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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-Q



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(Mark One)

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

For the quarterly period ended June 30, 2006

OR



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

Commission File Number: 000-50460



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TESSERA TECHNOLOGIES, INC.

(Exact
Name of Registrant as Specified in Its Charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)



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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act (Check one).



|                           |  |                    |  |                       
|-------------------------- |  | ------------------ |  | ----------------------
|Large accelerated filer  x |  | Accelerated filer ̈ |  | Non-accelerated filer ̈

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

As of August 7, 2006 46,540,603 shares of the registrants common stock were outstanding.



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##### Table of Contents

TESSERA TECHNOLOGIES, INC.

FORM 10-Q  QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED JUNE 30,
2006

TABLE OF CONTENTS



|              |  |                                                                                                                 |  |     
|------------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|              |  |                                                                                                                 |  | Page
|              |  | PART I                                                                                                          |  |     
|Item 1.       |  | Financial Statements                                                                                            |  |     
|              |  | Condensed Consolidated Balance Sheets (unaudited) June 30, 2006 and December 31, 2005                          |  | 3   
|              |  | Condensed Consolidated Statements of Operations (unaudited)  Three and Six Months Ended June 30, 2006 and 2005 |  | 4   
|              |  | Condensed Consolidated Statements of Cash Flows (unaudited)  Six Months Ended June 30, 2006 and 2005           |  | 5   
|              |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                                |  | 6   
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 22  
|Item 3.       |  | Quantitative and Qualitative Disclosures About Market Risks                                                     |  | 33  
|Item 4.       |  | Controls and Procedures                                                                                         |  | 33  
|              |  |                                                                                                                
|              |  | PART II                                                                                                         |  |     
|Item 1.       |  | Legal Proceedings                                                                                               |  | 35  
|Item 1A.      |  | Risk Factors                                                                                                    |  | 37  
|Item 2.       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                     |  | 50  
|Item 3.       |  | Defaults Upon Senior Securities                                                                                 |  | 50  
|Item 4.       |  | Submission of Matters to a Vote of Security Holders                                                             |  | 50  
|Item 5.       |  | Other Information                                                                                               |  | 51  
|Item 6.       |  | Exhibits                                                                                                        |  | 51  
|              | 
|Signatures    |  | 52                                                                                                             
|              | 
|Exhibit Index |  | 53                                                                                                             



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PART I  FINANCIAL INFORMATION

Item 1. Financial Statements

TESSERA TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for per share amounts)

(unaudited)



|                                                                                                           |  |              |         |   |                  |   |         |  
|---------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                           |  | June 30,2006 |         |   | December 31,2005 |  
|ASSETS                                                                                                     |  |              |         |   |                  |   |         |  
|Current assets:                                                                                            |  |              |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                  |  | $            | 146,503 |   |                  | $ | 127,594 |  
|Accounts receivable                                                                                        |  |              | 4,407   |   |                  |   | 4,602   |  
|Short term deferred tax assets                                                                             |  |              | 1,190   |   |                  |   | 1,190   |  
|Other current assets                                                                                       |  |              | 3,209   |   |                  |   | 1,039   |  
|                                                                                                           |  |              |         |   |                  |   |         |  
|Total current assets                                                                                       |  |              | 155,309 |   |                  |   | 134,425 |  
|                                                                                                           |  |             
|Property and equipment, net                                                                                |  |              | 7,781   |   |                  |   | 8,751   |  
|Intangible assets, net                                                                                     |  |              | 12,209  |   |                  |   | 12,757  |  
|Goodwill                                                                                                   |  |              | 24,196  |   |                  |   | 24,154  |  
|Long term deferred tax assets                                                                              |  |              | 9,982   |   |                  |   | 9,982   |  
|Other assets                                                                                               |  |              | 532     |   |                  |   | 58      |  
|                                                                                                           |  |              |         |   |                  |   |         |  
|Total assets                                                                                               |  | $            | 210,009 |   |                  | $ | 190,127 |  
|                                                                                                           |  |              |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                       |  |              |         |   |                  |   |         |  
|Current liabilities:                                                                                       |  |              |         |   |                  |   |         |  
|Accounts payable                                                                                           |  | $            | 2,015   |   |                  | $ | 3,043   |  
|Accrued legal fees                                                                                         |  |              | 10,283  |   |                  |   | 2,946   |  
|Accrued liabilities                                                                                        |  |              | 4,558   |   |                  |   | 3,856   |  
|Deferred revenue                                                                                           |  |              | 663     |   |                  |   | 324     |  
|                                                                                                           |  |              |         |   |                  |   |         |  
|Total current liabilities                                                                                  |  |              | 17,519  |   |                  |   | 10,169  |  
|                                                                                                           |  |              |         |   |                  |   |         |  
|                                                                                                           |  |             
|Commitments and contingencies (Note 10)                                                                    |  |              |         |   |                  |   |         |  
|                                                                                                           |  |             
|Stockholders equity:                                                                                      |  |              |         |   |                  |   |         |  
|Common stock: $0.001 par value; 150,000 shares authorized; 46,324 and 45,124 shares issued and outstanding |  |              | 46      |   |                  |   | 45      |  
|Additional paid-in capital                                                                                 |  |              | 192,847 |   |                  |   | 182,720 |  
|Deferred stock-based compensation                                                                          |  |              |        |   |                  |   | (2,245  | )
|Accumulated deficit                                                                                        |  |              | (403    | ) |                  |   | (562    | )
|                                                                                                           |  |              |         |   |                  |   |         |  
|Total stockholders equity                                                                                 |  |              | 192,490 |   |                  |   | 179,958 |  
|                                                                                                           |  |              |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                 |  | $            | 210,009 |   |                  | $ | 190,127 |  
|                                                                                                           |  |              |         |   |                  |   |         |  

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 EndedJune 30, |        | Six Months EndedJune 30,
|                                                                          |  | 2006                       |        |                          | 2005 |   | 2006   |  |   | 2005  
|Revenues:                                                                 |  |                            |        |                          |      |   |        |  |   |        |   |  |   |       
|Royalty and license fees                                                  |  | $                          | 19,529 |                          |      | $ | 13,292 |  | $ | 38,901 |   |  | $ | 25,125
|Past production payments                                                  |  |                            | 1,410  |                          |      |   | 5,359  |  |   | 1,633  |   |  |   | 17,669
|Service revenues                                                          |  |                            | 3,320  |                          |      |   | 3,810  |  |   | 7,389  |   |  |   | 7,566 
|                                                                          |  |                            |        |                          |      |   |        |  |   |        |   |  |   |       
|Total revenues                                                            |  |                            | 24,259 |                          |      |   | 22,461 |  |   | 47,923 |   |  |   | 50,360
|                                                                          |  |                            |        |                          |      |   |        |  |   |        |   |  |   |       
|Operating expenses:                                                       |  |                            |        |                          |      |   |        |  |   |        |   |  |   |       
|Cost of revenues                                                          |  |                            | 3,990  |                          |      |   | 3,287  |  |   | 7,422  |   |  |   | 6,250 
|Research, development and other related costs                             |  |                            | 3,396  |                          |      |   | 1,622  |  |   | 7,272  |   |  |   | 3,151 
|Selling, general and administrative                                       |  |                            | 20,105 |                          |      |   | 6,360  |  |   | 33,975 |   |  |   | 11,634
|                                                                          |  |                            |        |                          |      |   |        |  |   |        |   |  |   |       
|Total operating expenses                                                  |  |                            | 27,491 |                          |      |   | 11,269 |  |   | 48,669 |   |  |   | 21,035
|                                                                          |  |                            |        |                          |      |   |        |  |   |        |   |  |   |       
|Operating income (loss)                                                   |  |                            | (3,232 | )                        |      |   | 11,192 |  |   | (746   | ) |  |   | 29,325
|Other income, net                                                         |  |                            | 1,519  |                          |      |   | 773    |  |   | 2,724  |   |  |   | 1,360 
|                                                                          |  |                            |        |                          |      |   |        |  |   |        |   |  |   |       
|Income (loss) before taxes                                                |  |                            | (1,713 | )                        |      |   | 11,965 |  |   | 1,978  |   |  |   | 30,685
|Provision (benefit) for income taxes                                      |  |                            | (501   | )                        |      |   | 4,240  |  |   | 1,819  |   |  |   | 11,017
|                                                                          |  |                            |        |                          |      |   |        |  |   |        |   |  |   |       
|Net income (loss)                                                         |  | $                          | (1,212 | )                        |      | $ | 7,725  |  | $ | 159    |   |  | $ | 19,668
|                                                                          |  |                            |        |                          |      |   |        |  |   |        |   |  |   |       
|Basic and diluted net income per share:                                   |  |                            |        |                          |      |   |        |  |   |        |   |  |   |       
|Net income (loss) per share; basic                                        |  | $                          | (0.03  | )                        |      | $ | 0.18   |  | $ |       |   |  | $ | 0.45  
|                                                                          |  |                            |        |                          |      |   |        |  |   |        |   |  |   |       
|Net income (loss) per share; diluted                                      |  | $                          | (0.03  | )                        |      | $ | 0.16   |  | $ |       |   |  | $ | 0.41  
|                                                                          |  |                            |        |                          |      |   |        |  |   |        |   |  |   |       
|Weighted average number of shares used in per share calculations; basic   |  |                            | 45,905 |                          |      |   | 43,873 |  |   | 45,684 |   |  |   | 43,361
|                                                                          |  |                            |        |                          |      |   |        |  |   |        |   |  |   |       
|Weighted average number of shares used in per share calculations; diluted |  |                            | 45,905 |                          |      |   | 47,494 |  |   | 47,918 |   |  |   | 47,634
|                                                                          |  |                            |        |                          |      |   |        |  |   |        |   |  |   |       

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)



|                                                                              |  |                          |         |   |      |   |         |  
|----------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                                              |  | Six Months EndedJune 30, |        
|                                                                              |  | 2006                     |         |   | 2005 |  
|Cash flows from operating activities:                                         |  |                          |         |   |      |   |         |  
|Net income                                                                    |  | $                        | 159     |   |      | $ | 19,668  |  
|Adjustments to reconcile income to net cash provided by operating activities: |  |                          |         |   |      |   |         |  
|Depreciation and amortization                                                 |  |                          | 2,456   |   |      |   | 609     |  
|Gain on disposal of fixed assets                                              |  |                          | (8      | ) |      |   |        |  
|Stock-based compensation                                                      |  |                          | 7,109   |   |      |   | 315     |  
|Gross tax windfall from stock-based compensation                              |  |                          | (173    | ) |      |   |        |  
|Changes in operating assets and liabilities:                                  |  |                          |         |   |      |   |         |  
|Accounts receivable                                                           |  |                          | 195     |   |      |   | (88     | )
|Other assets                                                                  |  |                          | (2,644  | ) |      |   | 8,001   |  
|Accounts payable                                                              |  |                          | (1,028  | ) |      |   | 814     |  
|Accrued legal fees                                                            |  |                          | 7,337   |   |      |   | 1,053   |  
|Accrued liabilities                                                           |  |                          | 702     |   |      |   | (374    | )
|Deferred revenue                                                              |  |                          | 339     |   |      |   | (3      | )
|                                                                              |  |                          |         |   |      |   |         |  
|Net cash provided by operating activities                                     |  |                          | 14,444  |   |      |   | 29,995  |  
|                                                                              |  |                          |         |   |      |   |         |  
|Cash flows from investing activities:                                         |  |                          |         |   |      |   |         |  
|Purchases of property and equipment                                           |  |                          | (938    | ) |      |   | (2,148  | )
|Proceeds from sale of fixed assets                                            |  |                          | 8       |   |      |   |        |  
|Acquisitions                                                                  |  |                          | (42     | ) |      |   | (5,934  | )
|                                                                              |  |                          |         |   |      |   |         |  
|Net cash used in investing activities                                         |  |                          | (972    | ) |      |   | (8,082  | )
|                                                                              |  |                          |         |   |      |   |         |  
|Cash flows from financing activities:                                         |  |                          |         |   |      |   |         |  
|Excess tax benefit from stock-based compensation                              |  |                          | 173     |   |      |   |        |  
|Proceeds from exercise of stock options and warrants, net                     |  |                          | 4,600   |   |      |   | 7,218   |  
|Proceeds from employee stock purchase program                                 |  |                          | 664     |   |      |   | 576     |  
|                                                                              |  |                          |         |   |      |   |         |  
|Net cash provided by financing activities                                     |  |                          | 5,437   |   |      |   | 7,794   |  
|                                                                              |  |                          |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                     |  |                          | 18,909  |   |      |   | 29,707  |  
|Cash and cash equivalents at beginning of period                              |  |                          | 127,594 |   |      |   | 108,339 |  
|                                                                              |  |                          |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                    |  | $                        | 146,503 |   |      | $ | 138,046 |  
|                                                                              |  |                          |         |   |      |   |         |  

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, referred to as Tessera or the Company), is a provider
of miniaturization technologies for the electronics industry. The Company enables improvements in miniaturization and performance by applying its expertise in the electrical, thermal, mechanical and optical properties of materials and
interconnect. The Company develops and licenses technologies to the electronics industry. The Companys intellectual property portfolio includes approximately 564 issued patents covering a broad range of advanced semiconductor
packaging, interconnect and micro-optics solutions. The Company licenses its technology to its customers, enabling them to produce semiconductor chips that are smaller and faster, and incorporate more features. These semiconductors are utilized
in a broad range of electronics products, including digital audio players, digital cameras, personal computers, personal digital assistants, video game consoles and mobile phones.

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

The accompanying interim unaudited condensed consolidated financial statements as of June 30, 2006 and 2005, and for the three and six
months then ended, have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The amounts as of December 31, 2005 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 of America 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 only of normal recurring adjustments, necessary to present 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, 2005, included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

The
results of operations for the three and six months ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006 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, July 2, 2006. For presentation purposes, the financial statements and notes have been presented as ending on the last day of the nearest calendar month, June 30, 2006.

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of estimates

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

Cash and cash equivalents

All highly liquid investments with original maturities of three months or less from the date of purchase are classified as cash and cash equivalents.



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Fair value of financial instruments

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

Concentration of credit risk

Financial instruments that
potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents and accounts receivable. The Company invests primarily in money market funds and high quality commercial paper instruments. Cash
equivalents are maintained with high quality institutions, the composition and maturities of which are regularly monitored by management. The Company believes that the concentration of credit risk in its trade receivables is substantially mitigated
by the Companys evaluation process, relatively short collection terms and the high level of credit worthiness of its customers. The Company performs ongoing credit evaluations of its customers financial condition and limits the amount of
credit extended when deemed necessary, but generally requires no collateral.

The Companys accounts receivable are concentrated with three customers
at June 30, 2006, representing 45%, 20% and 20% of aggregate gross receivables, and two customers at June 30, 2005, representing 44% and 31% of aggregate gross receivables.

Impairment of long-lived assets

The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. When events or changes in circumstances indicate that the carrying amount of
long-lived assets may not be recoverable, the Company recognizes impairment if the net book value of such assets exceeds the future undiscounted cash flows attributed to such assets. The Company assesses the impairment in value to its long-lived
assets whenever events or circumstances indicate that their carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include operating losses, significant negative industry trends,
significant underutilization of the assets and significant changes in how it uses the assets or its plans for its use. No impairment losses were incurred in the periods presented.

Goodwill and identified intangible assets

Identified intangible assets consist of acquired patents, existing
technology and trade names that are amortized on a straight-line basis over their estimated useful lives, ranging from 10 to 15 years.

The Company
evaluates the recoverability of goodwill recorded in connection with acquisitions annually at the beginning of its third quarter or more frequently, whenever events or changes in circumstances indicate the carrying value of an asset may not be
recoverable in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. The impairment test is a two-step process. The first step requires comparing the fair value of each reporting unit with allocated goodwill to its net
book value. The Company uses management estimates of future cash flows to perform the first step of the goodwill impairment test. These estimates include assumptions about future conditions such as future revenues, gross margins and operating
expenses. The Company uses discounted cash flow and market multiple methodologies to obtain the fair value for each reporting unit. The second step is only performed if impairment is indicated after the first step is performed, as it involves
measuring the actual impairment to goodwill. No goodwill impairment was recorded for the periods presented.

Revenue recognition

The Company accounts for its revenues under the provisions of Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. Under the
provisions of SAB No. 104, the Company recognizes revenues when there is persuasive evidence of an arrangement, delivery has occurred, the fee is fixed and determinable, and collectibility of the resulting receivable is reasonably assured.



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Royalty and license fees revenues

Royalty and license fees revenues include revenues from license fees and from royalty payments. Licensees typically pay a non-refundable license fee. 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 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 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.

Past production payments revenues

Past production payments revenues are royalty payments received through license negotiations or the resolution of patent disputes. Such negotiations
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 it is entitled. Past production payments revenues represent the portion of royalty
payments received through such license negotiations or resolution of patent disputes that relates to previous periods and are based on historical production volumes.

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 collection 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.

Service revenues

The Company utilizes the completed-contract and the
percentage-of-completion methods of accounting for both 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 contracts are recognized upon acceptance 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.

The Company uses the percentage-of-completion method of
accounting for cost reimbursement-type contracts, which generally specify the reimbursable costs and a certain billable fee amount. 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 the costs to complete the projects. 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.



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The following table sets forth sales to customers comprising 10% or more of the Companys total revenues for the
periods indicated:



|                       |  |                            |   |  |                          |   |  |      |   |  |      |  
|---------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                       |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|                       |  | 2006                       |   |  | 2005                     |   |  | 2006 |   |  | 2005 |  
|Customer               |  |                            |   |  |                          |   |  |      |   |  |      |  
|Texas Instruments, Inc |  | 16                         | % |  | 16                       | % |  | 17   | % |  | 16   | %
|Samsung Electronics    |  | 19                         | % |  | 11                       | % |  | 17   | % |  | 25   | %
|Intel Corporation      |  | 10                         | % |  | 11                       | % |  | 10   | % |  | *    |  
|Hynix Semiconductor    |  | *                          |   |  | 22                       | % |  | *    |   |  | 10   | %
|Fujitsu Limited        |  | *                          |   |  | *                        |   |  | *    |   |  | 10   | %

---

|* | Less than 10%
|- | -------------

Indemnification

The Company does not have guarantees required to be disclosed under Financial Accounting Standards Board Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. However, some of the Companys technology license agreements provide certain types of indemnification
for customers regarding intellectual property infringement claims. Also, the Company indemnifies its officers and directors under the terms of indemnity agreements entered into with them, as well as pursuant to its certificate of incorporation,
bylaws and applicable Delaware law. As of June 30, 2006, no such claims have been filed against the Company and no liability has been accrued.

Research, development and other related costs

Research, development and other related costs consist primarily of compensation and
related costs for personnel, as well as costs related to patent prosecution, materials, supplies and equipment depreciation. All research, development and other related costs are expensed as incurred. Research, development and other related costs,
excluding costs related to patent prosecution for the three and six months ended June 30, 2006 and 2005 were $2,975,000, $6,463,000, $955,000 and $2,274,000, respectively.

Income taxes

The Company accounts for its income taxes under the liability method. Under this method,
deferred tax assets and liabilities are determined on the basis of the difference between income tax bases of assets and liabilities and their respective financial reporting amounts at enacted tax rates in effect for the periods in which the
differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to their realizable value when management cannot conclude based on available objective evidence that it is more likely than not
that the benefit will be realized for the deferred tax assets.

NOTE 3  RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the Financial Accounting Standards Board (FASB) issued FIN No. 48, Accounting for Uncertainty in Income Taxes  An
Interpretation of SFAS No. 109. This Interpretation contains a two-step process to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is evaluating the tax position for
recognition by determining whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step
is to measure the tax benefit at the largest amount has a greater than 50% likelihood of being realized upon ultimate settlement. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently in
the process of assessing the adoption of this statement.



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NOTE 4  COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

Accounts receivable consists of the following (in thousands):



|      |  |              |       |                  |   |      
|----- |  | ------------ | ----- | ---------------- | - | -----
|      |  | June 30,2006 |       | December 31,2005
|Trade |  | $            | 855   |                  | $ | 1,629
|Other |  |              | 3,552 |                  |   | 2,973
|      |  |              |       |                  |   |      
|      |  | $            | 4,407 |                  | $ | 4,602
|      |  |              |       |                  |   |      

Other current assets (in thousands):



|              |  |              |       |                  |   |      
|------------- |  | ------------ | ----- | ---------------- | - | -----
|              |  | June 30,2006 |       | December 31,2005
|Prepaid taxes |  | $            | 1,843 |                  | $ | 61   
|Other         |  |              | 1,366 |                  |   | 978  
|              |  |              |       |                  |   |      
|              |  | $            | 3,209 |                  | $ | 1,039
|              |  |              |       |                  |   |      

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



|                                                |  |              |         |   |                  |   |         |  
|----------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                |  | June 30,2006 |         |   | December 31,2005 |  
|Furniture and equipment                         |  | $            | 17,904  |   |                  | $ | 17,434  |  
|Leasehold improvements                          |  |              | 2,354   |   |                  |   | 1,886   |  
|                                                |  |              |         |   |                  |   |         |  
|                                                |  |              | 20,258  |   |                  |   | 19,320  |  
|Less: Accumulated depreciation and amortization |  |              | (12,477 | ) |                  |   | (10,569 | )
|                                                |  |              |         |   |                  |   |         |  
|                                                |  | $            | 7,781   |   |                  | $ | 8,751   |  
|                                                |  |              |         |   |                  |   |         |  

Accrued liabilities consist of the following (in thousands):



|                                   |  |              |       |                  |   |      
|---------------------------------- |  | ------------ | ----- | ---------------- | - | -----
|                                   |  | June 30,2006 |       | December 31,2005
|Employee compensation and benefits |  | $            | 1,983 |                  | $ | 2,723
|Professional services              |  |              | 262   |                  |   | 571  
|Other                              |  |              | 2,313 |                  |   | 562  
|                                   |  |              |       |                  |   |      
|                                   |  | $            | 4,558 |                  | $ | 3,856
|                                   |  |              |       |                  |   |      

NOTE 5  GOODWILL AND IDENTIFIED INTANGIBLE ASSETS

The allocation of goodwill to segments and the changes to the carrying value for the six months ended June 30, 2006 was reflected below (in thousands):



|                     |  |                             |       
|-------------------- |  | --------------------------- | ------
|                     |  | IntellectualPropertySegment
|January 1, 2006      |  | $                           | 24,154
|Goodwill adjustments |  |                             | 42    
|                     |  |                             |       
|June 30, 2006        |  | $                           | 24,196
|                     |  |                             |       



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The goodwill adjustments, as shown above, result from adjusting original estimates to actual costs.

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



|                    |  |             |  |               |        |                         |   |      |     |  |             |        |                         |   |        |     |   |      |   |  |   |       
|------------------- |  | ----------- |  | ------------- | ------ | ----------------------- | - | ---- | --- |  | ----------- | ------ | ----------------------- | - | ------ | --- | - | ---- | - |  | - | ------
|                    |  |             |  | June 30, 2006 |        | December 31, 2005      
|                    |  | AverageLife |  | GrossAssets   |        | AccumulatedAmortization |   |      | Net |  | GrossAssets |        | AccumulatedAmortization |   |        | Net
|Acquired patents    |  | 15 years    |  | $             | 6,073  |                         | $ | (438 | )   |  | $           | 5,635  |                         | $ | 6,073  |     | $ | (236 | ) |  | $ | 5,837 
|Existing technology |  | 10 years    |  |               | 6,700  |                         |   | (336 | )   |  |             | 6,364  |                         |   | 6,700  |     |   |     |   |  |   | 6,700 
|Trade name          |  | 10 years    |  |               | 220    |                         |   | (10  | )   |  |             | 210    |                         |   | 220    |     |   |     |   |  |   | 220   
|                    |  |             |  |               |        |                         |   |      |     |  |             |        |                         |   |        |     |   |      |   |  |   |       
|                    |  |             |  | $             | 12,993 |                         | $ | (784 | )   |  | $           | 12,209 |                         | $ | 12,993 |     | $ | (236 | ) |  | $ | 12,757
|                    |  |             |  |               |        |                         |   |      |     |  |             |        |                         |   |        |     |   |      |   |  |   |       

Amortization expense for the three and six months ended June 30, 2006 and 2005 amounted to $274,000,
$548,000, $33,000 and $33,000, respectively.

As of June 30, 2006, the estimated future amortization expense of purchased intangible assets is as
follows (in thousands):



|                          |  |   |       
|------------------------- |  | - | ------
|2006 (remaining 6 months) |  | $ | 549   
|2007                      |  |   | 1,097 
|2008                      |  |   | 1,097 
|2009                      |  |   | 1,097 
|2010                      |  |   | 1,097 
|Thereafter                |  |   | 7,272 
|                          |  |   |       
|                          |  | $ | 12,209
|                          |  |   |       

NOTE 6  NET INCOME PER SHARE

The Company reports both basic net income per share, which is based upon the weighted average number of common shares outstanding excluding returnable shares, and diluted net income per share, which is based on the
weighted average number of common shares outstanding and dilutive potential common shares outstanding.

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



|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                   |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                   |  | 2006                       |        |   | 2005                     |   |        | 2006 |  |   | 2005   |  
|Numerator:                                         |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net income                                         |  | $                          | (1,212 | ) |                          | $ | 7,725  |      |  | $ | 159    |   |  | $ | 19,668 |  
|Denominator:                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Weighted average common shares outstanding         |  |                            | 46,227 |   |                          |   | 43,896 |      |  |   | 46,006 |   |  |   | 43,379 |  
|Less: Unvested common shares subject to repurchase |  |                            | (321   | ) |                          |   | (23    | )    |  |   | (321   | ) |  |   | (18    | )
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total shares; basic                                |  |                            | 45,906 |   |                          |   | 43,873 |      |  |   | 45,685 |   |  |   | 43,361 |  
|                                                   |  |                            |        |  
|Effect of dilutive securities                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Stock options and warrants                         |  |                            |       |   |                          |   | 3,589  |      |  |   | 1,912  |   |  |   | 4,248  |  
|Unvested common shares subject to repurchase       |  |                            |       |   |                          |   | 32     |      |  |   | 321    |   |  |   | 25     |  
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total shares; diluted                              |  |                            | 45,906 |   |                          |   | 47,494 |      |  |   | 47,918 |   |  |   | 47,634 |  
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net income per common share; basic                 |  | $                          | (0.03  | ) |                          | $ | 0.18   |      |  | $ |       |   |  | $ | 0.45   |  
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net income per common share; diluted               |  | $                          | (0.03  | ) |                          | $ | 0.16   |      |  | $ |       |   |  | $ | 0.41   |  
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  



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For the three months ended June 30, 2006, potential common shares and the number of vested options outstanding, were
excluded in the calculation of diluted net loss per share, as they were considered antidilutive due to the net loss the Company experienced during the period. For the six months ended June 30, 2006, a total of 1,506,000 common stock options
were excluded from the computation of diluted net income per share as they had an antidilutive effect. For the three and six months ended June 30, 2005, 384,000 and 170,000 common stock options were excluded from the computation of diluted net
income per share, respectively.

NOTE 7  STOCK-BASED COMPENSATION

On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment, (SFAS No. 123(R)) under which the measurement and recognition of compensation expense
for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases under the Companys Employee Stock Purchase Plan based on estimated fair values was required. SFAS No. 123(R)
supersedes the Companys previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) for periods beginning in fiscal year 2006. In March 2005, the
SEC issued SAB No. 107 relating to SFAS No. 123(R).

SFAS No. 123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Companys Condensed Consolidated Statement
of Operations.

The Company has applied the provisions of SAB No. 107 in its adoption of SFAS No. 123(R). Thus, the Company adopted SFAS
No. 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of the first day of the Companys fiscal year 2006. In accordance with the modified prospective transition method,
the Companys Condensed Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include the impact of SFAS No. 123(R). The valuation provisions of SFAS No. 123(R) apply to new awards and to
awards that are outstanding on the effective date and subsequently modified or cancelled. Historically, the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB No. 25 and
only disclosed the impact of SFAS No. 123 within the footnote disclosures of the Companys financial statements. Thus, no stock-based compensation expense had been recognized in the Companys Condensed Consolidated Statement of
Operations as permitted under SFAS No. 123.

In conjunction with the adoption of SFAS No. 123(R), the Company prospectively amended its method of
attributing the value of stock-based compensation to expense. Historically, the Company utilized the provisions of FIN No. 28 to recognize the expense associated with equity awards. This method allows for accelerated amortization of stock based
compensation expense over the vesting period of the award. As permitted by SFAS No. 123(R), the Company elected the straight-line method of expensing all stock based compensation awarded subsequent to the adoption of SFAS No. 123(R). Thus,
compensation expense for all share-based payment awards granted on or prior to December 31, 2005 will continue to be recognized using the accelerated approach under FIN No. 28 while compensation expense for all share-based payment awards
granted subsequent to December 31, 2005 will be recognized using the straight-line method.

The Company will continue to use the Black-Scholes
valuation model to determine the estimated fair value of stock-based awards since this model utilizes the following award attributes to determine the estimated fair value of stock-based awards: fair value at date of grant, exercise price, risk free
interest rate, volatility, expected life of the award, forfeiture rate and dividend rate.



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The following table depicts the calculations prior to the adoption of the SFAS
No. 123(R) (in thousands, except per share amounts):



|                                                                                                                                 |  |                                 |        |   |                               |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ----------------------------- | - | ------ | -
|                                                                                                                                 |  | Three Months EndedJune 30, 2005 |        |   | Six Months EndedJune 30, 2005 |  
|Net income - as reported                                                                                                         |  | $                               | 7,725  |   |                               | $ | 19,668 |  
|Plus: Stock-based employee compensation expense determined under APB Opinion No. 25, included in reported net income, net of
tax |  |                                 | 3      |   |                               |   | 7      |  
|Less: Stock-based employee compensation expense determined under fair value based method, net of tax                             |  |                                 | (2,759 | ) |                               |   | (6,045 | )
|                                                                                                                                 |  |                                 |        |   |                               |   |        |  
|Net income - as adjusted                                                                                                         |  | $                               | 4,969  |   |                               | $ | 13,630 |  
|                                                                                                                                 |  |                                 |        |   |                               |   |        |  
|Basic net income per share:                                                                                                      |  |                                 |        |   |                               |   |        |  
|As reported                                                                                                                      |  | $                               | 0.18   |   |                               | $ | 0.45   |  
|As adjusted                                                                                                                      |  | $                               | 0.11   |   |                               | $ | 0.31   |  
|Diluted net income per share:                                                                                                    |  |                                 |        |   |                               |   |        |  
|As reported                                                                                                                      |  | $                               | 0.16   |   |                               | $ | 0.41   |  
|As adjusted                                                                                                                      |  | $                               | 0.10   |   |                               | $ | 0.29   |  

Impact of the adoption of SFAS No. 123(R)

The Company elected to adopt the modified prospective application method as provided by SFAS No. 123(R). Accordingly, during the three and six months ended
June 30, 2006, the Company recorded stock-based compensation cost totaling the amount that would have been recognized had the fair value method been applied since the effective date of SFAS No. 123. Previously reported amounts have not
been restated. The effect of recording stock-based compensation for the three and six months ended June 30, 2006 was as follows (in thousands, except per shares amounts):



|                                                   |  |                                 |       |   |                               |   |        |  
|-------------------------------------------------- |  | ------------------------------- | ----- | - | ----------------------------- | - | ------ | -
|                                                   |  | Three Months EndedJune 30, 2006 |       |   | Six Months EndedJune 30, 2006 |  
|Stock-based compensation expense by type of award: |  |                                 |       |   |                               |   |        |  
|Employee stock options                             |  | $                               | 2,739 |   |                               | $ | 5,886  |  
|Restricted stock awards                            |  |                                 | 510   |   |                               |   | 1,043  |  
|Employee stock purchase plan                       |  |                                 | 82    |   |                               |   | 180    |  
|                                                   |  |                                 |       |   |                               |   |        |  
|Total stock-based compensation                     |  |                                 | 3,331 |   |                               |   | 7,109  |  
|Tax effect on stock-based compensation             |  |                                 | (989  | ) |                               |   | (2,067 | )
|                                                   |  |                                 |       |   |                               |   |        |  
|Net effect on net income                           |  | $                               | 2,342 |   |                               | $ | 5,042  |  
|                                                   |  |                                
|Effect on earnings per share:                      |  |                                 |       |   |                               |   |        |  
|Basic                                              |  | $                               | 0.05  |   |                               | $ | 0.11   |  
|Diluted                                            |  | $                               | 0.05  |   |                               | $ | 0.10   |  

For the three months and six months ended June 30, 2006, the stock-based compensation expense was $734,000 and
$1,719,000 for cost of revenues and research, development and other related costs, and $2,597,000 and $5,390,000 for selling, general and administrative, respectively. The following table summarizes stock-based compensation expense related to all
share-based payment awards for the three months and six months ended June 30, 2006 (in thousands):



|                                                                  |  |                                 |       |                               |   |      
|----------------------------------------------------------------- |  | ------------------------------- | ----- | ----------------------------- | - | -----
|                                                                  |  | Three Months EndedJune 30, 2006 |       | Six Months EndedJune 30, 2006
|Stock-based compensation expense by Department:                   |  |                                 |       |                               |   |      
|Cost of revenues and research, development and other related cost |  | $                               | 734   |                               | $ | 1,719
|Selling, general and administrative                               |  |                                 | 2,597 |                               |   | 5,390
|                                                                  |  |                                 |       |                               |   |      
|Total stock-based compensation                                    |  |                                 | 3,331 |                               |   | 7,109
|                                                                  |  |                                 |       |                               |   |      



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During the three and six months ended June 30, 2006, the Company granted 508,000 and 759,000, stock options,
respectively with an estimated total grant-date fair value of $7.4 million and $11.6 million, respectively, before estimated forfeitures. As of June 30, 2006, the unrecorded deferred stock-based compensation balance related to stock options was
$21.4 million before estimated forfeitures and an additional $8.5 million related to restricted stock awards will be recognized over an estimated weighted average amortization period of 4 years.

The following assumptions have been used to value the options granted:



|                        |  |                            |   |  |                          |   |  |      |   |  |      |  
|----------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                        |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|                        |  | 2006                       |   |  | 2005                     |   |  | 2006 |   |  | 2005 |  
|Expected life (years)   |  | 4.0                        |   |  | 3.5                      |   |  | 4.0  |   |  | 3.6  |  
|Risk-free interest rate |  | 5.0                        | % |  | 3.8                      | % |  | 4.8  | % |  | 3.8  | %
|Dividend yield          |  | 0.0                        | % |  | 0.0                      | % |  | 0.0  | % |  | 0.0  | %
|Expected volatility     |  | 61.4                       | % |  | 64.3                     | % |  | 62.0 | % |  | 69.1 | %

The following assumptions have been used to value the ESPP shares:



|                        |  |                            |   |  |                          |   |  |      |   |  |      |  
|----------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                        |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|                        |  | 2006                       |   |  | 2005                     |   |  | 2006 |   |  | 2005 |  
|Expected life (years)   |  | 2.0                        |   |  | 2.0                      |   |  | 2.0  |   |  | 2.0  |  
|Risk-free interest rate |  | 5.0                        | % |  | 3.8                      | % |  | 4.8  | % |  | 3.9  | %
|Dividend yield          |  | 0.0                        | % |  | 0.0                      | % |  | 0.0  | % |  | 0.0  | %
|Expected volatility     |  | 43.7                       | % |  | 40.0                     | % |  | 43.4 | % |  | 43.6 | %

The Company uses third-party analyses to assist in developing the expected life assumption used in its
Black-Scholes model. The Company, however, is responsible for determining the assumptions regarding its volatility and risk-free interest rate. The Company is currently using estimated forfeitures on a quarterly basis and will, in accordance with
SFAS No. 123(R), be adjusting the stock-based expense for actual forfeitures at the end of the year. The volatility assumption is based on the blended volatility approach due to insufficient Company historical data. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes valuation model and the straight-line attribution approach.

NOTE 8 
STOCKHOLDERS EQUITY

Stock Option Plans

The 1991 Plan

In November 1991, the Company adopted the 1991 Stock Option Plan (the 1991 Plan). Under the 1991 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. Options granted under the 1991 Plan generally have a term of ten years from the date of grant and vest over a four-year period. After December 1996, no further options were
granted from the 1991 Plan.

The 1996 Plan

In December
1996, the Company adopted the 1996 Stock Option Plan (the 1996 Plan). Under the 1996 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. Options granted under the 1996 Plan generally have a term of ten
years from the date of grant and vest over a four-year period. After February 1999, no further options were granted from the 1996 Plan.



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The 1999 Plan

In
February 1999, the Company adopted the 1999 Stock Option Plan (the 1999 Plan), which was approved by the stockholders in May 1999. The terms of the 1999 Plan are similar to the terms of the 1996 Plan. After December 2002, no further
options were granted under the 1999 Plan.

The 2003 Plan

In February 2003, the Board of Directors adopted, and the Company stockholders approved, the 2003 Equity Incentive Plan (the 2003 Plan). The terms of the 2003 Plan are similar to the terms of the 1999 Plan. The 2003 Plan permits
the granting of restricted stock either alone, in addition to, or in tandem with any options granted thereunder. As of June 30, 2006, there were 3,065,000 shares reserved for grant under the 2003 Plan.

Options to purchase 508,000 and 759,000 of common stock were granted at a weighted average Black-Scholes fair value of $14.48 and $15.27 to employees during the three
and six months ended June 30, 2006 under our 2003 Plan, respectively. As of June 30, 2006, options to purchase 4,581,000 shares of common stock were outstanding.

The activities under all of the Companys stock options plans are summarized below (in thousands, except per share amounts):



|                             |  |                 |   |  |                     |   |  |                              |      
|---------------------------- |  | --------------- | - |  | ------------------- | - |  | ---------------------------- | -----
|                             |  |                 |   |  | Options Outstanding
|                             |  | SharesAvailable |   |  | Numberof Shares     |   |  | WeightedAverageExercisePrice
|Balance at December 31, 2003 |  | 2,460           |   |  | 8,387               |   |  |                              | 2.83 
|Additional shares authorized |  | 1,000           |   |  |                    |   |  |                              |     
|Restricted stocks granted    |  | (10             | ) |  |                    |   |  |                              |     
|Options granted              |  | (1,855          | ) |  | 1,855               |   |  |                              | 19.40
|Options exercised            |  |                |   |  | (3,474              | ) |  |                              | 2.58 
|Options canceled             |  | 150             |   |  | (150                | ) |  |                              | 7.30 
|                             |  |                 |   |  |                     |   |  |                              |      
|Balance at December 31, 2004 |  | 1,745           |   |  | 6,618               |   |  | $                            | 7.50 
|                             |  |                 |   |  |                     |   |  |                              |      
|Restricted stocks granted    |  | (87             | ) |  |                    |   |  |                              |     
|Options granted              |  | (1,112          | ) |  | 1,112               |   |  |                              | 33.71
|Options exercised            |  |                |   |  | (2,786              | ) |  |                              | 4.01 
|Options canceled             |  | 164             |   |  | (164                | ) |  |                              | 19.59
|                             |  |                 |   |  |                     |   |  |                              |      
|Balance at December 31, 2005 |  | 710             |   |  | 4,780               |   |  | $                            | 15.22
|                             |  |                 |   |  |                     |   |  |                              |      
|Additional shares authorized |  | 100             |   |  |                    |   |  |                              |     
|Restricted stocks granted    |  | (148            | ) |  |                    |   |  |                              |     
|Options granted              |  | (251            | ) |  | 251                 |   |  |                              | 32.44
|Options exercised            |  |                |   |  | (625                | ) |  |                              | 5.04 
|Options canceled             |  | 26              |   |  | (26                 | ) |  |                              | 17.09
|                             |  |                 |   |  |                     |   |  |                              |      
|Balance at March 31, 2006    |  | 437             |   |  | 4,380               |   |  | $                            | 17.65
|                             |  |                 |   |  |                     |   |  |                              |      
|Additional shares authorized |  | 3,200           |   |  |                    |   |  |                              |     
|Restricted stocks granted    |  | (107            | ) |  |                    |   |  |                              |     
|Restricted stocks canceled   |  | 14              |   |  |                    |   |  |                              |      
|Options granted              |  | (508            | ) |  | 508                 |   |  |                              | 28.23
|Options exercised            |  |                |   |  | (278                | ) |  |                              | 5.22 
|Options canceled             |  | 29              |   |  | (29                 | ) |  |                              | 23.79
|                             |  |                 |   |  |                     |   |  |                              |      
|Balance at June 30, 2006     |  | 3,065           |   |  | 4,581               |   |  | $                            | 19.54
|                             |  |                 |   |  |                     |   |  |                              |      



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The aggregate intrinsic value in the table below represents the total pretax intrinsic value, based on the Companys
closing stock price of $27.50 as of June 30, 2006, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of options exercisable as of June 30, 2006 was
1,955,000. The following table summarizes the ranges of outstanding and exercisable options as of June 30, 2006 (in thousands, except years, per share amounts and aggregate intrinsic value):



|                          |  |                     |  |                                                    |  |                              |       |                                      |   |                 |  |                                                    |  |                              |  |                                      |       |  |   |      
|------------------------- |  | ------------------- |  | -------------------------------------------------- |  | ---------------------------- | ----- | ------------------------------------ | - | --------------- |  | -------------------------------------------------- |  | ---------------------------- |  | ------------------------------------ | ----- |  | - | -----
|                          |  | Options Outstanding |  | Options Vested and Exercisable                    
|Range of exercise prices: |  | Number ofShares     |  | WeightedAverageRemainingContractualLife (in years) |  | WeightedAverageExercisePrice |       | AggregateIntrinsicValue (inmillions) |   | Number ofShares |  | WeightedAverageRemainingContractualLife (in years) |  | WeightedAverageExercisePrice |  | AggregateIntrinsicValue (inmillions)
|$0.53-$2.63               |  | 701                 |  | 4.55                                               |  | $                            | 2.27  |                                      | $ | 17.69           |  | 701                                                |  | 3.83                         |  | $                                    | 2.27  |  | $ | 17.67
|$3.25-$17.30              |  | 1,052               |  | 6.82                                               |  |                              | 8.42  |                                      |   | 20.07           |  | 606                                                |  | 6.71                         |  |                                      | 6.56  |  |   | 12.69
|$17.75-$27.94             |  | 935                 |  | 8.03                                               |  |                              | 18.72 |                                      |   | 8.21            |  | 248                                                |  | 8.38                         |  |                                      | 18.43 |  |   | 2.25 
|$28.07-$32.93             |  | 1,033               |  | 9.56                                               |  |                              | 29.73 |                                      |   |                |  | 155                                                |  | 9.70                         |  |                                      | 29.59 |  |   |     
|$34.52-$40.19             |  | 860                 |  | 8.84                                               |  |                              | 35.87 |                                      |   |                |  | 245                                                |  | 8.94                         |  |                                      | 36.13 |  |   |     
|                          |  |                     |  |                                                    |  |                              |       |                                      |   |                 |  |                                                    |  |                              |  |                                      |       |  |   |      
|$0.53-$40.19              |  | 4,581               |  | 7.72                                               |  | $                            | 19.54 |                                      |   | 44.97           |  | 1,955                                              |  | 7.51                         |  | $                                    | 12.05 |  |   | 32.62
|                          |  |                     |  |                                                    |  |                              |       |                                      |   |                 |  |                                                    |  |                              |  |                                      |       |  |   |      

Employee Stock Purchase Plan

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

The Company initially reserved 200,000 shares of our 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 and are scheduled to work more than 20 hours per week for more than five calendar
months per 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 be applied to the purchase of shares on each semi-annual purchase date. The purchase price per share will be equal to 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.

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
be equal to 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.



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

As of June 30, 2006, there were 457,000 shares reserved for grant under the ESPP, and an aggregate of 143,000 common shares were
purchased.

NOTE 9  INCOME TAXES

Income tax
benefit for the three months ended June 30, 2006 was $501,000 and income tax provision for the six months ended June 30, 2006 was $1.8 million and were comprised of domestic income tax and foreign withholding tax, respectively. For the
three and six months ended June 30, 2005, the income tax provision were $4.2 million and $11.0 million, respectively. The 2005 income tax provision included the domestic income tax and foreign withholding tax. The decrease in the income tax
provision for the three and six months ended June 30, 2006 is primarily attributable to the decrease in first quarter pre-tax income. Also for the three and six months ended June 30, 2006, the Company paid $0 and $130,000 of franchise
taxes, respectively.

On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, Transition Election Related to Accounting for
Tax Effects of Share-Based Payment Awards. SFAS No. 123(R) requires a company to calculate the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to adopting SFAS No. 123(R) (termed the APIC Pool),
as if the company had adopted SFAS No. 123 in 1995. There are two methods to calculate the companys hypothetical APIC Pool: (1) the long form method as set forth in paragraph 81 of SFAS No. 123(R), and (2) the short form
method as set forth in FASB Staff Position 123R-3.

The Company has elected the long form method under which the Company tracks each award grant on an
employee-by-employee basis and grant-by-grant basis to determine if there is a tax benefit situation or tax deficiency situation for such award. The Company then compares the fair value expense to the tax deduction received for each grant and
aggregates the benefits and deficiencies to determine whether there is a hypothetical APIC Pool (net tax benefit situation).

For the three and six months
ended June 30, 2006, the Company has not recognized a tax benefit to APIC, but will instead make this determination for our fiscal year ending December 31, 2006.

NOTE 10  COMMITMENTS AND CONTINGENCIES

Litigation



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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 the Companys U.S. Patents 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. 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 AMD and Spansion from continuing to infringe these patents.

On December 16, 2005, the Company
filed a first amended complaint to add Spansion Inc. and Spansion Technology, Inc. to the lawsuit. Spansion Inc. and Spansion Technology, Inc. are two new entities who were created by the initial public offering of Spansion in December, 2005.

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 U.S.A. Inc., STMicroelectronics N.V., STMicroelectronics, Inc.,
STATS ChipPAC Ltd., STATS ChipPAC, Inc., and STATS ChipPAC (BVI) Ltd.

The defendants in this action have asserted affirmative defenses to our patent
infringement claims, and some of them have brought related counterclaims alleging that the asserted Tessera patents are not infringed, invalid and unenforceable and/or that Tessera is not the owner of the patents. The Company cannot predict the
outcome of this proceeding. Discovery has just begun, and trial is currently set for January 28, 2008. An adverse decision in this proceeding could significantly harm our business.

Tessera, Inc. v. Amkor Technology, Inc.

On March 2, 2006, the Company issued a request for arbitration with Amkor
Technology, Inc. (Amkor) regarding Amkors failure to pay royalties under its license agreement with Tessera. This proceeding has just begun, and the Company cannot predict its outcome. An adverse decision in this proceeding could
significantly harm its business.



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

In July 2006, the Company entered into definitive agreements to settle its lawsuit against Micron Technology, Inc. and its subsidiaries (collectively Micron)
and against Infineon Technologies AG and its subsidiaries including Qimonda AG (collectively Infineon) in the U.S. District Court for the Eastern District of Texas. Initially filed on March 1, 2005, and subsequently amended, this lawsuit
alleged (1) Microns and Infineons infringement of the Companys U.S. Patents 5,852,326, 5,679,977, 6,433,419, 6,465,893 and 6,133,627; as well as (2) Microns and Infineons violations of federal antitrust law, Texas
antitrust law, and Texas common law. On July 20, 2006, Tessera and Micron entered into a Settlement Agreement and a TCC License Agreement that resolved all outstanding litigation between them. On July 31, 2006, Tessera, Infineon and Qimonda each
entered into a Settlement Agreement and TCC License Agreements that resolved all outstanding litigation between them. Dismissal of this lawsuit is contingent upon Tesseras receipt of payments from Micron, Infineon and Qimonda, the filing of a
joint motions to dismiss the lawsuit, and the Courts granting of those motions. Tessera has received payment from Micron and anticipates filing a joint motion to dismiss the claims between Tessera and Micron by August 14, 2006. Tessera
anticipates receiving payments from Infineon and Qimonda by August 18, 2006, and anticipates filing the joint motion to dismiss the claims between Tessera, Infineon and Qimonda within ten business days after such payment is received. The above
contingencies to the dismissal of this lawsuit may not be met, and it remains possible that these lawsuits will continue. If the lawsuit is not dismissed, we cannot predict its outcome, and an adverse decision could significantly harm our business.

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

On July 20, 2006, Tessera and Micron entered into a Settlement Agreement and a TCC License Agreement that resolved all outstanding litigation between the companies,
including this lawsuit, in which Micron alleged that the Company infringed Microns U.S. Patent Nos. 5,739,585, 6,013,948, 6,268,649, 6,738,263, 5,107,328, 6,265,766, 4,992,849 and Re. 36,325. Dismissal of this lawsuit is contingent upon
Tesseras receipt of payment from Micron under its TCC License Agreement, the filing of a joint motion to dismiss the lawsuit, and the Courts granting of that motion. Tessera has received payment from Micron and anticipates filing a joint
motion to dismiss this lawsuit by August 14, 2006. The contingencies to the dismissal of this lawsuit may not be met, and it remains possible that these lawsuits will continue. If the lawsuit is not dismissed, we cannot predict its outcome, and an
adverse decision could significantly harm our business.

Samsung Electronics Co. Ltd. v. Tessera, Inc., Civil Action No. 02-05837 CW (N.D. Cal.)

During the fiscal year ending December 31, 2004, the Company was involved in a lawsuit with Samsung Electronics Company and its subsidiaries
(collectively Samsung) that was settled in November 2004 and finally dismissed in February 2005. This lawsuit involved several Samsung semiconductor chip packages and the Companys U.S. Patent Nos 5,852,326, 5,679,977, 6,433,419,
6,465,893, 5,950,304 and 6,133,627. The terms of settlement, including a royalty-bearing license going forward, are set forth in a Settlement Agreement and a Restated License Agreement, both of which were executed on January 26, 2005.

Other Commitments

In June 2006, Tessera entered into an
agreement with lead litigation counsel Irell and Manella LLP (Irell) regarding an alternative fee arrangement for Tesseras pending lawsuit against Micron and Infineon. Depending on whether there was a favorable or unfavorable
outcome of the lawsuit, Tessera would be entitled to make adjustments to the withheld fees owed to Irell. On July 20, 2006 Tessera entered into a Settlement Agreement with Micron, constituting a favorable outcome. As a result all withheld fees plus
interest was payable along with an accrual for an additional 20% on the full fees incurred.



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NOTE 11  SEGMENT AND GEOGRAPHIC INFORMATION

The Company has adopted SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information (SFAS No. 131). In 2006, the Companys operating segments include
Intellectual Property and Services. Intellectual Property segment is primarily composed of Licensing Business and Emerging Markets and Technologies, and Services segment is composed primarily of the Product Division. The segments were determined
based upon how the chief operating decision maker views and evaluates our operations. In addition to its reportable segments, Corporate Overhead, not a reportable segment, includes certain operating expenses and credits that are not allocated to the
operating segments because these operating expenses and credits are not considered in evaluating the operating performance of its business segments.

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



|                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|----------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                              |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                              |  | 2006                       |        |   | 2005                     |   |        | 2006 |  |   | 2005    |  
|Revenues:                     |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Intellectual Property Segment |  | $                          | 21,034 |   |                          | $ | 18,651 |      |  | $ | 40,629  |   |  | $ | 42,794 |  
|Services Segment              |  |                            | 3,225  |   |                          |   | 3,810  |      |  |   | 7,294   |   |  |   | 7,566  |  
|Corporate Overhead            |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |       |  
|                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Total revenues                |  |                            | 24,259 |   |                          |   | 22,461 |      |  |   | 47,923  |   |  |   | 50,360 |  
|                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|                              |  |                            |        |  
|Operating expenses:           |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Intellectual Property Segment |  |                            | 16,599 |   |                          |   | 3,769  |      |  |   | 27,597  |   |  |   | 6,298  |  
|Services Segment              |  |                            | 4,681  |   |                          |   | 3,635  |      |  |   | 8,473   |   |  |   | 7,140  |  
|Corporate Overhead            |  |                            | 6,211  |   |                          |   | 3,865  |      |  |   | 12,599  |   |  |   | 7,597  |  
|                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Total operating expenses      |  |                            | 27,491 |   |                          |   | 11,269 |      |  |   | 48,669  |   |  |   | 21,035 |  
|                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|                              |  |                            |        |  
|Operating income (loss)       |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Intellectual Property Segment |  |                            | 4,435  |   |                          |   | 14,882 |      |  |   | 13,032  |   |  |   | 36,496 |  
|Services Segment              |  |                            | (1,456 | ) |                          |   | 175    |      |  |   | (1,179  | ) |  |   | 426    |  
|Corporate Overhead            |  |                            | (6,211 | ) |                          |   | (3,865 | )    |  |   | (12,599 | ) |  |   | (7,597 | )
|                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Total operating income        |  | $                          | (3,232 | ) |                          | $ | 11,192 |      |  | $ | (746    | ) |  | $ | 29,325 |  
|                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  

The Companys revenues are generated from licensees headquartered in the following geographic regions (in
thousands):



|              |  |                            |        |                          |   |        |  |      |        |  |   |       
|------------- |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|              |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|              |  | 2006                       |        | 2005                     |   | 2006   |  | 2005
|United States |  | $                          | 9,529  |                          | $ | 9,724  |  | $    | 20,213 |  | $ | 19,491
|Taiwan        |  |                            | 1,674  |                          |   | 242    |  |      | 2,951  |  |   | 280   
|Singapore     |  |                            | 346    |                          |   | 55     |  |      | 775    |  |   | 81    
|Korea         |  |                            | 5,276  |                          |   | 7,284  |  |      | 9,833  |  |   | 17,462
|Japan         |  |                            | 7,380  |                          |   | 4,899  |  |      | 13,782 |  |   | 12,762
|Other         |  |                            | 54     |                          |   | 257    |  |      | 369    |  |   | 284   
|              |  |                            |        |                          |   |        |  |      |        |  |   |       
|              |  | $                          | 24,259 |                          | $ | 22,461 |  | $    | 47,923 |  | $ | 50,360
|              |  |                            |        |                          |   |        |  |      |        |  |   |       

NOTE 12  RELATED PARTY TRANSACTION

In November 2005, the Company engaged in consulting services with a company which is owned 100% by one of the Companys employee. For the three and six months ended June 30, 2006, the Company recognized
$413,000 and $913,000 of consulting expenses.



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NOTE 13  SUBSEQUENT EVENTS

In July 2006, the Company completed its acquisition of Digital Optics Corporation (Digital Optics), a company based in Charlotte, North Carolina, for approximately $59.5 million in cash for all outstanding
shares of capital stock and vested stock options, subject to adjustment as set forth in the Agreement and Plan Merger. A portion of the purchase price will be held in escrow and is subject to forfeiture to satisfy indemnification obligations, if
any, of the former equity holders of Digital Optics and as security for purchase price adjustment, if any. In addition, each unvested option to purchase one share of Digital Optics common stock was converted into an option to purchase, on the same
terms, a fraction of a share of Tessera common stock. As a result of the acquisition, Digital Optics became a wholly owned subsidiary of Tessera. The Company will account for the acquisition using the purchase method of accounting.

In July, 2006, Tessera has entered into a definitive technology license agreement (the License Agreement) with Micron Technology, Inc. (Micron).
Under the terms of the License Agreement, Micron will pay $30 million in cash for a world-wide, non-exclusive, royalty-bearing license to Tesseras Compliant Chip (TCC) technology. In connection with the License Agreement, Tessera and Micron
have agreed to settle all outstanding litigation between the companies. The $30 million payment will be received by Tessera in the third quarter of 2006 and includes full payment of past royalties through June 30, 2006 on the use of the TCC
technology. In addition, under the License Agreement, Micron shall pay royalties to Tessera on a quarterly basis in the future with respect to the use of the TCC technology. The License Agreement expires on May 22, 2012, subject to Microns
option to extend the agreement for one additional five-year term.

In July, 2006, Tessera has entered into a definitive agreements with Infineon
Technologies AG and its subsidiary, Qimonda AG (together, Infineon). Under the terms of these agreements, Infineon and Qimonda will pay an aggregate of $50 million in cash for a world-wide, non-exclusive, royalty-bearing licenses to
Tesseras Compliant Chip (TCC) technology. In connection with these agreements, Tessera and Infineon have agreed to settle all outstanding litigation between the companies.



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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, 2005, found
in our Annual Report on Form 10-K filed on March 16, 2006.

The following Managements Discussion and Analysis of Financial Condition and
Results of Operations, as well as information contained in Risk Factors in Part II, Item IA and elsewhere in this Quarterly Report on Form 10-Q, contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend that these forward-looking statements be subject to the safe harbors created by those provisions. Forward-looking statements are generally written in the
future tense and/or are preceded by words such as will, may, should, would, could, forecast, expect, suggest, believe,
anticipate, intend, plan, or other similar words. Forward-looking statements include statements regarding (1) our revenue levels, (2) our gross profit and factors that affect gross profit, (3) our
level of operating expenses, (4) our research and development efforts, (5) our liquidity, (6) our partners and suppliers and (7) the commercial success of our products.

The forward-looking statements contained in this Quarterly Report involve a number of risks and uncertainties, many of which are outside of our control. Factors that
could cause actual results to differ materially from projected results include, but are not limited to, risks associated with (1) our ability to protect and enforce our intellectual property rights, (2) costly legal proceedings that we may
have to undertake to enforce or protect our intellectual property rights, (3) our inability to control risks that are inherent in a royalty-based business model, and (4) our ability to create and implement new designs to expand our
licensable technology portfolio. Although we believe that the assumptions underlying the forward-looking statements contained in this Quarterly Report are reasonable, any of the assumptions could be inaccurate, and therefore there can be no
assurance that such statements will be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other
person that the results or conditions described in such statements or our objectives and plans will be achieved. Furthermore, past performance in operations and share price is not necessarily indicative of future performance. Tessera disclaims any
intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

Tessera is a provider of miniaturization technologies for the electronics industry. We enable improvements in miniaturization and
performance by applying our expertise in the electrical, thermal, mechanical and optical properties of materials and interconnect. We develop and license technologies to the electronics industry. Our intellectual property portfolio includes
approximately 564 issued patents, covering a broad range of advanced semiconductor packaging, interconnect and micro-optics solutions. We license our technology to our customers, enabling them to produce semiconductor chips that are smaller and
faster, and incorporate more features. These semiconductors are utilized in a broad range of electronics products, including digital audio players, digital cameras, personal computers, personal digital assistants, video game consoles and mobile
phones. By using our technology, we believe that our customers are also able to reduce the time-to-market and development costs of their semiconductors.



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Our patented technology enables our customers to assemble semiconductor chips into chip-scale packages
(CSPs), that are almost as small as the chip itself. Our technology also enables multiple chips to be stacked vertically in a single three-dimensional multi-chip package that occupies almost the same circuit board area as a CSP. Our
technology allows a plurality of semiconductor chips and passive components to be densely combined in ultra-compact electronics modules. By reducing the size of the semiconductor package and shortening electrical connections between the chip and the
circuit board, our technology allows further miniaturization and increased performance and functionality of electronic products. We achieve these benefits without sacrificing reliability by allowing movement within the package, thus addressing
critical problems associated with thermally-induced stress which can occur when packages decrease in size. Our technologies also enable our customers to package semiconductor chips and microdevices at the wafer level (wafer level
packaging or WLP) and to create high-density interconnections between electronic components using flexible substrate materials.

From our
inception in 1990 through 1995, we engaged principally in research and development activities related to chip-scale and multi-chip packaging technology. We began generating revenues from licenses of our intellectual property in 1994. We began
manufacturing activities in 1997 to support market acceptance of our technology. We discontinued most of these manufacturing activities in 1999 after many suppliers had developed the manufacturing infrastructure to implement our technology. We
continue to develop prototypes and manufacture limited volumes of select circuits.

We generate revenues from:



| |  |  | royalties and license fees, which represents the majority of our revenues and consists of royalties on semiconductors shipped by our licensees that employ our patented technologies;
and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | services, which utilize or further our intellectual property and drive our product introduction process.
| | - |  | --------------------------------------------------------------------------------------------------------

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

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

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

Service revenues are primarily derived from engineering services, including related training services. Revenues from services related to training are recognized as the services are performed. Revenues from other
services are recognized on a percentage-of-completion 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 the total costs to complete the projects. 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 under the completed contract method are recognized upon acceptance by the customer or in accordance with the contract specifications.



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We derive a significant portion of our revenues from licensees headquartered outside of the United States, principally in
Asia. For the three and six months ended June 30, 2006, these revenues accounted for 61% and 57% of our total revenues, respectively. For the three and six months ended June 30, 2005, these revenues accounted for 56% and 61% of our total
revenues, respectively. We expect that these revenues will continue to account for a significant portion of revenues in future periods. All of our revenues are denominated in U.S. dollars. For the three and six months ended June 30, 2006, Intel
Corporation, Samsung Electronics Co., Ltd and Texas Instruments, Inc. each accounted for 10% or more of our total revenues. For the three and six months ended June 30, 2005, Fujitsu Limited, Hynix Semiconductor, Intel Corporation, Samsung
Electronics Co., Ltd. and Texas Instruments, Inc. each accounted for 10% or more of our total revenues.

We license most of our CSP and multi-chip
packaging technology under a license that we refer to as a TCC license. Our TCC license grants a worldwide right under the licensed patent claims to assemble, use and sell certain CSPs and multi-chip packages. We generally license semiconductor
material suppliers under our TCMT license. Our TCMT license calls for a one-time license fee and, unlike most of our other licenses, does not require ongoing royalty payments.

Effective as of the beginning of 2006 we organized our business units into three operating divisions: the Licensing Business, the Product Division and Emerging Markets and Technologies. These divisions are reported
into two segments, Intellectual Property, which consists primarily of our Licensing Business, and Emerging Markets and Technologies and Services, which consists primarily of the Product Division. The Product Division incorporates operational
functions that are reported in both our Intellectual Property and Services segments. The segments were determined based upon how our management views and evaluates our operations. Segment information in this Item 2 Managements
Discussion and Analysis of Financial Condition and Results of Operations and in Note 10 of the Notes to Condensed Consolidated Financial Statements included in this report are presented in accordance with the Statement of Financial Accounting
Standards (SFAS) No. 131, Disclosure about Segments of an Enterprise and Related Information. In addition to our reportable segments, we also have aCorporate Overhead category that is not a reportable segment. This category includes
certain operating expenses and credits that are not allocated to our business segments because these operating expenses and credits are not considered in evaluating the operating performance of our business segments.

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

Research, development and other related costs consist primarily of compensation and related costs for personnel as well as costs related to patent
applications and examinations, materials, supplies and equipment depreciation. Our research and development is conducted primarily in-house and targets CSP, multi-chip and WLP technology. All research, development and other related costs are
expensed as incurred. We believe that a significant level of research, development and other related costs will be required for us to remain competitive in the future. We have increased research and development personnel to 91 at June 30, 2006
from 54 at June 30, 2005, and expect to continue to increase research and development personnel in the future.

Selling expenses consist primarily of
compensation and related costs for sales and marketing personnel, marketing programs, public relations, promotional materials, travel and related trade show expenses. General and administrative expenses consist primarily of compensation and related
costs for: general management, information technology, finance and accounting personnel; litigation expenses and related fees; facilities costs; and professional services. Our general and administrative expenses are not allocated to other expense
line items. We anticipate that our selling, general and administrative expenses will increase as a result of our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002, related regulations and ongoing revisions to disclosure and
governance practices. Excluding litigation expenses, we expect that as a percentage of revenues, these expenses will decrease over time. However, we expect that litigation expenses will continue to be a material portion of our general and
administrative expenses in future periods, and may increase significantly in some periods, because of our ongoing legal actions, 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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Critical Accounting Policies and Estimates

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates
that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements.

On January 1, 2006, we adopted SFAS No. 123(R) under which the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee
stock purchases under our 2003 ESPP based on estimated fair values was required. SFAS No. 123(R) supersedes our previous accounting under Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees for periods beginning in fiscal year 2006. In March 2005, the Securities and Exchange Commission (SEC) issued SAB No. 107 relating to SFAS No. 123(R).

SFAS No. 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to
vest is recognized as expense over the requisite service periods in our Condensed Consolidated Statement of Operations.

We have applied the provisions of
SAB No. 107 in its adoption of SFAS No. 123(R). Thus, we have adopted SFAS No. 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of the first day of the
companys fiscal year 2006. In accordance with the modified prospective transition method, our Condensed Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include the impact of SFAS
No. 123(R). The valuation provisions of SFAS No. 123(R) apply to new awards and to awards that are outstanding on the effective date and subsequently modified or cancelled. Historically, we accounted for stock-based awards to employees and
directors using the intrinsic value method in accordance with APB No. 25 and only disclosed the impact of SFAS No. 123 within the footnote disclosures of our financial statements. Thus, no stock-based compensation expense had been
recognized in our Condensed Consolidated Statement of Operations as permitted under SFAS No. 123.

In conjunction with the adoption of SFAS
No. 123(R), we prospectively amended our method of attributing the value of stock-based compensation to expense. Historically, we utilized the provisions of Financial Accounting Standards Board Interpretation (FIN) No. 28 to recognize the
expense associated with equity awards. This method allows for accelerated amortization of stock based compensation expense over the vesting period of the award. As permitted by SFAS No. 123(R), we have elected the straight-line method of
expensing all stock based compensation awarded subsequent to the adoption of SFAS No. 123(R). Thus, compensation expense for all share-based payment awards granted on or prior to December 31, 2005 will continue to be recognized using the
accelerated approach under FIN No. 28 while compensation expense for all share-based payment awards granted subsequent to December 31, 2005 will be recognized using the straight-line method.

We will continue to use the Black-Scholes valuation model to determine the estimated fair value of stock-based awards since this model utilizes the following award
attributes to determine the estimated fair value of stock-based awards: fair value at date of grant, exercise price, risk free interest rate, volatility, expected life of the award, forfeiture rate and dividend rate.

The risk-free interest rate assumption is based upon observed interest rates from the U.S. Government SecuritiesTreasury Constant Maturities for the term of our
employee stock options, which is an average of four years. We currently do not pay out any dividends; therefore the dividend yield assumption is not applicable.

The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding. The expected life of any stock option cannot be less than the vesting period.

The volatility assumption is based on the blended volatility approach due to insufficient company historical data.

SFAS No. 123(R) guidelines also require that estimated forfeitures be excluded from the actual stock compensation expense. In consideration of that, we have
estimated the forfeiture rate using historical turnover data as well as pre-vesting cancellations spread over the vesting periods related to an expected term of four years.



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On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, Transition Election Related
to Accounting for Tax Effects of Share-Based Payment Awards. SFAS No. 123(R) requires a company to calculate the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to adopting SFAS No. 123(R)
(termed the APIC Pool), as if the company had adopted SFAS No. 123 in 1995. There are two methods to calculate the companys hypothetical APIC Pool: (1) the long form method as set forth in paragraph 81 of SFAS No. 123(R), and
(2) the short form method as set forth in FASB Staff Position 123R-3.

We have elected to use the long form method under which we track each award
grant on an employee-by-employee basis and grant-by-grant basis to determine if there is a tax benefit situation or tax deficiency situation for such award. We then compare the fair value expense to the tax deduction received for each grant and
aggregates the benefits and deficiencies to determine whether there is a hypothetical APIC Pool (net tax benefit situation).

Management believes there
have been no other significant changes in our critical accounting policies and estimates for the three months ended June 30, 2006 from our disclosure in our Annual Report on Form 10-K for the year ended December 31, 2005. For a discussion
of our critical accounting policies, please see the discussion in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

Results of Operations

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



|                                              |  |                            |    |  |                          |   |  |       |   |  |       |  
|--------------------------------------------- |  | -------------------------- | -- |  | ------------------------ | - |  | ----- | - |  | ----- | -
|                                              |  | Three Months EndedJune 30, |    |  | Six Months EndedJune 30, |  
|                                              |  | 2006                       |    |  | 2005                     |   |  | 2006  |   |  | 2005  |  
|Revenues:                                     |  |                            |    |  |                          |   |  |       |   |  |       |  
|Royalty and license fees                      |  | 80.5                       | %  |  | 59.2                     | % |  | 81.2  | % |  | 49.9  | %
|Past production payments                      |  | 5.8                        |    |  | 23.8                     |   |  | 3.4   |   |  | 35.1  |  
|Service revenues                              |  | 13.7                       |    |  | 17.0                     |   |  | 15.4  |   |  | 15.0  |  
|                                              |  |                            |    |  |                          |   |  |       |   |  |       |  
|Total revenues                                |  | 100.0                      |    |  | 100.0                    |   |  | 100.0 |   |  | 100.0 |  
|                                              |  |                            |    |  |                          |   |  |       |   |  |       |  
|                                              |  |                            |    | 
|Operating expenses:                           |  |                            |    |  |                          |   |  |       |   |  |       |  
|Cost of revenues                              |  | 16.4                       |    |  | 14.6                     |   |  | 15.5  |   |  | 12.4  |  
|Research, development and other related costs |  | 14.0                       |    |  | 7.2                      |   |  | 15.2  |   |  | 6.3   |  
|Selling, general and administrative           |  | 82.9                       |    |  | 28.3                     |   |  | 70.9  |   |  | 23.1  |  
|                                              |  |                            |    |  |                          |   |  |       |   |  |       |  
|Total operating expenses                      |  | 113.3                      |    |  | 50.1                     |   |  | 101.6 |   |  | 41.8  |  
|                                              |  |                            |    |  |                          |   |  |       |   |  |       |  
|Operating income (loss)                       |  | (13.3                      | )  |  | 49.9                     |   |  | (1.6  | ) |  | 58.2  |  
|Other income, net                             |  | 6.3                        |    |  | 3.4                      |   |  | 5.7   |   |  | 2.7   |  
|                                              |  |                            |    |  |                          |   |  |       |   |  |       |  
|Income (loss) before taxes                    |  | (7.0                       | )  |  | 53.3                     |   |  | 4.1   |   |  | 60.9  |  
|Income tax provision (benefit)                |  | (2.0                       | )  |  | 18.9                     |   |  | 3.8   |   |  | 21.9  |  
|                                              |  |                            |    |  |                          |   |  |       |   |  |       |  
|Net income (loss)                             |  | (5.0                       | )% |  | 34.4                     | % |  | 0.3   | % |  | 39.0  | %
|                                              |  |                            |    |  |                          |   |  |       |   |  |       |  

Three and Six Months Ended June 30, 2006 and 2005

Revenues

Revenues for the three months ended June 30, 2006 were
$24.3 million compared with $22.5 million for the three months ended June 30, 2005, an increase of $1.8 million, or 8.0%. Revenues for the six months ended June 30, 2006 were $47.9 million compared to $50.4 million for the six months ended
June 30, 2005, a decrease of $2.4 million or 4.8%. The overall increase for the three months ended June 30, 2006 is primarily due to an increase royalty and license fees of $6.2 million. The decrease in the six months ended June 30,
2006 is primarily due to a decrease in past production payments of $16.0 million, partially offset by an increase in royalty and license fees of $13.8 million.



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Cost and expenses

Cost of Revenues

Cost of revenues primarily relates to service revenue as the cost of revenues associated with intellectual property
revenues is de minimis. For the three months and six months ended June 30, 2006, cost of revenues represented 120.3% and 100.4%, respectively for each associated period. For the three months and six months ended June 30, 2005, cost
of revenues represented 86.3% and 82.6%, respectively, of service revenues for each associated period Cost of revenues as a percentage of total revenues varies based on the service revenues component of total revenues.

Cost of revenues for the three months ended June 30, 2006 were $4.0 million as compared to $3.3 million for the three months ended June 30, 2005, an increase
of $703,000, or 21.4 %. Cost of revenues for the six months ended June 30, 2006 were $7.4 million, as compared to $6.3 million for the six months ended June 30, 2005, and increase of $1.1 million, or 17.5%. The majority of the increase in
both the three and the six month period is attributable to the allocation of more personnel to service-related projects and an increase in the number of these projects. Increased materials costs related to service-related projects also accounted for
part of the increase in cost of revenues. For the three and six months ended June 30, 2006, materials and subcontractor costs totaled $1.5 million and $2.3 million, respectively, as compared to $748,000 and $1.7 million, respectively, for the
three months and six months ended June 30, 2005, an increase of $769,000 and $588,000, respectively, or 102.8% and 35.6%, respectively.

Research,
Development and Other Related Costs

Research, development and other related costs for the three and six months ended June 30, 2006 were $3.4
million and $7.3 million, respectively as compared to $1.6 million and $3.2 million, respectively, an increase of $1.8 million and $4.1 million, respectively or 109.4% and 128.1%, respectively. The increase is primarily due to an increase in
headcount from a total of 54 at June 30, 2005 to 91 at June 30, 2006, including compensation expenses, and $1.3 million and $1.4 million in costs for our research and development center in Jerusalem for the three and six months ended
June 30, 2006, respectively.

We believe that a significant level of research and development expenses will be required for us to remain competitive
in the future, therefore we expect research and development costs to increase in absolute dollars, but to decline as a percentage of revenues.

Selling,
General and Administrative

Selling, general and administrative or SG&A expenses for the three and six months ended June 30, 2006 were $20.1
million and $34.0 million, respectively, as compared to $6.3 million and $11.6 million, respectively, for the three and six months ended June 30, 2005, an increase of $13.8 million and $22.4 million, or 219.0% and 193.1%, respectively. The
increase is primarily attributable to litigation expense of $10.9 million and $15.8 million, stock-based compensation of $2.6 million and $5.4 million for the three an six months ended June 30, 2006, respectively, as well as our 2006 internal
reorganization of personnel and departments that better aligns our resources to accommodate the needs of our business. In this effort we have also increased our SG&A headcount by 20 in business development, finance and legal. The related
compensation expense is included in SG&A expenses. Total litigation expenses for the three and six months ended June 30, 2005 were $1.4 million and $1.9 million, respectively The increase in litigation is due to our ongoing legal actions,
described in Part II, Item 1 Legal Proceedings below. Stock-based compensation for the three and six months ended June 30, 2005 were $109,000 and $219,000, respectively. The overall increase stock-based compensation is
primarily related to our adoption of SFAS No. 123(R) and the increased issuances of restricted stock

Excluding litigation expenses, we expect that,
as a percentage of revenues, our SG&A expenses will decrease over time. However, we expect that litigation expenses will continue to be a material portion of our general and administrative expenses in future periods, and may increase
significantly in some periods, because of our ongoing litigation, as described 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.



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Stock-based Compensation

On January 1, 2006, we adopted SFAS No. 123(R) under which the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee
stock purchases under our 2003 ESPP based on estimated fair values was required. SFAS No. 123(R) supersedes our previous accounting under APB No. 25, Accounting for Stock Issued to Employees for periods beginning in fiscal year
2006. In March 2005, the SEC issued SAB No. 107 relating to SFAS No. 123(R).

SFAS No. 123(R) requires companies to estimate the fair value
of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Condensed Consolidated
Statement of Operations.

We have applied the provisions of SAB No. 107 in its adoption of SFAS No. 123(R). Thus, we have adopted SFAS
No. 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of the first day of the companys fiscal year 2006. In accordance with the modified prospective transition method,
our Condensed Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R). The valuation provisions of SFAS No. 123(R) apply to new awards and to awards that are
outstanding on the effective date and subsequently modified or cancelled. Historically, we accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB No. 25 and only disclosed the impact
of SFAS No. 123 within the footnote disclosures of our financial statements. Thus, previously no stock-based compensation expense had been recognized in our Condensed Consolidated Statement of Operations as permitted under SFAS No. 123.

Stock-based compensation for the three months ended June 30, 2006 was $3.3 million, of which $2.8 million related to employee stock options, $510,000
related to issuances of shares of restricted stock and $82,000 related to employee stock purchases through our 2003 ESPP. For the six months ended June 30, 2006 stock-based compensation was $7.1 million, of which $5.9 million related to
employee stock options, $1.0 million related to issuances of shares of restricted stock and $180,000 related to employee stock purchases through our 2003 ESPP. Stock-based compensation for the three and six months ended June 30, 2005 was
$181,000 and $315,000, respectively. The overall increase is primarily related to the application of SFAS No. 123(R) and an increase in the issuance of restricted stock.

Interest and Other Income, Net

Interest and other income, net for the three and six months ended June 30, 2006
was $1.5 million and $2.7 million, respectively as compared to $773,00 and $1.4 million, for the three and six months ended June 30, 2005, respectively. The increase is primarily related to income earned on higher cash balances as a result of
positive cash flow generated from operations. Our cash balance at June 30, 2006 was $146.5 million as compared to $138.0 million at June 30, 2005.

Provision for Income Taxes

Income tax benefit for the three months ended June 30, 2006 was $501,000 and income tax provision for the
six months ended June 30, 2006 was $1.8 million. Income tax benefit and provision for both periods is comprised of domestic income tax and foreign withholding tax. Income tax provision for the three and six months ended June 30, 2005 was
$4.2 million and $11.0 million, respectively. The 2005 income tax provision included domestic income tax and foreign withholding tax. The decrease in the income tax provision for the three and six months ended June 30, 2006 is primarily
attributable to the decrease in the pre-tax income.



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On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3. SFAS No. 123 (R) requires
a company to calculate the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to adopting SFAS No. 123 (R) (termed the APIC Pool), as if the company had adopted SFAS No. 123 in 1995. There are two
methods to calculate the companys hypothetical APIC Pool: (1) the long form method as set forth in paragraph 81 of SFAS No. 123(R), and (2) the short form method as set forth in FASB Staff Position 123R-3.

We have elected to use the long form method under which we track each award grant on an employee-by-employee basis and grant-by-grant basis to determine if there is a
tax benefit situation or tax deficiency situation for such award. We then compare the fair value expense to the tax deduction received for each grant and aggregates the benefits and deficiencies to determine whether there is a hypothetical APIC pool
(net tax benefit situation).

For the three and six months ended June 30, 2006 we have not recognized a tax benefit to APIC, but will instead make
this determination for our fiscal year ending December 31, 2006.

Segment Operating Results

Our two segments are: Intellectual Property and Services.

Intellectual
Property segment is primarily composed of the following:

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

Emerging Markets and Technologies is focused 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. This division also focuses on long-term
growth opportunities through new partnerships, ventures and acquisitions of complementary technology.

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

The Product Division incorporates operational functions that are reported
in both the Intellectual Property and Services segments.



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



|                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|----------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                              |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                              |  | 2006                       |        |   | 2005                     |   |        | 2006 |  |   | 2005    |  
|Revenues:                     |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Intellectual Property Segment |  | $                          | 21,034 |   |                          | $ | 18,651 |      |  | $ | 40,629  |   |  | $ | 42,794 |  
|Services Segment              |  |                            | 3,225  |   |                          |   | 3,810  |      |  |   | 7,294   |   |  |   | 7,566  |  
|Corporate Overhead            |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |       |  
|                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Total revenues                |  |                            | 24,259 |   |                          |   | 22,461 |      |  |   | 47,923  |   |  |   | 50,360 |  
|                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Operating expenses:           |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Intellectual Property Segment |  |                            | 16,597 |   |                          |   | 3,769  |      |  |   | 27,595  |   |  |   | 6,298  |  
|Services Segment              |  |                            | 4,683  |   |                          |   | 3,635  |      |  |   | 8,475   |   |  |   | 7,140  |  
|Corporate Overhead            |  |                            | 6,211  |   |                          |   | 3,865  |      |  |   | 12,599  |   |  |   | 7,597  |  
|                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Total operating expenses      |  |                            | 27,491 |   |                          |   | 11,269 |      |  |   | 48,669  |   |  |   | 21,035 |  
|                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Operating income (loss)       |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Intellectual Property Segment |  |                            | 4,437  |   |                          |   | 14,882 |      |  |   | 13,034  |   |  |   | 36,496 |  
|Services Segment              |  |                            | (1,458 | ) |                          |   | 175    |      |  |   | (1,181  | ) |  |   | 426    |  
|Corporate Overhead            |  |                            | (6,211 | ) |                          |   | (3,865 | )    |  |   | (12,599 | ) |  |   | (7,597 | )
|                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Total operating income        |  | $                          | (3,232 | ) |                          | $ | 11,192 |      |  | $ | (746    | ) |  | $ | 29,325 |  
|                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  

The revenues and operating income (loss) 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 and six months ended June 30, 2006, corporate overhead expenses were $6.2 million and $12.6 million, respectively, compared to $3.9 million and $7.6 million for the three and six months ended
June 30, 2005, respectively. The increase in 2006 is primarily attributable to stock-based compensation of $3.3 million and $7.1 million, for the three and six months ended June 30, 2006 respectively, an increase in headcount of 12 and the
related compensation expense.

Intellectual Property Segment

Intellectual property revenues for the three and six months ended June 30, 2006 were $21.0 million as compared to $18.7 million for the three and six months ended June 30, 2005, and increase of $2.3 million or 12.3%. The increase
of $2.3 million is primarily attributable to an increase in royalty and license fees of $6.2 million offset by a decrease in past production payments revenue of $3.9 million. The decrease of $3.9 million in past production payments revenue is
primarily due to negotiated resolutions with three customers totaling $1.7 million in the three months ended June 30, 2006 compared to resolution of negotiations with three customers totaling $5.6 million for the three months ended
June 30, 2005. For the six months ended June 30, 2006 intellectual property revenues were $40.6 million as compared to $42.8 million for the six months ended June 30, 2005, a decrease of $2.2 million or 5.1%. The decrease of $2.2
million consists of an increase of $12.6 million and $1.2 million in royalty and license fees from existing customers and new customers, respectively, offset by a decrease of $16.0 million in past production payments revenue. The decrease of $16.0
in past production payments revenue is primarily due to negotiated resolutions with three customers totaling $1.7 million in the six months ended June 30, 2006 compared to resolution of negotiations with four customers totaling $17.7 million
for the six months ended June 30, 2005.



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Operating expenses for the three months ended June 30, 2006 were $16.6 million. These expenses consisted of cost of
revenues of $18,000, research, development and other related costs of $3.0 million and SG&A costs of $13.5 million. Included in the research, development and other related costs were $1.9 million in costs related to our research and development
center in Jerusalem. SG&A costs included $792,000 in stock-based compensation and $10.9 million in litigation expense. For the six months ended June 30, 2006, operating expenses were $27.6 million. These expenses consisted of $37,000 in
cost of revenues, $6.8 million in research, development and other related costs and $20.8 million in SG&A. Included in research, development and other related costs were $3.2 million in costs related to our research and development center in
Jerusalem. SG&A costs included $1.7 million in stock-based compensation and $15.8 million in litigation expense. Operating expenses for the three months and six months ended June 30, 2005 were $3.8 million and $6.3 million, respectively.
For the three months ended June 30, 2005, operating expenses of $3.8 million consisted of $16,000 in cost of revenues, $1.4 million in research, development and other related costs, $2.3 million in SG&A and $80,000 in stock compensation
costs. For the six months ended June 30, 2005, operating expenses of $6.3 million consisted of $39,000 in cost of revenues, $2.7 million in research, development and other related costs, $3.5 million in SG&A and $116,000 of stock
compensation costs. Included in the SG&A expenses for the three and six months ended June 30, 2005 are litigation costs of $1.4 million and $1.9 million, respectively. The overall increase of $12.8 million and $21.3 million in the three and
six months ended June 30, 2006, respectively, over the three and six months ended June 30, 2005, respectively, is primarily due to increased research, development and other related costs of $1.5 million and $4.0 million, respectively and
increased SG&A of $11.2 million and $17.3 million, respectively. The increase in SG&A for the three and six months ended June 30, 2006 was primarily attributable to the increase in litigation costs of $9.5 million and $13.9 million,
respectively. We expect that litigation costs will become a material portion of the Intellectual Property segments SG&A in future periods, and may increase significantly in some periods, because of our ongoing legal actions, as described
in Part II, Item 1 Legal Proceedings below, and because we expect that we will become involved in other litigation from time to time in the future in order to enforce and protect our intellectual property rights.

Operating income for the three and six months ended June 30, 2006 was $4.4 million and $13.0 million, respectively, as compared to $14.9 million and $36.5 million
for the three and six months ended June 30, 2005, respectively, a decrease of $10.5 million or 70.5% and $23.5 million or 64.3%, respectively. The overall decrease for the three and six months ended June 30, 2006 is primarily due to
increased costs related to our research and development center in Jerusalem of $1.9 million and $3.2 million, respectively, an increase in stock-based compensation costs of $712,000 and $1.7 million, respectively, and an increase in litigation costs
of $9.5 million and $13.9 million, respectively.

Services Segment

Services revenues for the three and six months ended June 30, 2006 were $3.2 million and $7.3 million, respectively, as compared to $3.8 million and $7.6 million for the three and six months ended June 30,
2005. Services revenues consists primarily of government related contracts. For the three and six months ended June 30, 2006, services revenues from government related contracts were $3.0 million and $6.7 million, respectively. For the three
and six months ended June 30, 2005 services revenues from government related contracts of $3.6 million and $7.3 million, respectively.

Operating
expenses for the three months and six months ended June 30, 2006 were $4.7 million and $8.5 million, respectively as compared to were $3.6 million and $7.2 million, for the three and six months ended June 30, 2005, respectively, an
increase of $1.1 million, or 30.6%, and $1.3 million, or 18.1%, respectively. For the three and six months ended June 30, 2006, operating expenses consisted of cost of revenues of $3.9 million and $7.4 million, respectively, research,
development and other related costs of $356,000 and $473,000, respectively and SG&A of $352,000 and $616,000, respectively. Included in these costs were $822,000 and $1.8 million in stock-based compensation costs for the three and six months
ended June 30, 2006, respectively. For the three months ended June 30, 2005, operating expenses of $3.6 million consisted of $2.2 million in cost of revenues, $1.1 million in R&D costs, $284,000 in SG&A and $18,000 in stock-based
compensation costs. For the six months ended June 30, 2005 operating expenses of $7.1 million consisted of $6.2 million in cost of revenues, $1.3 million in R&D costs, $615,000 in SG&A and $20,000 in stock-based compensation costs.



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Operating loss for the three months and six months ended June 30, 2006 was $1.5 million and $1.2 million,
respectively, as compared to operating income of $175,000 and $426,000, for the three and six months ended June 30, 2005, respectively. Overall decrease in the three and six months ended June 30, 2006 is due primarily to the increase in
stock-based compensation costs of $804,000 and $1.7 million, respectively.

Liquidity and Capital Resources

Cash and cash equivalents were $146.5 million at June 30, 2006, an increase of $18.9 million from $127.6 million at December 31, 2005. The increase was
primarily the result of $14.4 million in cash provided by operating activities and $4.6 million in net proceeds from the issuance of common stock under our stock option and employee stock purchase plans, partially offset by $972,000 net cash used in
investing activities.

Net cash provided by operating activities for the six months ended June 30, 2006 of $14.4 million was attributable to net
income of $159,000, adjusted for non-cash items of depreciation and stock-based compensation of $2.5 million and $7.1 million, respectively, a decrease in account receivable of $195,000 and an increase in accrued liabilities and deferred revenue of
$8.0 million and $339,000, respectively. The increase was partially offset by an increase in prepaid and other assets of $2.6 million and a decrease in accounts payable of $1.0 million. The increase in depreciation is primarily due to the
amortization of certain intangible assets purchased in the prior year from North Corporation and amortization of certain tangible and intangible assets of Shellcase, Ltd. The increase of $7.1 million in stock-based compensation is attributable to
the adoption of SFAS No. 123(R) on January 1, 2006. The increase in accrued expenses of $8.0 million is primarily attributable to the timing of payment on vendor invoices for goods and services mainly related to outside legal services to
support litigation efforts. The increase in prepaid and other assets of $2.6 million is primarily due to the timing of cash disbursements related to insurance and services. The decrease in accounts payable of $1.0 million primarily due to
the timing of cash disbursements on vendor invoices.

Net cash provided by operating activities for the six months ended June 30, 2005 of $30.0
million was attributable to net income of $19.7 million, adjusted for non-cash items of depreciation and stock-based compensation of $609,000 and $315,000, respectively, a decrease in prepaid expenses and other assets of $8.0 million, an increase in
accounts payable of $814,000 and an increase in accrued liabilities of $679,000. The increase was partially offset by an increase in accounts receivable of $88,000 and a decrease in deferred revenue of $3,000. The $8.0 million decrease in prepaid
and other assets is primarily due to the booking of domestic income tax of $8.6 million against our deferred tax asset, and off-set by prepaid expenses of $575,000. The increase in accounts payable is attributable to increased purchases of materials
and supplies to accommodate our increase in service-related projects. The increase in accounts receivable of $88,000 is primarily attributable to the timing or receipt from customers and amounts earned under our license agreements. The increase in
accrued liabilities is primarily due to an increase in litigation expenses.

Net cash used in investing activities for the six months ended June 30,
2006 of $971,000, was primarily attributable to the purchase of property and equipment. Net cash used in investing activities for the six months ended June 30, 2005 of $8.1 million, was attributable to the purchase of property and
equipment of $2.2 million, and the purchase of intangible assets of $5.9 million from North Corporation in May 2005, which included the acquisition of 100% ownership of all US patents/applications filed by North Corporation, joint ownership of
patents/applications filed in other jurisdictions and the right to sublicense certain other patents currently owned by North Corporation.

Net cash
provided by financing activities in the six months ended June 30, 2006 and 2005 of $5.4 million and $7.8 million, respectively, is attributable to net proceeds from the issuance of common stock under our stock option and employee stock purchase
plans.

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



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Contractual Cash Obligations

As of June 30, 2006, the following sets forth our minimum commitments under operating leases, most of which result from a facilities lease:



|                            |  |                                       |       |                 |   |          |  |          |       |              |   |     |  |   |  
|--------------------------- |  | ------------------------------------- | ----- | --------------- | - | -------- |  | -------- | ----- | ------------ | - | --- |  | - | -
|                            |  | Payments Due by Period (In thousands)
|                            |  | Total                                 |       | Less than1 year |   | 1-3Years |  | 4-5Years |       | After 5Years
|Operating Lease Obligations |  | $                                     | 3,265 |                 | $ | 345      |  | $        | 2,056 |              | $ | 864 |  | $ | 

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. We recorded the difference between rent expense and rent paid as deferred rent, in accrued liabilities.

Our principal administrative, sales, marketing and research and development facilities occupy approximately 51,000 square feet in one building in San Jose, California,
under a lease that expires on May 31, 2011. In July 2006 we acquired a research and development and manufacturing facility in Charlotte, North Carolina that occupies approximately 100,000 square feet in one building on approximately 18 acres of
land. We also have a research and development facility in Jerusalem, Israel that occupies approximately 2,400 square feet in one building under a lease that expires on January 31, 2011. We believe our existing facilities are adequate for our
current needs.

Off-Balance Sheet Arrangements

As of
June 30, 2006, we did not have any off-balance sheet arrangements as defined in item 303(a)(4)(ii) of Regulation S-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

The primary objective of our investment activities is
to preserve principal while maximizing the income we receive from our investments without significantly increasing risk of loss. Some of the securities that we may invest in the future may be subject to market risk for changes in interest rates. To
mitigate this risk, we plan to maintain a portfolio of cash equivalents and short-term investments in a variety of securities, which may include commercial paper, money market funds, government and non-government debt securities. Currently, we are
exposed to minimal market risks. We manage the sensitivity of our results of operations to these risks by maintaining a conservative portfolio, which is comprised solely of highly-rated, short-term investments. We do not hold or issue derivative,
derivative commodity instruments or other financial instruments for trading purposes.

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

Item 4. Controls and Procedures

Tessera maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in Tesseras Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms and that such information
is accumulated and communicated to Tesseras management, including its 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.



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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 Securities Exchange Act of 1934, as amended, as
of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures were effective such that the
information relating to Tessera, including our consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission or 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.

There has been no change in Tesseras internal controls over financial reporting during Tesseras most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, Tesseras internal controls over financial reporting.



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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

As reported in previous SEC filings, including our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, on October 7, 2005, we
filed a complaint for patent infringement against Advanced Micro Devices, Inc., or AMD, and Spansion LLC, or Spansion, in the United States District Court for the Northern District of California, alleging infringement of Tesseras U.S. Patents
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. We seek to recover
damages, up to treble the amount of actual damages, together with attorneys fees, interest and costs. We also seek other relief, including enjoining AMD and Spansion from continuing to infringe these patents.

On December 16, 2005, we filed a first amended complaint to add Spansion Inc. and Spansion Technology, Inc. to the lawsuit. Spansion Inc. and Spansion Technology, Inc.
are two new entities who were created by the initial public offering of Spansion in December 2005.

On January 31, 2006, we filed a second amended
complaint to add claims of breach of contract and/or patent infringement against several new defendants, including Advanced Semiconductor Engineering, Inc. ASE (U.S.) Inc., ChipMOS Technologies, Inc., ChipMOS U.S.A., Inc., Siliconware Precision
Industries Co. Ltd, Siliconware USA Inc., STMicroelectronics N.V., STMicroelectronics, Inc., STATS ChipPAC Ltd., STATS ChipPAC, Inc. and STATS ChipPAC Ltd. (BVI).

The defendants in this action have asserted affirmative defenses to our patent infringement 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. We cannot predict the outcome of this proceeding. Discovery has just begun, and trial is currently set for January 28, 2008. An adverse decision in this proceeding could significantly harm our
business.

Tessera, Inc. v. Amkor Technology, Inc.

As
previously reported in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, on March 2, 2006, we issued a request for arbitration with Amkor Technology, Inc., or Amkor, regarding Amkors failure to pay royalties under its
license agreement with Tessera. This proceeding has just begun, and we cannot predict its outcome. An adverse decision in this proceeding could significantly harm our business.



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

In July 2006, the Company entered into definitive agreements to settle its lawsuit against Micron Technology, Inc. and its subsidiaries (collectively Micron)
and against Infineon Technologies AG and its subsidiaries including Qimonda AG (collectively Infineon) in the U.S. District Court for the Eastern District of Texas. Initially filed on March 1, 2005, and subsequently amended, this lawsuit
alleged (1) Microns and Infineons infringement of the Companys U.S. Patents 5,852,326, 5,679,977, 6,433,419, 6,465,893 and 6,133,627; as well as (2) Microns and Infineons violations of federal antitrust law, Texas
antitrust law, and Texas common law. On July 20, 2006, Tessera and Micron entered into a Settlement Agreement and a TCC License Agreement that resolved all outstanding litigation between them. On July 31, 2006, Tessera, Infineon and Qimonda each
entered into a Settlement Agreement and TCC License Agreements that resolved all outstanding litigation between them. Dismissal of this lawsuit is contingent upon Tesseras receipt of payments from Micron, Infineon and Qimonda, the filing of a
joint motions to dismiss the lawsuit, and the Courts granting of those motions. Tessera has received payment from Micron and anticipates filing a joint motion to dismiss the claims between Tessera and Micron by August 14, 2006. Tessera
anticipates receiving payments from Infineon and Qimonda by August 18, 2006, and anticipates filing the joint motion to dismiss the claims between Tessera, Infineon and Qimonda within ten business days after such payment is received. The above
contingencies to the dismissal of this lawsuit may not be met, and it remains possible that these lawsuits will continue. If the lawsuit is not dismissed, we cannot predict its outcome, and an adverse decision could significantly harm our business.

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

On July 20, 2006, Tessera and Micron entered into a Settlement Agreement and a TCC License Agreement that resolved all outstanding litigation between the companies,
including this lawsuit, in which Micron alleged that the Company infringed Microns U.S. Patent Nos. 5,739,585, 6,013,948, 6,268,649, 6,738,263, 5,107,328, 6,265,766, 4,992,849 and Re. 36,325. Dismissal of this lawsuit is contingent upon
Tesseras receipt of payment from Micron under its TCC License Agreement, the filing of a joint motion to dismiss the lawsuit, and the Courts granting of that motion. Tessera has received payment from Micron and anticipates filing a joint
motion to dismiss this lawsuit by August 14, 2006. The above contingencies to the dismissal of this lawsuit may not be met, and it remains possible that these lawsuits will continue. If the lawsuit is not dismissed, we cannot predict its outcome,
and an adverse decision could significantly harm our business.



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Item 1A. Risk Factors

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

Our patent portfolio contains some patents that are particularly significant to our ongoing revenues and business. If any of these key patents are
invalidated, or if a court limits the scope of the claims in any of these key patents, the likelihood that companies will take new licenses and that current licensees will continue to agree to pay under their existing licenses could be significantly
reduced. The resulting loss in license fees and royalties could significantly harm our business.

We are currently in legal proceedings involving some
of our key patents.

As discussed above in Item 1 - Legal Proceedings, the Company is currently involved in legal proceedings
involving some of its key patents. Any adverse rulings relating to the infringement, validity or enforceability of these key patents could significantly harm our business.



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

Our current legal actions, as described above in Part II, Item 1 Legal
Proceedings, are examples of significant disputes and litigation that impact our business. Any similar dispute in the future could cause an existing licensee or strategic partner to cease making royalty or other payments to us and could
substantially damage our relationship with the licensee or strategic partner on both business and technical levels. Any litigation stemming from such a dispute could be very expensive and may reduce or eliminate our profits. Litigation could also
severely disrupt or shut down the business operations of our licensees or strategic partners, which in turn would significantly harm our ongoing relations with them and cause us to lose royalty revenues. Any such litigation could also harm our
relationships with other licensees or our ability to gain new customers, who may postpone licensing decisions pending the outcome of the litigation.

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 fail to enter into a license agreement with us or pay for licensed technology, then we may be forced to commence legal proceedings against them.

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

We rely primarily on a
combination of license, development and nondisclosure agreements and other contractual provisions and patent, trademark, trade secret and copyright laws to protect our intellectual property rights. If we fail to protect our intellectual property
rights, our licensees and others may seek to use our technology without the payment of license fees and royalties, which could weaken our competitive position, reduce our operating results and increase the likelihood of costly litigation. The growth
of our business depends in large part on our ability to convince third parties of the applicability of our intellectual property to their products, and our ability to enforce our intellectual property rights against them.

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



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

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

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

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

The costs associated with the legal proceedings that we are involved in are unpredictable and not completely within the our control, and our operating results could
be adversely affected.

As described above in Part II, Item 1 Legal Proceedings, we are currently involved in legal proceedings
against a number of different companies. The costs associated with legal proceedings are typically very high, relatively unpredictable and not completely within the our control. While we do our best to forecast and control such costs, it may be that
the costs will be materially more than expected, which could adversely affect our operating results.

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

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

If Congress changes the patent laws, we could be adversely impacted

Tessera relies on the uniform and historically consistent application of United States patent laws and regulations. Congress is currently considering modifying the US patent laws, and the Patent and Trademark Office
is considering modifying certain regulations relating to filing for patent protection. Some of these modifications 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 could have a deleterious affect on our licensing program and, therefore, the royalties we receive.

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 a decline to occur, our business could become more cyclical in nature.



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

We receive a significant amount of our revenues from a limited number of customers. For the three months and six months ended
June 30, 2006, revenues from Intel Corporation accounted for 10% and 10% of total revenues, respectively, Samsung Electronics Co., Ltd. accounted for 19% and 17% of total revenues, respectively, and Texas Instruments, Inc. accounted for 16% and
17% of total revenues, respectively. In the three months and six months ended June 30, 2005, revenues from Fujitsu Limited accounted for 5% and 10% of total revenues respectively, Hynix Semiconductor accounted for 22% and 10% of total revenue,
respectively, Intel Corporation accounted for 11% and 8% of total revenues, respectively, Samsung Electronics accounted for 11% and 25% of total revenues, respectively, and Texas Instruments, Inc., accounted for 16% and 16% of total revenues,
respectively.

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.

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

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

For example, on January 1, 2006 we adopted
SFAS No. 123 (revised 2004), Share-Based Payment, (SFAS No. 123(R)) under which the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including
employee stock options and employee stock purchases under our 2003 Employee Stock Purchase Plan based on estimated fair values was required. SFAS No. 123(R) supersedes our previous accounting under APB No. 25, Accounting for Stock
Issued to Employees for periods beginning in fiscal year 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 relating to SFAS No. 123(R).

SFAS No. 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statement of Operations.

The recognition of these expenses in our statements of operations could have a negative affect on our earnings per share, which could negatively impact our future stock price.

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.



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

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



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



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



| |  |  | the amount of our service revenues;
| | - |  | -----------------------------------



| |  |  | changes in the level of our operating expenses;
| | - |  | -----------------------------------------------



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



| |  |  | our failure to protect or enforce our intellectual property rights;
| | - |  | -------------------------------------------------------------------



| |  |  | legal proceedings affecting our patents or patent applications;
| | - |  | ---------------------------------------------------------------



| |  |  | the timing of the introduction by others of competing technologies;
| | - |  | -------------------------------------------------------------------



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



| |  |  | changes in accounting principles or a requirement to treat stock option grants as an operating expense; and
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | cyclical fluctuations in semiconductor markets generally.
| | - |  | ---------------------------------------------------------

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

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



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

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

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

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

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

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



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



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



| |  |  | the demand for products incorporating semiconductors that use our licensed technology; and
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | the cyclicality of supply and demand for products using our licensed technology.
| | - |  | --------------------------------------------------------------------------------

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

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



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

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



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



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



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



| |  |  | our licensees ability to design and assemble packages incorporating our technology that are acceptable to their customers.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------

Failure by the semiconductor industry to adopt new 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 was
designated by Rambus as the recommended package for its high performance Rambus DRAM chips. However, the DRAM designed by Rambus has not been widely adopted due to the use of competing technologies such as the first generation of Double Data Rate
(DDR) DRAM, which does not widely utilize advanced packaging technologies. DRAM manufacturers are also currently developing new high performance DRAM chips such as the next generation of DDR, referred to as DDR2 and DDR3, to meet
increasing speed and performance requirements of electronic products. We believe that these new high performance DRAM chips will require advanced packaging technologies such as CSP, and we currently have licensees, including Samsung, Electronics,
Co., Ltd. who are paying royalties for DRAM chips in advanced packages.

We anticipate that royalties from shipments of these new, high performance DRAM
chips packaged using our technology may account for a significant percentage of our future revenues. If semiconductor manufacturers do not adopt new, high performance DRAM as quickly as is currently being projected by industry sources or find an
alternate viable packaging technology for use with their high performance DRAM chips, or if we do not receive royalties from new, high performance DRAM chips that use our technology, our future revenues could be adversely affected.

Our technology may be too expensive for certain new, high performance DRAM manufacturers, which could significantly reduce the adoption rate of our packaging technology
in new, high performance DRAM chips. Even if our package technology is selected for at least some of these new, 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 new, high performance DRAM products include delays or shortages of materials and equipment and the availability of testing
services.

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

To date, wafer level packaging technologies have been adopted for a limited number of semiconductor products. To date, our packaging technology has been used by several
companies for CMOS image sensor chips principally for use in camera-equipped mobile phones. We believe that such WLP packages will be useful for image sensors in other applications such as personal digital assistants and digital cameras, and for
other applications such as MEMS devices.



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

Competing technologies may harm our business.

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

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

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

We derive a significant portion of our revenues from licenses and
royalties from a relatively small number of key technologies. We plan to devote significant engineering resources in order to develop new packaging technologies to address the evolving needs of the semiconductor and the consumer and communication
electronics industries. To remain competitive, we must introduce new technologies or designs in a timely manner and the market must adopt them. Developments in packaging technologies are inherently complex, and require long development cycles and a
substantial investment before we can determine their commercial viability. We may not be able to develop and market new technologies in a timely or commercially acceptable fashion. Moreover, our currently issued U.S. patents expire at various times
from January 25, 2009 through November 12, 2024. We need to develop and patent successful innovations before our current patents expire. Our failure to do so could significantly harm our business.

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

We also attempt to expand our licensable technology portfolio and technical expertise by acquiring technology or developing strategic relationships with others. These
strategic relationships may include the right for us to sublicense technology to others. However, we may not be able to acquire or obtain rights to licensable technology in a timely manner or upon commercially reasonable terms. Even if we do acquire
such rights, some of the technologies we are investing in are 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 accepted by the industry could significantly harm our business.



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

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

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

Some of our royalty bearing license agreements convert to fully paid-up licenses at the expiration of their terms, either automatically or if the licensee
exercises an option to extend the term for an additional royalty payment. The effect of conversion to a fully paid-up license is that we will not receive further royalties for the licensed technology from the licensee, who will be entitled to
continue using that technology to the same extent it was using that technology under license prior to expiration, even if relevant patents are still in effect. This could materially harm our results of operations after such time.

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

Some of our license agreements convert to fully paid-up licenses at the expiration of their terms, either automatically or if the licensee exercises an option to
extend the term for an additional royalty payment. The effect of conversion to a fully paid-up license is that we will not receive further royalties from the licensee for the licensed technology, who will be entitled to continue using our technology
to the same extent they were using it under license prior to expiration, even if relevant patents are still in effect. This could materially harm our results of operations after such time.

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

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

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

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

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

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

We derive a significant portion of our revenues from licensees headquartered outside of
the United States, principally in Asia, and these revenues accounted for 61% and 57% of our total revenues for the three months and six months ended June 30, 2006, respectively. For the three and six months ended June 30, 2005, these
revenues accounted for 56% and 61% of our total revenues, respectively. International operations are subject to a number of risks, including the following:



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



| |  |  | laws and business practices favoring local companies;
| | - |  | -----------------------------------------------------



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



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

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

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

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

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

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

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

If our prototypes, manufactured packages or products based on our designs are used in defective products, we may be subject to product liability or other claims.

Under our service contracts, we may, at times, manufacture packages on a limited basis, deliver prototypes or designs or help to design prototypes or
products. If these prototypes, packages or designs are used in defective or malfunctioning products, we could be sued for damages, especially if the defect or malfunction causes physical harm to people. The occurrence of a problem could result in
product liability claims and/or a recall of, or safety alert or advisory notice relating to, the product. While we believe the amount of product liability insurance maintained by us combined with the indemnities that we have been granted under these
service contracts are adequate, there can be no assurance that these will be adequate to satisfy claims made against us in the future or that we will be able to obtain insurance in the future at satisfactory rates or in adequate amounts. Product
liability claims or product recalls in the future, regardless of their ultimate outcome, could have a material adverse effect on our business, financial condition and reputation, and on our ability to attract and retain licensees and customers.



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

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

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

Acquisitions are commonplace in the semiconductor industry and we may acquire businesses or technologies. 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. 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 Digital Optics Corporation and of certain
assets from Shellcase Ltd.

In July 2006, we completed our acquisition of Digital Optics Corporation, a company based in Charlotte, North
Carolina, and 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:



| |  |  | Either acquisition 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 and may harm our financial results.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | We have incurred substantial direct transaction costs as a result of these acquisitions and anticipate incurring substantial additional costs to support the integration of Digital
Optics Corporation and the assets of Shellcase Ltd. The total cost of the integration may exceed our expectations.
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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 been Chairman 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.

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

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

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

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

We have historically used stock options and other forms of share-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 Financial Accounting Standards Board Statement 123R, Share-Based
Payment, we began recording charges to earnings for share-based payments on January 1, 2006. As a result, we have incurred increased compensation costs associated with our share-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 share-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.



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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, alteration of our manufacturing processes or cessation of operations. Compliance with such
regulations could require us to acquire expensive remediation equipment or to incur other substantial expenses. Any failure by us to control the use, disposal, removal or storage of, or to adequately restrict the discharge of, or assist in the
cleanup of, hazardous or toxic substances, could subject us to significant liabilities, including joint and several liability under certain statues. The imposition of such liabilities could significantly harm our business.

Our corporate headquarters is located in California and, as a result, is subject to catastrophes.

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

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

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

We have a research and development facility in Jerusalem, Israel that subjects us to risks that may negatively affect our results of operations and
financial condition.

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



| |  |  | security concerns, including crime, political instability, terrorist activity, armed conflict and civil or military unrest;
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| |  |  | local business and cultural factors that differ from our normal standards and practices;
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| |  |  | regulatory requirements and prohibitions that differ between jurisdictions;
| | - |  | ---------------------------------------------------------------------------



| |  |  | differing employment practices and labor issues
| | - |  | -----------------------------------------------



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



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

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

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

Our initial public offering of 7,500,000 shares of
common stock was effected through a Registration Statement on Form S-1 (File No. 333-108518) that was declared effective by the Securities and Exchange Commission on November 12, 2003.

All of the net proceeds from the initial public offering remain invested in short-term, money market funds pending application of the funds to general corporate
purposes, as described in the Registration Statement on Form S-1.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

The Companys Annual Meeting of Stockholders was held on
May 18, 2006. The stockholders elected for the ensuing year all of managements nominees for the Board of Directors and ratified the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm of the
Company for the fiscal year ended December 31, 2006. The stockholders also approved the Companys Third Amended and Restated 2003 Equity Incentive Plan to increase the number of shares authorized for issuance thereunder by 3,200,000 shares
and to revise the automatic award formula for non-employee directors.



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The voting results are as follows:



|                           |     |            |          |           |                  |    
|-------------------------- | --- | ---------- | -------- | --------- | ---------------- | ---
|Directors                  |     | Votes Cast
|                           | For |            | Withheld |           | Broker Non-Votes
|Robert J. Boehlke          |     | 41,785,207 |          | 2,191,700 |                  | -0-
|John B. Goodrich           |     | 42,877,020 |          | 1,099,887 |                  | -0-
|Al S. Joseph, Ph.D.        |     | 39,285,574 |          | 4,691,333 |                  | -0-
|Bruce M. McWilliams, Ph.D. |     | 42,253,261 |          | 1,723,646 |                  | -0-
|David C. Nagel, Ph.D.      |     | 42,835,741 |          | 1,141,166 |                  | -0-
|Henry R. Nothhaft          |     | 42,987,741 |          | 989,166   |                  | -0-
|Robert A. Young, Ph.D.     |     | 42,791,574 |          | 1,185,333 |                  | -0-



|                                                                                                                                                                                    |  |            |  |           |  |             |  |                 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | --------- |  | ----------- |  | ----------------
|                                                                                                                                                                                    |  |            |  |          
|Proposal 2                                                                                                                                                                          |  |            |  |           |  |             |  |                 
|                                                                                                                                                                                    |  |            |  |          
|                                                                                                                                                                                    |  | For        |  | Against   |  | Abstentions |  | Broker Non-Votes
|Ratification of the appointment of PricewaterhouseCoopers LLP as                                                                                                                    |  | 43,926,800 |  | 38,523    |  | 11,584      |  |                 
|the independent public accounting firm for the fiscal year ended                                                                                                                    |  |            |  |           |  |             |  |                 
|December 31, 2006                                                                                                                                                                   |  |            |  |           |  |             |  |                 
|                                                                                                                                                                                    |  |            |  |          
|Proposal 3                                                                                                                                                                          |  |            |  |           |  |             |  |                 
|                                                                                                                                                                                    |  |            |  |          
|Approval of the Companys Third Amended and Restated 2003                                                                                                                           |  | 33,655,794 |  | 5,942,504 |  | 37,097      |  | 4,341,512       
|Equity Incentive Plan to increase the number of shares authorized for issuance thereunder by 3,200,000 shares and to revise the automatic
award formula for non-employee directors. |  |            |  |           |  |             |  |                 

Item 5. Other Information

Not applicable.

Item 6. Exhibits



|              |  |                                                                                                                                                                                                       
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Title                                                                                                                                                                                         
|              | 
|3.1*          |  | Restated Certificate of Incorporation                                                                                                                                                                 
|              | 
|3.2*          |  | Restated Bylaws                                                                                                                                                                                       
|              | 
|10.1          |  | Tessera Technologies, Inc. Third Amended and Restated Equity Incentive Plan (filed as Exhibit 10.1 to Tesseras Current Report on Form 8-K filed on May 23, 2006 and incorporated herein
by reference)
|              | 
|31.1          |  | Section 302 Certification of the Chief Executive Officer                                                                                                                                              
|              | 
|31.2          |  | Section 302 Certification of the Chief Financial Officer                                                                                                                                              
|              | 
|32.1          |  | Section 906 Certification of the Chief Executive Officer and Chief Financial Officer                                                                                                                  



---

|* | Filed as exhibits to Tesseras Registration Statement on Form S-1 (SEC File No. 333-108518), effective November 12, 2003, and incorporated herein by reference.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



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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: August 11, 2006



Tessera Technologies, Inc.By:

/s/ Michael A. FormanMichael A. FormanActing Chief Financial Officer and Vice President, Finance




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EXHIBIT INDEX



|               |  |                                                                                                                                                                                                       
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit Title                                                                                                                                                                                         
|               | 
|3.1*           |  | Restated Certificate of Incorporation                                                                                                                                                                 
|               | 
|3.2*           |  | Restated Bylaws                                                                                                                                                                                       
|               | 
|10.1           |  | Tessera Technologies, Inc. Third Amended and Restated Equity Incentive Plan (filed as Exhibit 10.1 to Tesseras Current Report on Form 8-K filed on May 23, 2006 and incorporated herein
by reference)
|               | 
|31.1           |  | Section 302 Certification of the Chief Executive Officer                                                                                                                                              
|               | 
|31.2           |  | Section 302 Certification of the Chief Financial Officer                                                                                                                                              
|               | 
|32.1           |  | Section 906 Certification of the Chief Executive Officer and Chief Financial Officer                                                                                                                  



---

|* | Filed as exhibits to Tesseras Registration Statement on Form S-1 (SEC File No. 333-108518), effective November 12, 2003, and incorporated herein by reference.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



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