
	Number of Shares		Weighted Average Exercise Price Per Share
Balance at December 31, 2007	3,794		$	28.31
Options granted	410			23.98
Options exercised	(169	)		9.04
Options forfeited / expired	(28	)		34.99

Balance at March 31, 2008	4,007		$	28.63

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Information with respect to outstanding restricted stock awards and units as of March 31, 2008 was as follows (in thousands, except per share amounts):


	Restricted Stock
	Number of Shares		Weighted Average Grant Date Fair Value Per Share
Unnvested at December 31, 2007	434		$	35.41
Awards and units granted	317			38.37
Awards and units vested	(60	)		36.26
Awards and units cancelled / forfeited	(1	)		30.48

Unnvested at March 31, 2008	690		$	36.74

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 March 31, 2008 and 2007, there were 703,000 and 538,000 shares, respectively, reserved for grant under the ESPP.

NOTE 9 – STOCK-BASED COMPENSATION

The effect of recording stock-based compensation for the three months ended March 31, 2008 and 2007 is as follows (in thousands):


	Three Months Ended March 31,
	2008		2007
Cost of revenues	$	105	$	550
Research, development & other related costs		1,411		508
Selling, general & administrative		2,977		2,623

Total stock-based compensation	$	4,493	$	3,681

The stock-based compensation expenses categorized by various equity components for the three months ended March 31, 2008 and 2007 is summarized in the table below (in thousands):


	Three Months Ended March 31,
	2008		2007
Employee stock options	$	2,435	$	2,618
Restricted stock awards and units		1,654		788
Employee stock purchase plan		404		275

Total stock-based compensation	$	4,493	$	3,681

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The Company uses the Black-Scholes option pricing model to determine the estimated fair value of stock-based awards. The Company determines the assumptions regarding its expected life, volatility and risk-free interest rate. The volatility assumption is based on the Company’s historical volatility. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model and the expense is recognized on a straight-line basis.

The following assumptions were used to value the options granted:


	Three Months Ended March 31,
	2008		2007
Expected life (in years)	4.0		4.0
Risk-free interest rate	2.6	%	4.8	%
Dividend yield	0.0	%	0.0	%
Expected volatility	59.9	%	37.9	%

NOTE 10 – INCOME TAXES

Income tax provision for the three months ended March 31, 2008 and 2007 was $5.9 million and $9.3 million, respectively, and was comprised of domestic income tax and foreign income and withholding tax. The Company’s income tax provision is based on our worldwide estimated annualized effective tax rate except for jurisdictions for which a loss is expected for the year and for which no benefit can be realized for those losses. Such jurisdictions’ tax is based on actual withholding taxes for the quarter. The decrease in the income tax provision for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007 is primarily attributable to the decrease in pre-tax income as partially off-set by the tax effects of the non-deductible in-process research and development expense related to the acquisition of FotoNation, an increase in non-deductible stock-based compensation expense relative to pre-tax income and an increase in withholding tax on foreign income.

As of March 31, 2008 and December 31, 2007, unrecognized tax benefits determined in accordance with Financial Accounting Standards Board Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes,” approximated $4.5 million and $3.2 million, respectively. Included in the unrecognized tax benefits increase of $1.3 million was $1.2 million related to the FotoNation business acquisition. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate is $2.6 million at March 31, 2008.

It is the Company’s 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 months ended March 31, 2008, interest and penalties related to unrecognized tax benefits were immaterial and are included in the unrecognized tax benefits. The Company does not expect any of its unrecognized tax benefits to expire within the next twelve months.

Our United States Federal and state tax returns are generally not open to examination by tax authorities for years before 2003. In the major foreign jurisdictions in which we operate, the Company is not subject to audit by the tax authorities for years prior to 2005. The Company is not currently under federal or state tax examination. We are currently under exam in Hungary for the 2005 – 2006 tax years of which the outcome is not yet known. Notwithstanding, the result is not expected to be material to our financial position, results of operations or cash flow.

NOTE 11 – COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases office and research facilities and office equipment under operating leases which expire at various dates through 2015. For lease agreements that contain escalating rent provisions, lease expense is recorded on a straight-line basis over the lease term. Rent expense for the three months ended March 31, 2008 and 2007 amounted to $0.3 million and $0.2 million, respectively.

As of March 31, 2008, future minimum lease payments are as follows (in thousands):


2008 (remaining 9 months)	$	1,874
2009		2,666
2010		2,339
2011		1,603
2012		1,478
Thereafter		4,004

	$	13,964

Litigation

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. (“ST NV”), STMicroelectronics, Inc. (“ST 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.

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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 ITC, 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.

On February 5, 2008, Tessera filed a motion for a declaratory ruling that Tessera complied with the Court’s November 1, 2007 order and may proceed with its proposed action before the ITC against each of the subcontractor defendants. Tessera argued that it has provided notice to the subcontractor defendants of its intention to file a complaint against them in the ITC, in accordance with Judge Wilken’s November 1, 2007 order, but that the subcontractor defendants had failed to take a position as to whether or not the products implicated are covered by their licenses. Tessera sought to confirm its ability to proceed with the filing of its ITC complaint against the subcontractor defendants. On February 19, 2008, Judge Wilken granted Tessera’s motion, permitting Tessera to proceed with the filing of its ITC complaint against the subcontractor defendants, as described below.

On December 20, 2007, defendants ST Inc. and ST NV filed a motion for preliminary injunction, arguing that Tessera should be enjoined from proceeding against products of ST Inc., or which are sold from ST Inc. to ST NV, in its pending ITC action against ST NV, based on the license agreement between Tessera and ST Inc. On January 28, 2008, Judge Wilken issued an order denying the ST defendants’ motion for preliminary injunction. On February 7, 2008, the ST defendants filed a renewed motion, seeking essentially the same relief. On February 21, 2008, Judge Wilken denied the ST defendants’ renewed motion.

On January 15, 2008, the Siliconware defendants filed a motion for a temporary restraining order and preliminary injunction, this time relating to Tessera’s pending action in the ITC action against various DRAM companies and related respondents, titledIn the Matter of Certain Semiconductor Chips with Minimized Chip Package Size and Products Containing Same (III),Investigation No. 337-TA-630 (the “‘630 ITC action”). On January 17, 2008, ChipMOS filed a similar motion. In their motions, Siliconware and ChipMOS argued that pursuant to their respective licenses, Tessera should be barred from proceeding in the ITC as against certain of their customers. Tessera filed oppositions to the motions, and on February 12, 2008, both the Siliconware and ChipMOS motions were denied by Judge Wilken.

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 consolidated financial position, results of operations or cash flows.

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 in connection with the full hearing of the case.

A seven day hearing of the case was held beginning March 31, 2008, and has now been completed. The arbitration panel ordered the parties to submit their closing briefs on May 23, 2008, and reply submissions on May 30, 2008. Closing arguments are scheduled to be held in San Francisco on June 10, 2008, and a decision is expected to be rendered by the arbitration panel thereafter. Tessera seeks a substantial monetary recovery in the action.

The Company cannot predict the outcome of this proceeding. An adverse decision in this proceeding could significantly harm the Company’s business and consolidated financial position, results of operations or cash flows.

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 consolidated financial position, results of operations or cash flows.

In re Certain Semiconductor Chips With Minimized Chip Package Size and Products Containing Same, ITC No. 337-TA-605

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 July 11, 2007, the assigned Administrative Law Judge ordered that the “target date” for completing the ITC investigation be August 21, 2008.

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opposed the proposed respondents’ request. On January 2, 2008, Judge Essex ruled that Tessera would be permitted to use information obtained during discovery to file a new ITC complaint against the proposed respondents. On January 30, 2008, ASE, Inc. and STATS ChipPAC, Ltd. again moved to intervene in the action, for the purpose of consolidating Tessera’s then yet-to-be filed ITC action against the proposed respondents with the current action, and extending the hearing date. Tessera has opposed this motion. The ITC has not yet ruled on the motion.

On September 19, 2007, the ITC issued an order setting key dates for the investigation, including for the ITC hearing which was 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 deadline for fact and expert discovery in the action has passed.

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 opposed the motion on June 21, 2007, but initially there was no ruling from the ITC. On February 22, 2008, the respondents filed a renewed motion to stay the ITC action pending completion of reexamination proceedings relating to the patents at issue, in view of actions by the PTO regarding the reexamination of these patents describe below in Reexamination Proceedings. An initial hearing of the matter was held on February 25, 2008, and Tessera further opposed the motion in writing on that date. On February 26, 2008, Judge Essex ruled that the action would be stayed in view of the pending reexamination proceedings relating to the patents at issue.

On March 4, 2008, Tessera filed a Request for Emergency Review with the ITC, seeking reversal of the order staying the case, and seeking reinstatement of the trial date. On March 27, 2008, the ITC issued an order reversing the stay, and requiring that the trial proceedings be reset for the earliest practicable date. On April 29, 2008, the ITC issued its confidential written opinion regarding reversal of the stay. Tessera is currently awaiting notice of the date for resuming trial.

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 titled In 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 consolidated financial position, results of operations or cash flows.

In the Matter of Certain Semiconductor Chips with Minimized Chip Package Size and Products Containing Same (III), ITC No. 337-TA-630

On December 7, 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 January 3, 2008. The respondents are A-Data Technology Co., Ltd., A-Data Technology (U.S.A.) Co., Ltd., Acer, Inc., Acer America Corp., Centon Electronics, Inc., Elpida Memory, Inc., Elpida Memory (USA) Inc., International Products Sourcing Group, Inc., Kingston Technology Co., Inc., Nanya Technology Corporation, Nanya Technology Corp., U.S.A., Peripheral Devices & Products Systems, Inc. d/b/a Patriot Memory, Powerchip Semiconductor Corp., Promos Technologies Inc., Ramaxel Technology Ltd., Smart Modular Technologies, Inc., TwinMOS Technologies, Inc., and TwinMOS Technologies USA Inc. The ITC will, among other things, investigate infringement of U.S. Patent Nos. 5,679,977, 6,133,627, 5,663,106, and 6,458,681, 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 parties with domestic inventories to desist from activities with respect to infringing products.

The action has been assigned to Administrative Law Judge Bullock. On January 14, 2008, Judge Bullock issued a protective order in the action, and ground rules setting case procedures. On January 23, 2008, Judge Bullock issued an order setting the target date for completion of the investigation at April 14, 2009. On February 27, 2008, Judge Bullock ordered the trial date to be set for September 22, 2008.

With the exception of the TwinMOS respondents, all of the respondents have answered Tessera’s complaint. On February 19, 2008, Tessera moved for an order to show cause why the TwinMOS respondents should not be found in default. Tessera is awaiting Judge Bullock’s decision regarding the motion.

Discovery in the action is underway. The Company cannot predict the outcome of this proceeding. An adverse decision in this proceeding could significantly harm the Company’s business and consolidated financial position, results of operations or cash flows.

Tessera, Inc. v. A-DATA Technology Co., Ltd., et al., Civil Action No. 2:07-cv-534 (E.D. Tex.)

On December 7, 2007, the Company filed a complaint against A-Data Technology Co., Ltd., A-Data Technology (U.S.A.) Co., Ltd., Acer, Inc., Acer America Corp., Centon Electronics, Inc., Elpida Memory, Inc., Elpida Memory (USA) Inc., International Products Sourcing Group, Inc., Kingston Technology Co., Inc., Nanya Technology Corporation, Nanya Technology Corp., U.S.A., Peripheral Devices & Products Systems, Inc. d/b/a Patriot Memory, Powerchip Semiconductor Corp., Promos Technologies Inc., Ramaxel Technology Ltd., Smart Modular Technologies, Inc., TwinMOS Technologies, Inc., and TwinMOS Technologies USA Inc. in the United States District Court for the Eastern District of Texas, alleging infringement of Tessera’s U.S. Patent Nos. 5,679,977, 6,133,627, 5,663,106 and 6,458,681, 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, but, with the exception of the TwinMOS defendants and Ramaxel, have filed motions to stay the case pursuant to 28 U.S.C. § 1659 pending final resolution of the ‘630 ITC action. Tessera has not opposed the motions to stay. Tessera has filed a motion seeking to find the TwinMOS defendants in default. On February 25, 2008, the district court granted the defendants’ motion to stay the action.

In the Matter of Certain Semiconductor Chips with Minimized Chip Package Size and Products Containing Same (IV)

On April 21, 2008, 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 proposed respondents include Siliconware Precision Industries Co., Ltd., STATS ChipPAC, Ltd., ASE Inc. and ChipMOS Technologies, Inc., as well as several of these companies’ affiliates.

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Tessera requests that the ITC investigate, among other things, infringement of U.S. Patent Nos. 5,679,977, 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 parties with domestic inventories to desist from activities with respect to infringing products. The ITC is expected to decide whether to initiate an investigation under the complaint within 30 days after the complaint’s filing.

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.

On February 15, 2008, the PTO issued a second official action maintaining the rejections of U.S. Patent No. 6,465,893. On February 19, 2008 the PTO issued a second official action maintaining the rejections in U.S. Patent No. 6,433,419. A first official action rejecting some claims and confirming other claims as patentable was mailed February 21, 2008 in the reexamination of U.S. Patent No. 5,852,326. A first official action was mailed February 22, 2008 in the reexamination of U.S. Patent No. 5,861,666 rejecting those claims which were subject to reexamination. Such official action was superseded by a substantively identical action mailed March 11, 2008 restarting the period for response. On February 12, 2008, the PTO issued decisions merging the three reexaminations of U.S. Patent No. 5,679,977 with one another and also merging the two reexaminations of U.S. Patent No. 6,133,627 with one another. A first official action was issued on February 29, 2008 in the merged reexaminations of U.S. Patent No. 6,133,627, rejecting those claims subject to reexamination. A first official action was issued on March 28, 2008 in the merged reexaminations of U.S. Patent No. 5,679,977, rejecting those claims subject to reexamination.

On March 10, 2008, Tessera filed a petition to vacate the second official action in the reexamination of U.S. Patent No. 6,433,419 on the ground that the second official action did not properly take account of an amendment to U.S. Patent No. 6,433,419 specification. On March 19, 2008, Tessera filed a substantive response to such second official action. On March 28, Tessera filed a petition to vacate the second official action in the reexamination of U.S. Patent No. 6,465,893 on the ground that the second official action did not properly take account of an amendment to U.S. Patent No. 6,465,893 specification. On April 15, Tessera filed a response to the second official action in the reexamination of U.S. Patent No. 6,465,893. A response to the official action in the reexamination of U.S. Patent No. 5,852,326 was filed on April 21, 2008. A response to the official action in the reexamination of U.S. Patent No. 6,133,627 was filed on April 29, 2008. The Company will have an opportunity to file substantive responses to the first official actions in the other reexaminations.

On March 26, 2008, a request for a thirdex partereexamination of U.S. Patent No. 6,133,627 patent was filed, ostensibly by PowerChip Semiconductor Corporation. On May 2, 2008, the PTO granted this request.

On April 2, 2008, a request forinter partes reexamination of Tessera’s U.S. Patent No. 6,458,681 was filed, ostensibly by Powerchip Semiconductor Corporation. The PTO has not yet acted on such request.

The patents that are subject to these reexamination proceedings include some of the key patents in Tessera’s portfolio, and claims that have been rejected in the current official actions are being asserted in certain of Tessera’s various litigations. 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. An adverse decision could also significantly affect Tessera’s ongoing litigations, as described above, in which patents are being asserted, which in turn could significantly harm the Company’s business and consolidated financial position, results of operations or cash flows.

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 consolidated financial position, results of operations or cash flows.

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TESSERA TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

NOTE 12 – SEGMENT AND GEOGRAPHIC INFORMATION

The Company has two reportable segments: Intellectual Property segment and Product and Service segment. In addition to these reportable segments, the Corporate Overhead division includes certain operating amounts that are not allocated to the reportable segments because these operating amounts are not considered in evaluating the operating performance of the Company’s business segments.

Our Intellectual Property segment is primarily composed of the Licensing Business and the Emerging Markets and Technologies Group. 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 consumer imaging and optics technologies for the consumer optics industry. Key functions of this division include licensing, intellectual property management and marketing. 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 is also focused on long-term growth opportunities through new partnerships, ventures and acquisitions of complementary technology.

Our Product and Service segment is composed primarily of our Product Division, where small form factor micro-optics are sold to the consumer optics industry from our wafer-based optics technology which utilizes semiconductor processes and equipment, and our Service Division, which performs key research and development and drives our production development services revenues. This segment involves solutions to address the challenges of electronic products miniaturization from a system perspective and wafer-level optics, through the use of consumer imaging and optics technologies, the dense interconnection of components, and extensive use of three-dimensional packaging technologies.

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 reportable segments using information about its revenue and operating income (loss) before interest and 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 reportable segments when evaluating the operating performance of the business.

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

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


	Three Months Ended March 31,
	2008			2007
Revenues:
Intellectual Property Segment	$	50,608		$	37,456
Product and Service Segment		8,743			9,363
Corporate Overhead		—			—

Total revenues		59,351			46,819

Operating expenses:
Intellectual Property Segment		36,290			13,316
Product and Service Segment		8,172			9,178
Corporate Overhead		9,540			6,715

Total operating expenses		54,002			29,209

Operating income (loss)
Intellectual Property Segment		14,318			24,140
Product and Service Segment		571			185
Corporate Overhead		(9,540	)		(6,715	)

Total operating income	$	5,349		$	17,610

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 March 31,
	2008				2007
United States	$	18,937	32	%	$	12,056	26	%
Asia Pacific		25,867	44			25,134	54
Europe and other		14,547	24			9,629	20

	$	59,351	100	%	$	46,819	100	%

Two customers accounted for 15% and 14% of revenues in the three months ended March 31, 2008. For the three months ended March 31, 2007, no customers accounted for 10% or more of total revenues.

During the three months ended March 31, 2008, there were no significant changes to net property and equipment by geographical area as disclosed in the Annual Report on Form 10-K for the year ended December 31, 2007.

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NOTE 13. FAIR VALUE

Effective January 1, 2008, the Company adopted SFAS No. 157 (“SFAS No. 157”), “Fair Value Measurements,” which defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS No. 157, among other things, requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company meaasures its available-for-sale securities at fair value in accordance with SFAS No. 157.

SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability, or an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1

Quoted prices in active markets for identical assets or liabilities.

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The following is a listing of our assets and liabilities required to be measured at fair value on a recurring basis and where they are classified within the hierarchy as of March 31, 2008 (in thousands):


	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Available-for-sale securities		$	241,226	$	72,861	$	130,694	$	37,671

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NOTE 14 – RELATED PARTY TRANSACTION

In September 2007, the Company licensed its OptiML Wafer-Level Camera technology and SHELLCASE Wafer-Level Chip Scale Packaging solutions to NemoTek. In December 2007, the Company made an investment in NemoTek S. A. (“NemoTek”), a supplier of camera solutions for the mobile phone market. The total investment by the Company in NemoTek is approximately $0.5 million and represents less than a 10 percent holding in NemoTek. Revenue from NemoTek represented approximately 2 percent of the total revenue in the year ended December 31, 2007. Revenue from Nemotek during the three months ended March 31, 2008 and amounts due from Nemotek as of March 31, 2008 were immaterial. The amount due from NemoTek as of December 31, 2007 was $1.5 million.

From November 2005 through April 2007, the Company engaged in consulting services with a company 100% owned by one of the Company’s employees. For the three months ended March 31, 2008 and 2007, the Company recognized approximately zero and $0.3 million, respectively, of consulting expenses.

NOTE 15 – SUBSEQUENT EVENT

In April 2008, Tessera entered into an agreement with Kronos Advanced Technologies, Inc. (“Kronos”), which included the acquisition of ownership of certain patents related to micro-cooling applications for $3.5 million. Tessera will record these patents as identified intangible assets and will amortize them over the estimated useful life of nine years.

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, 2007 found in our Annual Report on Form 10-K filed on February 29, 2008.

This Quarterly Report (including the following section regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations) contains forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Certain, but not all, of the forward-looking statements in this report are specifically identified. The identification of certain statements as “forward-looking” is not intended to mean that other statements not specifically identified are not forward-looking. Forward-looking statements include, but are not limited to, statements that relate to our future revenue, product development, demand, acceptance and market share, competitiveness, gross margins, levels of research and development (R&D), operating expenses, tax expenses, our management’s plans and objectives for our current and future operations, management’s plans for repurchasing Company stock pursuant to the authorization of our Board, the levels of customer spending or R&D activities, general economic conditions and the sufficiency of financial resources to support future operations, the outcome or effects of and expenses related to litigation and capital expenditures. Words such as “expects,” “anticipates,” “plans,” “believes,” “seeks,” “estimates,” “could,” “would,” “may,” “intends,” “targets” 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.

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, uncertainties, and changes in condition, significance, value and effect, including those discussed below under the heading “Risk Factors” within Item 1A of this report and other documents we file from time to time with the Securities and Exchange Commission (SEC), such as our quarterly reports on Form 10-Q and our current reports on Form 8-K. Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from those expressed herein and in ways not readily foreseeable. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report and are based on information currently and reasonably known to us. 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.

Business Overview

Tessera 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 imaging 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 for consumer optics industries. Consumer optics technologies include image sensor packaging, wafer-level camera manufacturing technology, camera assembly technology and technology for custom depth of focus, and embedded image processing solutions for digital cameras. Our intellectual property includes approximately 1,500 domestic and internationally issued patents and patent applications, covering a broad range of advanced semiconductor packaging, substrate, interconnect and consumer imaging technology.

We have two reportable segments: Intellectual Property and Product and Service. We derive the majority of our revenues from license fees and royalties associated with our semiconductor chip packaging technology, with a growing contribution from our consumer imaging technology. Our semiconductor chip packaging technology has been widely adopted and is currently licensed to more than 60 companies, including Intel Corporation, Hynix, 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.

Intellectual Property Technology Platforms/Portfolios

Within our Intellectual Property segment, we have the following primary technology platforms and portfolios available for licensing.

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Advanced Packaging and Interconnect

Chip-Scale Package Technology Platforms

Tessera was a pioneer in the development of technology that allows semiconductor chips to be packaged reliably in a configuration that allows the package to be essentially the same size as the semiconductor chip. The resulting chip-scale packaging technology has been broadly licensed, and most of our licensees have developed their own proprietary packages incorporating our intellectual property. We have developed multiple CSP platforms that are included in our TCC license, and the various implementations address the specific challenges of different semiconductor applications.

Multi-Chip Package Technology Platforms

We have developed a family of three-dimensional multi-chip platforms that build upon the existing CSP infrastructure and enable further miniaturization and increased performance and functionality for a broad range of cost-sensitive, high volume applications. With multiple approaches to stacking chips vertically, Tessera provides solutions for increasing memory content in a product, or for the integration of processing capability with memory. Each platform was developed to resolve complex technical and business challenges inherent in the miniaturization of electronic products.

MicroPILR Interconnect platform

We have developed 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.

Consumer Imaging

We have a significant consumer imaging technology portfolio that includes technology platforms for image sensor packaging, wafer-level camera manufacturing technology, camera assembly technology, technology for custom depth of focus, and embedded image processing solutions.

Wafer-Level Package (WLP) Technology Platforms

Our WLP technologies are suitable for a variety of electronics products. The principal application to date is optical sensors, in particular complementary metal oxide semiconductor (“CMOS”) image sensors for camera-equipped mobile phones, charge-coupled device, or CCD area sensors and linear array image sensors. In the first quarter of 2008 we introduced our latest generation SHELLCASE WLP technology, SHELLCASE MVP.

Wafer-Based Optics Technology Platform

With our acquisition of Digital Optics Corporation in 2006, we acquired a wafer-based optics platform that utilizes semiconductor processes and equipment to manufacture small form factor micro-optics. We continue to develop our auto focus technologies that, when completed, will be bundled with our wafer-level optics technology platform. Our auto focus technologies will also be directly licensable to manufacturers of miniature cameras.

Other elements of our Consumer Imaging portfolio include the following OptiML technologies:


OptiML Wafer-Level Camera (“WLC”)		OptiML WLC technology makes it possible for cameras to be manufactured at the wafer level, drastically reducing the size and total bill of material cost of camera modules. As a result of these and other significant benefits, Tessera is providing the electronics industry a powerful tool for integrating cameras into a wider range of electronic products.

OptiML Focus		OptiML Focus enables high quality image taking where the image is brought into focus automatically and simultaneously. The OptiML Focus solution is based on our revolutionary micro-imaging technology that combines lens design with light digital algorithms that together result in an image which is always in focus.

OptiML UFL		OptiML UFL technology uses a combination of advanced lens design and embedded processing technology to improve low-light performance of a camera module by increasing the amount of available light by as much as 250%, greatly improving indoor image capture where low-light situations generally occur.

OptiML Zoom		OptiML Zoom is the industry’s first non-mechanical optical zoom solution, offering 3x zoom capability with superior image quality when compared to the most advanced digital zoom technologies in use today.

In February 2008, we expanded our Consumer Imaging portfolio with our acquisition of FotoNation, Inc. (“FotoNation”), a privately-owned business that develops embedded imaging solutions including red-eye correction, face tracking, smile and blink detection as well as other patented technologies. We plan to use this technology portfolio to drive differentiation in our consumer imaging business aimed principally at the wireless device market.

Our Services

Within our Product and Service segment, we provide our customers and partners with engineering, assembly and infrastructure services that we believe accelerate the adoption of our technology for a broad range of cost-sensitive, high-volume applications. We also manufacture small form factor micro-optics, using our wafer-based optics platform.

Acquisitions

We have grown our business partly through acquisitions. The impact of these acquisitions on our financial results has been included in the following discussion. In February 2008, Tessera completed its acquisition of FotoNation, a Delaware corporation. In February 2007, Tessera completed its acquisition of the assets of Eyesquad GmbH (“Eyesquad”), a private limited liability company organized under the laws of the Federal Republic of Germany and operates in Israel. In February 2007 and May 2005, the Company purchased from North Corporation all of its patents and patent applications filed in the United States and in foreign jurisdictions, trademark assets and certain license agreements along with certain tangible assets. In July 2006, Tessera completed its acquisition of Digital Optics Corporation (“Digital Optics”), a Delaware corporation. In December 2005, Tessera completed its purchase of certain intellectual property and related assets of Shellcase, Ltd. (“Shellcase”), an Israeli company.

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Results of Operations

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


	Three Months Ended March 31,
	2008		2007
Revenues:
Royalty and license fees	85	%	80	%
Product and service revenues	15		20

Total revenues	100		100

Operating expenses:
Cost of revenues	7		10
Research, development and other related costs	24		18
Selling, general and administrative	60		34

Total operating expenses	91		62

Operating income	9		38
Interest and other income, net	5		6

Income before taxes	14		44
Income tax provision	10		20

Net income	4	%	24	%

Revenues

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


	For the Three Months Ended March 31,								Increase/ (Decrease)			% Change
	2008				2007				Increase/ (Decrease)			% Change
Royalty and license fees	$	50,240	85	%	$	37,456	80	%	$	12,784		34	%
Product and service revenues		9,111	15			9,363	20			(252	)	(3	)

Total revenues	$	59,351	100	%	$	46,819	100	%	$	12,532		27	%

Revenues for the three months ended March 31, 2008 were $59.4 million as compared to $46.8 million for the three months ended March 31, 2007, an increase of $12.5 million, or 27%. The overall increase in the three months ended March 31, 2008 as compared to 2007 is primarily due to the increase in royalty revenue from existing customers due to royalties reported on strong forth quarter shipments, a one-time favorable royalty pricing adjustment from one of our current licensees and new license revenue primarily related to the consumer imaging technologies.

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 months ended March 31, 2008, cost of revenues represented 48% of product and service revenues. For the three months ended March 31, 2007, cost of revenues represented 50% of product and service revenues. 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 and on the mix of commercial and government revenues.

Cost of revenues for the three months ended March 31, 2008 decreased by $0.3 million, or 8%, to $4.3 million as compared to $4.7 million for the three months ended March 31, 2007. The decrease was primarily attributable to a reduction in government funded revenue.

Research, Development and Other Related Costs

Research, development and other related (“R&D”) costs for the three months ended March 31, 2008 were $14.2 million, an increase of $5.8 million, or 69%, as compared to $8.4 million for the three months ended March 31, 2007. The increase was primarily due to approximately $1.0 million increased R&D project spending, the inclusion of R&D costs related to the subsidiary acquired in February 2008 of approximately $0.6 million, an increase in the amortization expense of acquired intangible assets of $0.7 million, a one-time charge of $2.5 million related to in-process research and development acquired from the FotoNation acquisition and increased stock-based compensation of $0.9 million. R&D headcount increased from 181 at March 31, 2007 to a total of 259 at March 31, 2008.

Selling, General and Administrative

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, other than facilities related expenses, are not allocated to other expense line items.

Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2008 were $35.5 million, an increase of $19.3 million, or 120%, as compared to $16.2 million for the three months ended March 31, 2007. The increase was primarily attributable to the increase of $16.6 million in patent litigation and legal consulting, $1.4 million in stock-based compensation and other personnel-related expense from additional headcount, $0.6 million in audit services and $0.5 million in increased marketing activities.

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 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.

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Stock-based Compensation

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


	Three Months Ended March 31,
	2008		2007
Cost of revenues	$	105	$	550
Research, development and other related costs		1,411		508
Selling, general and administrative		2,977		2,623

Total stock-based compensation expenses	$	4,493	$	3,681

Stock-based compensation awards included employee stock options, restricted stock and employee stock purchases under our 2003 Employee Stock Purchase Plan. Stock-based compensation for the three months ended March 31, 2008, was $4.5 million, of which $2.4 million related to employee stock options, $1.7 million related to issuances of shares of restricted stock and $0.4 million related to employee stock purchases. For the three months ended March 31, 2007, stock-based compensation was $3.7 million, of which $2.6 million related to employee stock options, $0.8 million related to issuances of shares of restricted stock and $0.3 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. 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, was $2.8 million and $2.8 million for the three months ended March 31, 2008 and 2007. Our cash, cash equivalents and investments at March 31, 2008 were $256.2 million as compared to $204.3 million at March 31, 2007. The effect of the increased interest income from our cash and investment balances was offset by the decrease in interest rates and cash used for the acquisition of FotoNation.

Provision for Income Taxes

Our estimated effective tax rate is based on tax law in effect at March 31, 2008 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 months ended March 31, 2008 and 2007 was $5.9 million and $9.3 million, respectively, and was comprised of domestic income tax and foreign income and withholding tax. The Company’s income tax provision is based on our worldwide estimated annualized effective tax rate except for jurisdictions for which a loss is expected for the year and for which no benefit can be realized for those losses. With respect to the latter, tax is based on withholding taxes for the quarter. The decrease in the income tax provision for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007 is primarily attributable to the decrease in pre-tax income as partially off-set by the tax effects of the non-deductible in-process research and development expense related to the acquisition of FotoNation, an increase in non-deductible stock compensation expense relative to pre-tax income and an increase in withholding tax on foreign income.

Segment Operating Results

We have two reportable segments: Intellectual Property segment and Product and Service segment. In addition to these reportable segments, the Corporate Overhead division includes certain operating amounts that are not allocated to the reportable segments because these operating amounts are not considered in evaluating the operating performance of the Company’s business segments.

Our Intellectual Property segment is primarily composed of our Licensing Business and our Emerging Markets and Technologies Group. 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 consumer imaging and optics technologies for the consumer optics industry. Key functions of this division include licensing, intellectual property management and marketing. 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 is also focused on long-term growth opportunities through new partnerships, ventures and acquisitions of complementary technology.

Our reportable segments were determined based upon the manner in which our management views and evaluates our operations. Segment information below and in Note 12 of the Notes to Financial Statements is presented in accordance with the Statement of Financial Accounting Standards No. 131 (SFAS No. 131), “Disclosure about Segments of an Enterprise and Related Information.” We do not present financial data to our management for each of our divisions, and our management does not evaluate each division separately from our segments when measuring the operating performance of our business.

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


	Three Months Ended March 31,
	2008			2007
Revenues:
Intellectual Property Segment	$	50,608		$	37,456
Product and Service Segment		8,743			9,363
Corporate Overhead		—			—

Total revenues		59,351			46,819

Operating expenses:
Intellectual Property Segment		36,290			13,316
Product and Service Segment		8,172			9,178
Corporate Overhead		9,540			6,715

Total operating expenses		54,002			29,209

Operating income (loss)
Intellectual Property Segment		14,318			24,140
Product and Service Segment		571			185
Corporate Overhead		(9,540	)		(6,715	)

Total operating income	$	5,349		$	17,610

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The revenues and operating income amounts in this section have been presented on a basis consistent with accounting principles generally accepted in the U.S. 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 months ended March 31, 2008, corporate overhead expenses were $9.5 million compared to $6.7 million for the three months ended March 31, 2007. The increases from the three months ended March 31, 2007 are primarily attributable to an increase in legal services, primarily related to the acquisition of FotoNation.

Intellectual Property Segment

Intellectual property revenues for the three months ended March 31, 2008 were $50.6 million as compared to $37.5 million for the three months ended March 31, 2007, which represented an increase of $13.1 million or 35%. The increase is primarily attributed to strong royalty revenue related to core technologies, a one-time favorable royalty pricing adjustment from one of our current licensees and new license revenue from the technology of the subsidiary acquired in February 2008.

Intellectual property revenues consist primarily of royalties received from our TCC licensees from 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 March 31, 2008 were $36.3 million and consisted primarily of cost of revenues of $0.2 million, R&D costs of $11.8 million and SG&A costs of $24.3 million. Included in the R&D costs were $3.2 million in costs related to our R&D centers in Ireland and Romania and $3.6 million from the R&D centers in Hungary and Israel. Included in SG&A costs were $20.2 million in litigation expenses. Operating expenses for the three months ended March 31, 2008 of $36.3 million represented an increase of $23.0 million as compared to $13.3 million for the three months ended March 31, 2007, which is primarily attributable to an increase of $16.6 millions in SG&A costs and an increase of $6.5 million in R&D costs. The increase in SG&A costs is primarily due to the increase in litigation costs of $15.5 million and in personnel related expenses of $1.7 million due to increased headcount. The increase in R&D costs is primarily due to a one-time in-process R&D expense of $2.5 million, an increase in amortization of $0.7 million and an increase in personnel related costs of approximately $3.1 million.

We expect that litigation costs will continue to be 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 months ended March 31, 2008 and 2007 was $14.3 million and $24.1 million, respectively.

Product and Service Segment

Product and Service revenues for the three months ended March 31, 2008 were $8.7 million as compared to $9.4 million for the three months ended March 31, 2007. This is a decrease of $0.6 million, or 7%, from the three months ended March 31, 2007. For the three months ended March 31, 2008, the decrease in revenues was primarily related to lower government-funded R&D programs.

Operating expenses for the three months ended March 31, 2008 were $8.2 million and consisted of costs of revenues of $4.1 million, R&D costs of $2.4 million and SG&A costs of $1.6 million. Operating expenses for the three months ended March 31, 2007 were $9.2 million, which consisted of costs of revenues of $4.4 million, R&D costs of $3.1 million and SG&A costs of $1.7 million. The decrease of $1.0 million in total operating expenses from the three months ended March 31, 2007 is primarily due to lower outside services, supplies and materials expense related to decreased activities in government projects and a decrease in stock-based compensation expense.

Operating income for the three months ended March 31, 2008 and 2007 was $0.6 million and $0.2 million, respectively.

Liquidity and Capital Resources


	As of March 31,			As of December 31,
(in thousands, except for percentages)	2008			2007
Cash and cash equivalents	$	126,827		$	207,158
Short-term investments		92,692			82,566
Long-term investments		36,674			—

Total cash, cash equivalents, short-term and long-term investments	$	256,193		$	289,724

Percentage of total assets		56	%		65	%


	Three Months Ended March 31,
	2008			2007
Net cash provided by operating activities	$	9,532		$	27,449
Net cash used in investing activities	$	(82,732	)	$	(21,574	)
Net cash provided by (used in) financing activities	$	(7,131	)	$	4,308

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Cash generated from operations is our primary source of liquidity and capital resources. Our investment portfolio is also available for future cash requirements. Cash, cash equivalents and investments were $256.2 million at March 31, 2008, a decrease of $33.5 million from $289.7 million at December 31, 2007. Cash and cash equivalents were $126.8 million at March 31, 2008, a decrease of $80.4 million from $207.2 million at December 31, 2007. The decrease was primarily the result of $82.7 million net cash used in investing activities, $7.1 million net cash used in financing activities, offset by $9.5 million in cash provided by operating activities. The acquisition completed in February 2008 was the primary use of the Company’s cash during the three months ended March 31, 2008.

Net cash provided by operating activities was $9.5 million for the three months ended March 31, 2008, primarily due to net income of $2.2 million, adjusted for non-cash items of depreciation and amortization of $4.3 million, in-process R&D expense of $2.5 million, and stock-based compensation expenses of $4.5 million, an increase in income tax payable of $4.6 million and an increase in accounts payable and accrued legal of $2.9 million. Increases were partially offset by an increase in accounts receivable of $8.1 million and a decrease in accrued liabilities of $3.1 million.

Net cash provided by operating activities was $27.4 million for the three months ended March 31, 2007, primarily due to net income of $11.1 million adjusted for non-cash items of depreciation and amortization of $2.9 million, stock-based compensation expenses of $3.7 million, a decrease of $11.3 million in prepaid and other assets and an increase in income tax payable of $7.9 million. The increase was partially offset by an increase in net accounts receivable of $7.4 million and a decrease in accrued liabilities of $2.1 million.

Net cash used in investing activities was $82.7 million in the three months ended March 31, 2008, primarily related to purchases of short-term and long-term investments of $112.5 million, purchases of property and equipment of $1.7 million, consideration paid for the acquisition of a subsidiary completed in February 2008 and certain patents of $32.1 million, offset by proceeds from maturities and sales of short-term and long-term investments of $63.5 million. Net cash used in investing activities for the three months ended March 31, 2007 was $21.6 million, primarily related to the acquisitions of a subsidiary completed in the first quarter of 2007 for approximately $19.5 million and the purchase of property and equipment of $2.0 million.

The primary objective of our investment activities is to preserve principal while at the same time capturing a market rate of return without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents, short-term and long-term investments in a variety of securities, including both government and corporate obligations and money market funds. We invest excess cash predominantly in marketable debt securities that are of high-quality investment grade and the majority of which have effective maturities of less than two years. Our marketable debt and equity securities are classified as available-for-sale and are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income (loss). Realized gains or losses and declines in value judged to be other than temporary, if any, on available-for-sale securities are reported in other income, net. The fair value for securities is determined based on quoted market prices as of the valuation date. We evaluate these investments periodically for possible other-than-temporary impairment and review factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, and our ability and intent to hold the investment for a period of time which may be sufficient for an anticipated recovery in market value.

Our investments as of March 31, 2008 also include $37.7 million in auction rate municipal bond securities (“ARS”) and asset-backed securities, including mortgaged-backed securities (collectively “ABS”). In connection with the liquidity issues experienced in the global credit and capital markets, our ARS and ABS holdings have experienced failed auctions or thinly traded markets. However, we continue to earn and receive interest on these investments at the maximum contractual rate. Due to the lack of observable market quotes on the Company’s ARS and ABS investment portfolio, the Company utilizes valuation models that rely on Level 3 inputs including those that are based on a discounted cash flow model and assessments of counterparty credit quality, default risk underlying the security, discount rates and overall capital market liquidity. The estimated market value of the Company’s ARS and ABS holdings at March 31, 2008 is $37.7 million. The Company has recorded unrealized losses of $1.6 million, net of tax, in accumulated other comprehensive loss, net of taxes, as a reduction in stockholders’ equity, reflecting adjustments to ARS and ABS holdings with a temporary decline in value.

We continue to monitor the market for ARS and ABS and consider its impact, if any, on the fair value of our investments. If uncertainties in these credit and capital markets continue, these markets deteriorate further or the Company experiences any additional ratings downgrades on any investments in its portfolio, the Company may incur impairment charges or additional unrealized losses in other comprehensive loss, which could negatively affect the Company’s financial condition, statement of operations or cash flow. We intend and have the ability to hold these securities until the market recovers or until they reach maturity. We do not anticipate having to sell these securities in order to operate our business. We believe that based on the Company’s current cash, cash equivalents, short-term and long-term investment balances of $256.2 million at March 31, 2008 and expected operating cash flows, the current lack of an active market in the credit and capital markets will not have a material impact on the Company’s ability to fund its operations.

Net cash used in financing activities was $7.1 million in the three months ended March 31, 2008, due to the repurchase of common stock for $10.0 million offset by $2.8 million from the issuance of common stock under our employee stock option programs and employee stock purchase plans. Net cash provided by financing activities was $4.3 million for the three months ended March 31, 2007, resulting from the issuance of common stock under our employee stock option programs and employee stock purchase plans.

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. Repurchases may take place in the open market or through private transactions. Under the plan in the three months ended March 31, 2008, the Company repurchased 630,000 shares of common stock at a cost of $10.0 million at an average price of $15.78 per share. As of March 31, 2008, the Company has repurchased a total of 645,000 shares of common stock at a total cost of $10.5 million under this plan.

We believe that based on current levels of operations and anticipated growth, our cash from operations, together with cash, cash equivalents and short-term investments currently available, will be sufficient to fund our operations, anticipated growth and acquisition funding needs 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


	Payments Due by Period
	Total		1-3 Years		4-5 Years		Thereafter
	(In thousands)
Operating Lease Obligations	$	13,964	$	6,879	$	3,081	$	4,004

The amounts reflected in the table above for operating leases represent aggregate future minimum lease payments under non-cancellable facility leases. For our facilities lease, rent expense charged to operations differs from rent paid because of scheduled rent increases. Rent expense is calculated by allocating total rental payments on a straight-line basis over the lease term.

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In accordance with Financial Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” we have recognized approximately $4.7 million in the liability for unrecognized tax benefits. At this time, we are unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time. As a result, this amount is not included in the table above.

Off-Balance Sheet Arrangements and Related Party Transactions

As of March 31, 2008, we did not have any off-balance sheet arrangements as defined in item 303(a)(4)(ii) of Regulation S-K.

In September 2007, the Company licensed its OptiML Wafer-Level Camera technology and SHELLCASE Wafer-Level Chip Scale Packaging solutions to NemoTek S. A. (“NemoTek”), a supplier of camera solutions for the mobile phone market. In December 2007, the Company invested in NemoTek with total investment by the Company in NemoTek of approximately $0.5 million, which represents less than a 10 percent holding in NemoTek. The Company plans on increasing its investment in NemoTek in 2008, not to exceed 10 percent holding. Revenue from NemoTek represented approximately 2 percent of the total revenue in the year ended December 31, 2007. Revenue from Nemotek during the three months ended March 31, 2008 and amounts due from Nemotek as of March 31, 2008 were immaterial. The amount due from NemoTek as of December 31, 2007 was $1.5 million.

Critical Accounting Estimates

With the exception of the paragraph below that discusses the impact of Financial Accounting Standards Board (“FASB”) No. 157 (“SFAS No. 157”), “Fair Value Measurements,” on our critical accounting estimates for financial instruments, during the three months ended March 31, 2008 there were no significant changes in our critical accounting estimates. For a discussion of the Company’s critical accounting policies, see Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2007 Annual Report on Form 10-K, filed February 29, 2008.

Financial Instruments

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” For further information on fair value of certain financial assets and liabilities see Note 13 of the Consolidated Financial Statements.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. On February 12, 2008, the FASB issued FSP FAS 157-2 which delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). This FSP partially defers the effective date of SAS No. 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. Effective for 2008, we adopted SFAS No. 157 except as it applies to those nonfinancial assets and nonfinancial liabilities as noted in FSP FAS 157-2. The partial adoption of the statement did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

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 adopted SFAS No. 159 in the first quarter of fiscal year 2008. The adoption of the statement did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

Item 3.

Quantitative and Qualitative Disclosures About Market Risks

For a discussion of the Company’s market risk, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in the Company’s 2007 Annual Report on Form 10-K, filed on February 29, 2008.

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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.

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 to provide reasonable assurance 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)

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

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Tessera, Inc. v. Amkor Technology, Inc.

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

In re Certain Semiconductor Chips With Minimized Chip Package Size and Products Containing Same, ITC No. 337-TA-605

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 (“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. On January 2, 2008, Judge Essex ruled that Tessera would be permitted to use information obtained during discovery to file a new ITC complaint against the proposed respondents. On January 30, 2008, ASE, Inc. and STATS ChipPAC, Ltd. again moved to intervene in the action, for the purpose of consolidating Tessera’s then yet-to-be filed ITC action against the proposed respondents with the current action, and extending the hearing date. Tessera has opposed this motion. The ITC has not yet ruled on the motion.

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

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In the Matter of Certain Semiconductor Chips with Minimized Chip Package Size and Products Containing Same (III), ITC No. 337-TA-630

Tessera, Inc. v. A-DATA Technology Co., Ltd., et al., Civil Action No. 2:07-cv-534 (E.D. Tex.)

In the Matter of Certain Semiconductor Chips with Minimized Chip Package Size and Products Containing Same (IV)

Reexamination Proceedings

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second official action. On March 28, Tessera filed a petition to vacate the second official action in the reexamination of U.S. Patent No. 6,465,893 on the ground that the second official action did not properly take account of an amendment to U.S. Patent No. 6,465,893 specification. On April 15, Tessera filed a response to the second official action in the reexamination of U.S. Patent No. 6,465,893. A response to the official action in the reexamination of U.S. Patent No. 5,852,326 was filed on April 21, 2008. A response to the official action in the reexamination of U.S. Patent No. 6,133,627 was filed on April 29, 2008. The Company will have an opportunity to file substantive responses to the first official actions in the other reexaminations.

Item 1A.

Risk Factors

Our operations and financial results are subject to various risks and uncertainties, including those described below, that could adversely affect our business, financial condition, results of operations, cash flows, and trading price of our common stock.

We are currently involved in litigation and administrative proceedings involving some of our key patents; 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. As more fully described in Part II, Item 1—Legal Proceedings, we are currently involved in litigation involving some of these key patents in the United States. These legal actions challenge the validity, scope, enforceability and ownership of key patents that we license to generate the substantial portion of our revenues. In addition, reexamination requests have been filed against us in the United States Patent and Trademark Office (“PTO”) with respect to certain key patent claims at issue in one or more of our litigation and arbitration proceedings, and oppositions have been filed against us with respect to key patents in the European Patent Office. Under a reexamination proceeding and upon completion of the proceeding, the PTO may leave a patent in its present form, narrow the scope of the patent or cancel all of the claims of the patent. As further described in Part II, Item 1—Legal Proceedings, the PTO recently issued several Official Actions rejecting or maintaining earlier rejections of many of the claims in certain of our key patents. We are currently asserting these key patents and patent claims in certain of our ongoing litigation and administrative proceedings. If the PTO’s adverse rulings are upheld on appeal and some or all of the claims of the key patents that are subject to reexamination are canceled, our business may be significantly harmed. In addition, counterparties to our litigation and administrative proceedings may seek and obtain motions to stay these proceedings based on rejections of claims in the PTO reexaminations, and other courts or tribunals reviewing our legal actions could make findings adverse to our interests, even if the PTO actions are not final.

We cannot predict the outcome of any of these proceedings or the myriad procedural and substantive motions in 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, or if a court or an administrative body such as the PTO limits the scope of the claims in any of our key patents, we could be prevented from enforcing or earning future revenues from our key patents, and 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, consolidated financial position, results of operations or cash flows, or the trading price of our common stock. 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 divert our management’s time and attention away from our other business operations, which could significantly harm our business. Our enforcement proceedings historically have been protracted and complex, and we have experienced significant delays in certain of these proceedings. 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 that we may lose particular motions as well as the overall litigations all could cause significant volatility in our stock price and could materially adversely affect our business and consolidated financial position, results of operations or cash flows.

We expect to continue to be involved in material legal proceedings in the future to enforce or protect our intellectual property rights, including material litigation with existing licensees or strategic partners, which could 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. Our current legal actions, as described in Part II, Item 1—Legal Proceedings, are examples of significant disputes and litigation that impact our business. We expect to be involved in similar legal proceedings in the future. These existing and any future legal actions could cause an existing licensee or strategic partner to cease making royalty or other payments to us and could significantly damage our relationship with the licensee or strategic partner. 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. 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. Litigation stemming from these or other disputes 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. In addition, these legal proceedings could be very expensive and may reduce or eliminate our profits. 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 higher than expected, which could adversely affect our operating results. Whether or not determined in our favor or settled by us, litigation diverts our managerial, technical, legal and financial resources from our business operations. Furthermore, an adverse decision in any of these legal actions 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 stock price or our business and consolidated financial position, results of operations or cash flows. 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.

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If we fail to protect and enforce our intellectual property rights and our confidential information, 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. The misappropriation of our trade secrets or other proprietary information could seriously harm our business. 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 be able to timely detect unauthorized use or transfer of our intellectual property, 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.

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, financial position, results of operations or cash flows could suffer.

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

Tessera’s business relies in part 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. Recently, certain proposals have been made to change some aspects of the patent laws and PTO rules, and the U.S. Supreme Court has decided a number of patent cases. 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. These changes or potential changes, if passed by Congress, could have a deleterious affect on our licensing program and, therefore, the royalties we earn.

Certain disputes regarding our intellectual property may require us to indemnify certain licensees, the cost of which could adversely affect our business operations and financial condition.

While we generally do not indemnify our licensees, some of our license agreements in consumer optics provide limited indemnities for certain actions brought by third parties against our licensees, and some require us to provide technical support and information to a licensee that is involved in litigation for using our technology. We expect to agree to provide similar indemnity or support obligations to future licensees. Our indemnity and support obligations could result in substantial expenses. In addition to the time and expense required for us to indemnify or supply such support to our licensees, a licensee’s development, marketing and sales of licensed consumer optics products could be severely disrupted or shut down as a result of litigation, which in turn could severely hamper our business operations and consolidated financial position, results of operations or cash flows.

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 position, results of operations or cash flow.

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 earn a significant amount of our revenues from a limited number of customers. For the three months ended March 31, 2008, there were two customers that each accounted for 10% or more of total revenue. For the three months ended March 31, 2007, there were no customers that 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.

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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.

Our investments in adjustable rate securities and asset-backed securities, including mortgage-backed securities, are subject to risks which may cause losses and affect the liquidity of these investments.

Our investments as of March 31, 2008 include $37.7 million in auction rate municipal bond securities (“ARS”), and asset-backed securities, including mortgaged-backed securities (collectively “ABS”). In connection with the liquidity issues experienced in the global credit and capital markets, our ARS and ABS holdings have experienced failed auctions or thinly traded markets. A failed auction results when sell orders exceed buy orders. As of March 31, 2008, we have recorded net unrealized losses of $1.6 million in accumulated other comprehensive loss, net of tax, as a reduction in stockholders’ equity, reflecting adjustments to ARS and ABS holdings with a temporary decline in value. As a result of auction failures and thinly traded markets, our ability to liquidate and fully recover the carrying value of our ARS and ABS in the near term may be limited or not exist. We may be required to wait until market stability is restored for these instruments or until the final maturity of the underlying notes to realize our investments’ recorded value. If uncertainties in these credit and capital markets continue, these markets deteriorate further or we experience any additional ratings downgrades on any investments in our portfolio, we may incur impairment charges or additional unrealized losses, and investments may be reclassified as long-term investments in our financial statements in future reporting periods. These events could negatively affect our financial condition, statement of operations or cash flow.

Future changes in, or interpretations of, 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.

We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles. These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. 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. Recent accounting pronouncements and their estimated potential impact on our business are addressed in Part I, Item 1— Financial Statements.

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. 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 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:

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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;

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

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the amount of our service revenues;

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changes in the level of our operating expenses;

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

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

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

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the timing of the introduction by others of competing technologies;

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

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changes in accounting principles; and

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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.

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. We also have royalty arrangements for TCC and other technologies 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:

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

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

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

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

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the impact of economic downturns

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:

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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;

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

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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

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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.

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.

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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.

We make significant investments in new products and services that may not be profitable or could limit our revenue growth.

We have made and will continue to make significant investments in research, development, and marketing for new technologies, products and services, including wafer level packaging, wafer level camera and other image quality enhancement technologies, and MicroPILR. Investments in new technology are speculative. Commercial success depends on many factors including innovativeness, delays or shortages of materials and equipment, and effective licensing. We may not achieve significant revenue from new product and service investments for a number of years, if at all. Moreover, new technologies, products and services may not be profitable, and even if they are profitable, operating margins for new products and businesses may not be as high as the margins we have experienced historically.

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, and the inherent advantage of internal access to corporate strategies. 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. Wafer-level packaging is an emerging competitive technology that could also erode chip-scale packaging market share as the technology and infrastructure matures. Other examples of competitive technologies are the chip-on-board technique to package image sensors and the system-in-package technology that can integrate multiple die without chip-scale packaging.

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 February 26, 2028. We need to develop and patent successful innovations before our current patents expire, and our failure to do so could significantly harm our business, financial position, results of operations or cash flows.

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, financial position, results of operations or cash flows.

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.

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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 on 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 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, in the case of our TCC licenses, 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 that may have a negative impact on our consolidated financial position, results of operations or cash flow, 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. We have also expanded our operations outside of the United States such as research and development facilities in Japan, Israel, Ireland and Romania to design, develop, test or market certain technologies. International operations are subject to a number of risks, including but not limited to the following:

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Fluctuations in exchange rates between the U. S. dollar and foreign currencies as our revenues are denominated in principally in U. S. dollars and a portion of our costs are based in non U. S. dollars;

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Security concerns, including crime, political instability, terrorist activity, anti-American sentiment, armed conflict and civil or military unrest;

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Changes in trade protection laws, policies and measures, and other regulatory requirements affecting trade and investment;

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Regulatory requirements and prohibitions that differ between jurisdictions;

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Laws and business practices favoring local companies;

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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;

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Differing employment practices, labor issues and business and cultural factors;

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Less effective protection of intellectual property than is afforded to us in the U. S. or other developed countries;

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

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, financial position, results of operations or cash flows.

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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, in some cases including 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 business, financial position, results of operations or cash flows.

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, financial position, results of operations or cash flows.

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 continue to 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.

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 continue 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 FotoNation, Inc., Eyesquad GmbH and Digital Optics Corporation and of certain assets from Shellcase, Ltd. and North Corporation.

In February 2008, we completed our acquisition of FotoNation, Inc., a company headquartered in Burlingame, California. In February 2007, we acquired 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, FotoNation, Inc. 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 any of these acquisitions.

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•

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, FotoNation, Inc. and the assets of Shellcase, Ltd. and North Corporation. The total cost of the integration may exceed our expectations.

•

Sales of the acquired businesses may be subject to different accounting treatment than our existing businesses, especially related to the recognition of revenue. This may lead to potential deferral of revenue due to new multiple-element revenue arrangements .

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

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., North Corporation and FotoNation, into our products. However, if customers 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 customers fail to accept new or upgraded products incorporating our technologies, our financial position, results of operations or cash flows 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.

Many of our senior management personnel and other key employees have become, or will soon become, 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, financial position, results of operations or cash flows.

We have business operations located globally in places that are subject to natural disasters.

Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel. Our locations may be subject to earthquakes, hurricanes and other natural disasters. Should a hurricane, earthquake or other catastrophe, 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.

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, 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.

Provisions of our certificate of incorporation and bylaws or Delaware law might delay or prevent a change of control transaction and depress the market price of our stock.

Various provisions of our certificate of incorporation and bylaws might have the effect of making it more difficult for a third party to acquire, or discouraging a third party from attempting to acquire, control of our company. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock. Certain of these provisions eliminate cumulative voting in the election of directors, authorize the board to issue “blank check” preferred stock, prohibit stockholder action by written consent, eliminate the right of stockholders to call special meetings, limit the ability of stockholders to remove directors, and establish advance notice procedures for director nominations by stockholders and the submission of other proposals for consideration at stockholder meetings. We are also subject to provisions of Delaware law which could delay or make more difficult a merger, tender offer or proxy contest involving our company. In particular, Section 203 of the Delaware General Corporation Law prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years unless specific conditions are met. Any of these provisions could have the effect of delaying, deferring or preventing a change in control, including without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock.

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
February 25, 2008–March 30, 2008	630,000	$	15.78	630,000	$	89,514,034

Total	630,000	$	15.78	630,000	$	89,514,034

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. The Company plans to continue to execute authorized repurchases from time to time under the plan.

Item 3.

Defaults Upon Senior Securities

Not applicable.

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Item 4.

Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5.

Other Information

Not applicable.

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Item 6.

Exhibits


Exhibit Number		Exhibit Title

2.1		Agreement and Plan of Merger, dated as of January 31, 2008, among Tessera Technologies, Inc., Fort Knox Merger Sub, Inc., FotoNation, Inc. and Yury Prilutsky, as Stockholders’ Agent (filed as Exhibit 2.4 to the Registrant’s Annual Report on Form 10-K, filed February 29, 2008, 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, as amended on February 7, 2008 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed February 12, 2008, and incorporated herein by reference)

10.1		Form of Change in Control Severance Agreement with registrant’s executive officers (filed as Exhibit 10.1 to registrant’s Current Report on Form 8-K, filed on February 12, 2008, and incorporated herein by reference)

10.2		Employment Agreement, dated March 28, 2008, between Tessera Technologies, Inc. and Henry R. Nothhaft (filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K, filed April 1, 2008, and incorporated herein by reference)

10.3		Amendment to Tessera Technologies, Inc. Third Amended and Restated 2003 Equity Incentive Plan, effective March 13, 2008

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

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SIGNATURES

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

Dated: May 8, 2008


Tessera Technologies, Inc.

By:		/s/ Charles A. Webster
		Charles A. Webster
		Executive Vice President and Chief Financial Officer

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EXHIBIT INDEX


Exhibit Number		Exhibit Title

2.1		Agreement and Plan of Merger, dated as of January 31, 2008, among Tessera Technologies, Inc., Fort Knox Merger Sub, Inc., FotoNation, Inc. and Yury Prilutsky, as Stockholders’ Agent (filed as Exhibit 2.4 to the Registrant’s Annual Report on Form 10-K, filed February 29, 2008, 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, as amended on February 7, 2008 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed February 12, 2008, and incorporated herein by reference)

10.1		Form of Change in Control Severance Agreement with registrant’s executive officers (filed as Exhibit 10.1 to registrant’s Current Report on Form 8-K, filed on February 12, 2008, and incorporated herein by reference)

10.2		Employment Agreement, dated March 28, 2008, between Tessera Technologies, Inc. and Henry R. Nothhaft (filed as Exhibit 10.1 to registrant’s Current Report on Form 8-K, filed on April 1, 2008, and incorporated herein by reference)

10.3		Amendment to Tessera Technologies, Inc. Third Amended and Restated 2003 Equity Incentive Plan, effective March 13, 2008

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

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Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

March 31,
2008

December 31,
2007

Unrealized losses on available-for-sale securities, net of tax

Accumulated other comprehensive loss