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UNITED STATES

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 March 31, 2007

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 May 8, 2007, 47,922,915 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 MARCH 31,
2007

TABLE OF CONTENTS



|              |  |                                                                                                          |  |     
|------------- |  | -------------------------------------------------------------------------------------------------------- |  | ----
|              |  |                                                                                                          |  | Page
|              |  | PART I                                                                                                   |  |     
|Item 1.       |  | Financial Statements                                                                                     |  | 3   
|              |  | Condensed Consolidated Balance Sheets (unaudited)  March 31, 2007 and December 31, 2006                 |  | 3   
|              |  | Condensed Consolidated Statements of Operations (unaudited)  Three Months Ended March 31, 2007 and 2006 |  | 4   
|              |  | Condensed Consolidated Statements of Cash Flows (unaudited)  Three Months Ended March 31, 2007 and 2006 |  | 5   
|              |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                         |  | 6   
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                    |  | 19  
|Item 3.       |  | Quantitative and Qualitative Disclosures About Market Risks                                              |  | 25  
|Item 4.       |  | Controls and Procedures                                                                                  |  | 25  
|              |  | PART II                                                                                                  |  |     
|Item 1.       |  | Legal Proceedings                                                                                        |  | 25  
|Item 1A.      |  | Risk Factors                                                                                             |  | 26  
|Item 2.       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                              |  | 35  
|Item 3.       |  | Defaults Upon Senior Securities                                                                          |  | 35  
|Item 4.       |  | Submission of Matters to a Vote of Security Holders                                                      |  | 35  
|Item 5.       |  | Other Information                                                                                        |  | 35  
|Item 6.       |  | Exhibits                                                                                                 |  | 35  
|Signatures    |  | 36                                                                                                      
|Exhibit Index |  | 37                                                                                                      



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PART I  FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

TESSERA TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for par value and shares)

(unaudited)



|                                                                                                           |  |               |         |                  |   |        
|---------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | ---------------- | - | -------
|                                                                                                           |  | March 31,2007 |         | December 31,2006
|                                                                                                           |  |               |         | (audited)       
|ASSETS                                                                                                     |  |               |         |                  |   |        
|Current assets:                                                                                            |  |               |         |                  |   |        
|Cash and cash equivalents                                                                                  |  | $             | 204,259 |                  | $ | 194,076
|Accounts receivable, net                                                                                   |  |               | 14,311  |                  |   | 6,783  
|Inventories                                                                                                |  |               | 1,843   |                  |   | 1,548  
|Short term deferred tax assets                                                                             |  |               | 4,814   |                  |   | 4,814  
|Other current assets                                                                                       |  |               | 1,997   |                  |   | 13,434 
|                                                                                                           |  |               |         |                  |   |        
|Total current assets                                                                                       |  |               | 227,224 |                  |   | 220,655
|                                                                                                           |  |              
|Property and equipment, net                                                                                |  |               | 25,880  |                  |   | 24,705 
|Intangible assets, net                                                                                     |  |               | 57,032  |                  |   | 27,529 
|Goodwill                                                                                                   |  |               | 35,425  |                  |   | 35,425 
|Long term deferred tax assets                                                                              |  |               | 1,133   |                  |   | 12,530 
|Other assets                                                                                               |  |               | 571     |                  |   | 444    
|                                                                                                           |  |               |         |                  |   |        
|Total assets                                                                                               |  | $             | 347,265 |                  | $ | 321,288
|                                                                                                           |  |               |         |                  |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                       |  |               |         |                  |   |        
|Current liabilities:                                                                                       |  |               |         |                  |   |        
|Accounts payable                                                                                           |  | $             | 3,870   |                  | $ | 3,895  
|Accrued legal fees                                                                                         |  |               | 3,993   |                  |   | 3,166  
|Accrued liabilities                                                                                        |  |               | 5,597   |                  |   | 7,350  
|Deferred revenue                                                                                           |  |               | 620     |                  |   | 646    
|Income tax payable                                                                                         |  |               | 8,247   |                  |   | 376    
|                                                                                                           |  |               |         |                  |   |        
|Total current liabilities                                                                                  |  |               | 22,327  |                  |   | 15,433 
|                                                                                                           |  |              
|Commitments and contingencies (Note 11)                                                                    |  |               |         |                  |   |        
|                                                                                                           |  |              
|Stockholders equity:                                                                                      |  |               |         |                  |   |        
|Common stock: $0.001 par value; 150,000 shares authorized; 47,640 and 47,214 shares issued and outstanding |  |               | 48      |                  |   | 47     
|Additional paid-in capital                                                                                 |  |               | 253,007 |                  |   | 245,019
|Retained earnings                                                                                          |  |               | 71,883  |                  |   | 60,789 
|                                                                                                           |  |               |         |                  |   |        
|Total stockholders equity                                                                                 |  |               | 324,938 |                  |   | 305,855
|                                                                                                           |  |               |         |                  |   |        
|Total liabilities and stockholders equity                                                                 |  | $             | 347,265 |                  | $ | 321,288
|                                                                                                           |  |               |         |                  |   |        

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 EndedMarch 31,
|                                                                          |  | 2007                        |        | 2006
|Revenues:                                                                 |  |                             |        |      |   |       
|Royalty and license fees                                                  |  | $                           | 35,708 |      | $ | 19,372
|Past production payments                                                  |  |                             | 1,748  |      |   | 223   
|Product and service revenues                                              |  |                             | 9,363  |      |   | 4,069 
|                                                                          |  |                             |        |      |   |       
|Total revenues                                                            |  |                             | 46,819 |      |   | 23,664
|                                                                          |  |                             |        |      |   |       
|Operating expenses:                                                       |  |                             |        |      |   |       
|Cost of revenues                                                          |  |                             | 4,702  |      |   | 3,432 
|Research, development and other related costs                             |  |                             | 8,353  |      |   | 3,876 
|Selling, general and administrative                                       |  |                             | 16,154 |      |   | 13,870
|                                                                          |  |                             |        |      |   |       
|Total operating expenses                                                  |  |                             | 29,209 |      |   | 21,178
|                                                                          |  |                             |        |      |   |       
|Operating income                                                          |  |                             | 17,610 |      |   | 2,486 
|Other income, net                                                         |  |                             | 2,758  |      |   | 1,205 
|                                                                          |  |                             |        |      |   |       
|Income before taxes                                                       |  |                             | 20,368 |      |   | 3,691 
|Provision for income taxes                                                |  |                             | 9,274  |      |   | 2,320 
|                                                                          |  |                             |        |      |   |       
|Net income                                                                |  | $                           | 11,094 |      | $ | 1,371 
|                                                                          |  |                             |        |      |   |       
|Basic and diluted net income per share:                                   |  |                             |        |      |   |       
|Net income per share; basic                                               |  | $                           | 0.24   |      | $ | 0.03  
|                                                                          |  |                             |        |      |   |       
|Net income per share; diluted                                             |  | $                           | 0.23   |      | $ | 0.03  
|                                                                          |  |                             |        |      |   |       
|Weighted average number of shares used in per share calculations; basic   |  |                             | 47,001 |      |   | 45,432
|                                                                          |  |                             |        |      |   |       
|Weighted average number of shares used in per share calculations; diluted |  |                             | 48,749 |      |   | 47,345
|                                                                          |  |                             |        |      |   |       

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



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TESSERA TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                  |  |                             |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Three months endedMarch 31, |        
|                                                                                  |  | 2007                        |         |   | 2006 |  
|Cash flows from operating activities:                                             |  |                             |         |   |      |   |         |  
|Net income                                                                        |  | $                           | 11,094  |   |      | $ | 1,371   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                             |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |                             | 2,858   |   |      |   | 1,240   |  
|Loss (gain) on disposal of fixed assets                                           |  |                             | 2       |   |      |   | (8      | )
|Stock-based compensation                                                          |  |                             | 3,681   |   |      |   | 3,778   |  
|Gross tax windfall from stock-based compensation                                  |  |                             | 281     |   |      |   |        |  
|Changes in operating assets and liabilities, net of acquisitions:                 |  |                             |         |   |      |   |         |  
|Accounts receivable, net                                                          |  |                             | (7,401  | ) |      |   | (1,964  | )
|Inventories                                                                       |  |                             | (295    | ) |      |   |        |  
|Deferred income tax, net                                                          |  |                             | (20     | ) |      |   |        |  
|Other assets                                                                      |  |                             | 11,313  |   |      |   | (2,099  | )
|Accounts payable                                                                  |  |                             | (322    | ) |      |   | (768    | )
|Accrued legal fees                                                                |  |                             | 827     |   |      |   |        |  
|Accrued liabilities                                                               |  |                             | (2,133  | ) |      |   | 576     |  
|Deferred revenue                                                                  |  |                             | (26     | ) |      |   | 349     |  
|Income tax payable                                                                |  |                             | 7,871   |   |      |   |        |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                             | 27,730  |   |      |   | 2,475   |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Cash flows from investing activities:                                             |  |                             |         |   |      |   |         |  
|Purchases of property and equipment                                               |  |                             | (2,036  | ) |      |   | (314    | )
|Proceeds from sale of fixed assets                                                |  |                             | 1       |   |      |   | 8       |  
|Acquisitions, net of cash acquired                                                |  |                             | (19,539 | ) |      |   | 100     |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Net cash used in investing activities                                             |  |                             | (21,574 | ) |      |   | (206    | )
|                                                                                  |  |                             |         |   |      |   |         |  
|Cash flows from financing activities:                                             |  |                             |         |   |      |   |         |  
|Excess tax benefit from stock-based compensation                                  |  |                             | (281    | ) |      |   |        |  
|Proceeds from exercise of stock options, net                                      |  |                             | 3,196   |   |      |   | 3,149   |  
|Proceeds from employee stock purchase program                                     |  |                             | 1,112   |   |      |   | 665     |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Net cash provided by financing activities                                         |  |                             | 4,027   |   |      |   | 3,814   |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                         |  |                             | 10,183  |   |      |   | 6,083   |  
|Cash and cash equivalents at beginning of period                                  |  |                             | 194,076 |   |      |   | 127,594 |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                        |  | $                           | 204,259 |   |      | $ | 133,677 |  
|                                                                                  |  |                             |         |   |      |   |         |  

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



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TESSERA TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1  THE COMPANY AND BASIS OF
PRESENTATION

Tessera Technologies, Inc. (together with its subsidiaries, herein referred to as Tessera or the Company), is a
developer and licensor of miniaturization technologies for the electronics industry. The Company enables improvements in the size, performance and cost of its customers products by applying its expertise in the electrical, thermal and
mechanical properties of semiconductor materials, and in the design and manufacturing of micro-optics. The Companys intellectual property includes approximately 1,100 domestic and international issued patents and patent applications, covering
a broad range of advanced semiconductor packaging, substrate, interconnect and micro-optics solutions. The Company licenses its chip packaging technology to its customers on a worldwide basis, enabling them to produce semiconductor chips that are
smaller and faster, and incorporate more features. These semiconductors are utilized in a broad range of electronics products, including digital audio players, digital cameras, personal computers, PDAs, video game consoles and mobile phones.

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

The accompanying interim unaudited condensed consolidated financial
statements as of March 31, 2007 and 2006, and for the three 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, 2006 have been derived from the Companys annual audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally
accepted in the United States 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 state fairly the financial position of the Company and its results of operations and cash flows as of and for the periods presented. These financial statements should be read in
conjunction with the annual audited financial statements and notes thereto as of and for the year ended December 31, 2006, included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

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

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

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of estimates

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

Cash 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.

Fair value of
financial instruments

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

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 accounts
receivable 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 two customers at March 31, 2007, representing 67% and 12% of aggregate gross trade receivables, and four customers at March 31, 2006, representing 32%, 17%, 17% and 14% of aggregate gross trade receivables.

Inventories

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



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Property and equipment, net

Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Equipment held under capital lease is stated at the fair market value of the related asset
and is amortized on a straight-line basis over the term of the lease. Repair and maintenance costs are charged to expense as incurred.

The
depreciation and amortization periods for property and equipment are as follows:



|                        |  |                                                                                                         
|----------------------- |  | --------------------------------------------------------------------------------------------------------
|Furniture and equipment |  | One to five years                                                                                       
|Buildings               |  | Shorter of the estimated useful life which is generally 4 to 40 years or the remaining term of the lease

When property and equipment are sold or disposed, the cost of the asset and the related accumulated depreciation
or amortization are removed from the accounts and the resulting gain or loss on disposal is included in other income and expense.

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, trade names and assembled workforce and
non-compete agreements that are amortized on a straight-line basis over their estimated useful lives, ranging from 2 to 15 years.

The Company evaluates
the recoverability of goodwill recorded in connection with acquisitions on an annual basis in the quarter in which the anniversary date of the acquisition occurs, 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 in Financial Statements and AICPA Statements of Position (SOP) No. 81-1, Accounting for Performance of Construction-Type and Certain Porduction-Type Contracts. Under the provisions of SAB No. 104
and SOP No. 81-1, the Company recognizes revenues when there is persuasive evidence of an arrangement, delivery has occurred, the fee is fixed or determinable, and collectibility of the resulting receivable is reasonably assured.

Royalty and license fees

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

Past production payment revenues are
royalty payments received through license negotiations, the resolution of patent disputes or the results of the license compliance audit. Such negotiations and resolutions arise when it comes to the Companys attention that a third party is
infringing on patents or a current licensee is not paying royalties to which the Company is entitled. The Company also completes compliance audits of licensees to independently verify the accuracy of the information contained in the licensees
royalty reports. Past production payments revenues represent the portion of royalty payments received through such license negotiations, resolution of patent disputes or license compliance audit 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.



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Product and service revenues

The Company utilizes the completed-contract and the percentage-of-completion methods of accounting for commercial and government contracts, dependent upon the type of the contract. The completed-contract method of accounting is used for
fixed-fee contracts with relatively short delivery times. Revenues from fixed-fee and fixed-priced contracts are recognized upon acceptance of deliverables by the customer or in accordance to the contract specifications, assuming title and risk of
loss has transferred to the customer, prices are fixed or determinable, no significant Company obligations remain, and collection of the related receivable is reasonably assured.

The Company uses the progress toward completion method of accounting for cost reimbursement-type contracts, which generally specify the reimbursable costs and a certain billable fee amount. Under the progress toward
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.

Product revenue is generated principally from sales of micro-optic products. The Company recognizes revenue from product sales upon acceptance by the customer or in accordance to the contract specifications, assuming
the title and risk and awards of product ownership are transferred to the customer, price and terms are fixed and the collection of the resulting receivable is reasonably assured. Revenue from non-recurring engineering fees are recognized when the
service is completed or upon certain milestones as provided for in the agreements.

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



|                             |  |                             |  |      |  
|---------------------------- |  | --------------------------- |  | ---- | -
|                             |  | Three Months EndedMarch 31, | 
|                             |  | 2007                        |  | 2006 |  
|Customer                     |  |                             |  |      |  
|Texas Instruments, Inc       |  | *                           |  | 19   | %
|Samsung Electronics Co. Ltd. |  | *                           |  | 16   | %
|Intel Corporation            |  | *                           |  | 11   | %



| | * | 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, the Companys technology license agreements typically provide for indemnification of customers
for 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 March 31, 2007, 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, equipment depreciation and intangible amortization. All research, development and other related costs are expensed as incurred. Research, development costs and other related costs, excluding
costs related to patent prosecution for the three months ended March 31, 2007 and 2006 were $7.2 million and $3.7 million, respectively.

Advertising

Cooperative marketing programs reimburse customers for promoting certain of the companys products, subject to
defined criteria. The expenses are accrued and recorded as a reduction of revenue in the same period as related revenue is recognized. All other advertising costs are expensed as incurred. The Company recognized advertising expenses of $14,000 and
$69,000 for the three months ended March 31, 2007 and 2006, respectively.

Stock-based Compensation

The Company has share-based payment awards to its employees and directors that are described fully in Notes 8 and 9. The stock-based compensation expenses are recorded in
accordance with SFAS No. 123(R), Share-Based Payment (SFAS No. 123(R)).



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Income taxes

The Company accounts for income taxes in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48), an interpretation of SFAS No. 109, Accounting for Income Taxes
(SFAS No. 109). Under this method, the Company determines deferred tax assets and liabilities based upon the difference between the 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. The tax consequences of most events recognized in the current years financial statements are included in determining income taxes currently payable. However,
because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenues, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income
for a year and between the tax bases of assets or liabilities and their reported amounts in the financial statements. Because it is assumed that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference
between the tax basis of an asset or a liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of assets are
recovered, hence giving rise to a deferred tax liability or asset, respectively. The Company then assesses the likelihood that its deferred tax assets will be recovered from future taxable income and to the extent the Company believes that recovery
is not likely, the Company establish a valuation allowance. The Company classifies accrued interest and penalties as part of the accrued FIN No. 48 liability and records the expense in the provision for income taxes.

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

Litigation and Contingencies

From
time to time, the Company has been subject to legal proceedings and claims with respect to such matters as patents and other actions arising out of the normal course of business, as well as other matters identified below in Part 2,
Item 1Legal Proceedings .

The results of any litigation are 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 technologies and otherwise negatively impact over business. If the Company believes that it is probable for a certain
proceeding to result in an adverse decision and that the loss is estimable, the Company would establish an appropriate accrual for the loss.

NOTE 3
 RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the Financial Accounting Standards Board (FASB) issued FIN No. 48, which
contains a two-step process. The first step is evaluating the tax position for recognition by determining whether it is more-likely-than-not 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 that is greater than 50% likely of being realized upon ultimate settlement. The Company adopted FIN 48 on January 1,
2007. The adoption of the statement does not have a material effect on the Companys financial statements.

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

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

NOTE 4  COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

Cash and cash equivalents consists of the following (in thousands):



|             |  |           |         |              |   |        
|------------ |  | --------- | ------- | ------------ | - | -------
|             |  | March 31, |         | December 31,
|             |  | 2007      |         | 2006        
|Cash         |  | $         | 23,522  |              | $ | 44,030 
|Money market |  |           | 180,737 |              |   | 150,046
|             |  |           |         |              |   |        
|             |  | $         | 204,259 |              | $ | 194,076
|             |  |           |         |              |   |        

Accounts receivable consists of the following (in thousands):



|                                |  |           |        |   |              |   |       |  
|------------------------------- |  | --------- | ------ | - | ------------ | - | ----- | -
|                                |  | March 31, |        |   | December 31, |  
|                                |  | 2007      |        |   | 2006         |  
|Trade                           |  | $         | 14,132 |   |              | $ | 3,841 |  
|Other                           |  |           | 254    |   |              |   | 3,017 |  
|Allowance for doubtful accounts |  |           | (75    | ) |              |   | (75   | )
|                                |  |           |        |   |              |   |       |  
|                                |  | $         | 14,311 |   |              | $ | 6,783 |  
|                                |  |           |        |   |              |   |       |  



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Inventories consist of the following (in thousands):



|                |  |           |       |              |   |      
|--------------- |  | --------- | ----- | ------------ | - | -----
|                |  | March 31, |       | December 31,
|                |  | 2007      |       | 2006        
|Raw materials   |  | $         | 233   |              | $ | 247  
|Work in process |  |           | 764   |              |   | 407  
|Finished goods  |  |           | 846   |              |   | 894  
|                |  |           |       |              |   |      
|                |  | $         | 1,843 |              | $ | 1,548
|                |  |           |       |              |   |      

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



|                                 |  |           |       |              |   |       
|-------------------------------- |  | --------- | ----- | ------------ | - | ------
|                                 |  | March 31, |       | December 31,
|                                 |  | 2007      |       | 2006        
|Foreign taxes withholding refund |  | $         | 930   |              | $ | 11,556
|Other                            |  |           | 1,067 |              |   | 1,878 
|                                 |  |           |       |              |   |       
|                                 |  | $         | 1,997 |              | $ | 13,434
|                                 |  |           |       |              |   |       

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



|                                                |  |           |         |   |              |   |         |  
|----------------------------------------------- |  | --------- | ------- | - | ------------ | - | ------- | -
|                                                |  | March 31, |         |   | December 31, |  
|                                                |  | 2007      |         |   | 2006         |  
|Furniture and equipment                         |  | $         | 25,334  |   |              | $ | 23,153  |  
|Land and buildings                              |  |           | 17,126  |   |              |   | 16,607  |  
|                                                |  |           |         |   |              |   |         |  
|                                                |  |           | 42,460  |   |              |   | 39,760  |  
|Less: Accumulated depreciation and amortization |  |           | (16,580 | ) |              |   | (15,055 | )
|                                                |  |           |         |   |              |   |         |  
|                                                |  | $         | 25,880  |   |              | $ | 24,705  |  
|                                                |  |           |         |   |              |   |         |  

NOTE 5  BUSINESS COMBINATIONS

Eyesquad GmbH

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

Eyesquad
develops and designs digital auto-focus and optical zoom solutions for camera phones and other electronic products that integrate cameras. This acquisition enables the Company to provide a complete optical product offering to complement its recent
acquisition of Shellcase Ltd. and Tessera NA (formerly Digital Optics Corporation) in 2005 and 2006, respectively.

The Company accounted for this
transition in accordance with SFAS No. 141, Business Combinations, and Emerging Issue Task Force (EITF) 98-3, Determining Whether a Non Monetary Transaction Involves Receipt of a Productive Asset or a Business, as an
asset acquisition.

There is no acquired in-process research and development.

Preliminary purchase price allocation

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



|                                 |  |   |  |  |   |       
|-------------------------------- |  | - |  |  | - | ------
|Cash                             |  | $ |  |  | $ | 19,492
|Transaction costs                |  |   |  |  |   | 760   
|                                 |  |   |  |  |   |       
|Total preliminary purchase price |  | $ |  |  |   | 20,252
|                                 |  |   |  |  |   |       



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



|                                          |  |        |         |   |                      |  
|----------------------------------------- |  | ------ | ------- | - | -------------------- | -
|                                          |  | Amount |         |   | EstimatedUseful Life
|                                          |  |        |         |   | (Years)             
|Acquired tangible assets and liabilities: |  |        |         |   |                      |  
|Current assets                            |  | $      | 2,783   |   |                      |  
|Property and equipment, net               |  |        | 173     |   |                      |  
|Other Assets                              |  |        | 130     |   |                      |  
|Liabilities assumed                       |  |        | (677    | ) |                      |  
|Deferred tax liability                    |  |        | (11,417 | ) |                      |  
|                                          |  |        |         |   |                      |  
|                                          |  |        | (9,008  | ) |                      |  
|                                          |  |       
|Identified intangible assets:             |  |        |         |   |                      |  
|Existing technology                       |  |        | 25,762  |   |                      | 9
|Patents/core technology                   |  |        | 1,798   |   |                      | 8
|Non-competition agreements                |  |        | 1,400   |   |                      | 2
|Assembled workforce                       |  |        | 300     |   |                      | 4
|                                          |  |        |         |   |                      |  
|                                          |  |        | 29,260  |   |                      |  
|                                          |  |        |         |   |                      |  
|Total preliminary purchase price          |  | $      | 20,252  |   |                      |  
|                                          |  |        |         |   |                      |  

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

Digital Optics Corporation

In July 2006, Tessera completed its acquisition of Digital Optics Corporation (Digital Optics), a Delaware corporation, a leader in the development and design
of micro-optical solutions. The acquisition was an important milestone in Tesseras long-term growth strategy and builds upon the wafer-level image sensor packaging technology assets acquired from Shellcase, Ltd. in December 2005. The Digital
Optics personnel and key technology became components in Tesseras development of low-cost, miniaturized imaging solutions for high-volume consumer optics applications, such as camera phones, next-generation DVD players and automotive
applications. These factors contributed to a purchase price in excess of the fair value of the net tangible and intangible assets acquired from Digital Optics and as a result, the company has recorded goodwill in connection with this transaction.

Under the terms of the agreement, Digital Optics became a wholly owned subsidiary of Tessera in a transaction accounted for using the purchase accounting
method. The preliminary purchase price of $59.8 million includes cash of $58.6 million, for all outstanding shares of capital stock and vested stock options, and transaction costs of $1.2 million. Approximately $8.0 million of the purchase
consideration was held in escrow and is subject to forfeiture to satisfy the indemnification obligations, if any, of the former stockholders of Digital Optics and to serve to as security for the purchase price. During the year 2006, $0.9 million of
the escrow amount was returned to Tessera, and $1.1 million was returned to former stockholders of Digital Optics. The remaining balance of $6.0 million will expire in January, 2008. All interest and other income earned from the escrow will be
allocated and distributed to the former stockholders of Digital Optics.

There is no acquired in-process research and development.

Preliminary purchase price allocation

In accordance to SFAS
No. 141, Business Combinations, the preliminary purchase price of the acquisition was approximately $59.8 million, which has been determined as follows (in thousands):



|                                 |  |   |       
|-------------------------------- |  | - | ------
|Cash                             |  | $ | 58,644
|Transaction costs                |  |   | 1,166 
|                                 |  |   |       
|Total preliminary purchase price |  | $ | 59,810
|                                 |  |   |       

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



|                                             |  |        |        |   |                      |       
|-------------------------------------------- |  | ------ | ------ | - | -------------------- | ------
|                                             |  | Amount |        |   | EstimatedUseful Life
|                                             |  |        |        |   | (Years)             
|Net tangible assets:                         |  |        |        |   |                      |       
|Current assets                               |  | $      | 8,468  |   |                      |       
|Inventory, net                               |  |        | 2,885  |   |                      |       
|Property and equipment, net                  |  |        | 18,270 |   |                      |       
|Long term assets                             |  |        | 7,193  |   |                      |       
|Current liabilities                          |  |        | (5,123 | ) |                      |       
|Long term debt                               |  |        | (12    | ) |                      |       
|                                             |  |        |        |   |                      |       
|                                             |  |        | 31,681 |   |                      |       
|                                             |  |       
|Identified intangible assets:                |  |        |        |   |                      |       
|Existing technology                          |  |        | 6,700  |   |                      | 5 - 7 
|Patents/core technology                      |  |        | 5,200  |   |                      | 7 - 10
|Customer contracts and related relationships |  |        | 1,900  |   |                      | 4     
|Trade name/trademark                         |  |        | 3,100  |   |                      | 10    
|Goodwill                                     |  |        | 11,229 |   |                      | N/A   
|                                             |  |        |        |   |                      |       
|                                             |  |        | 28,129 |   |                      |       
|                                             |  |        |        |   |                      |       
|Total preliminary purchase price             |  | $      | 59,810 |   |                      |       
|                                             |  |        |        |   |                      |       

Approximately $31.7 million of the purchase price has been allocated to acquire net tangible assets consisting of
inventory, property and equipment and various assumed assets and liabilities. Approximately $16.9 million has been allocated to amortizable intangible assets acquired. The depreciation and amortization related to the fair value adjustments to net
tangible assets and the amortization related to the amortizable intangible assets are reflected as pro forma adjustments to the pro forma results.

For the
quarter ended March 31, 2007, no adjustment to inventory was recorded in relation to the purchase accounting treatment of inventory acquired in the acquisition of Digital Optics Corporation.

Tessera acquired Digital Optics with the intent of furthering the companys core manufactured business and of extending the companys technology and
intellectual property in building a larger technology-licensing business in micro-optics for the consumer electronics industry. These factors contributed to a purchase price in excess of the fair value of the underlying net tangible and intangible
assets. Goodwill recognized in this transaction totaled $11.2 million, which is anticipated to be fully deductible for tax purposes.

Pro forma
results

The results of operations of the acquisitions have been included in the Companys consolidated statement of operations since the
completion of the acquisition. The following unaudited pro forma information presents a summary of the results of operations of the Company assuming the acquisitions occurred at the beginning of the periods presented (in thousands, except for per
share amounts):



|                             |  |                                  |       
|---------------------------- |  | -------------------------------- | ------
|                             |  | Three Months EndedMarch 31, 2006
|Net revenues                 |  | $                                | 30,214
|Net income                   |  | $                                | 2,960 
|Basic net income per share   |  | $                                | 0.07  
|Diluted net income per share |  | $                                | 0.06  

North Corporation

In May 2005, Tessera entered into a number of new agreements with North Corporation (North), which included the acquisition of 100% ownership of all United States patents and patent applications filed by North, joint ownership
of patents and applications filed in other jurisdictions and the right to sublicense certain other patents currently owned by North, for approximately $6.1 million. Tessera has recorded these patents and license rights as intangible assets, and is
amortizing them over their respective estimated useful lives, currently estimated at 15 years. In February 2007, the Company purchased the remaining interests in all patent assets and applications, trademark assets and certain license agreements
from North, for approximately $1.7 million. Tessera has recorded these patents, trademark and license rights as intangible assets, and is amortizing them over their respective estimated useful lives, estimated at 13 to 15 years.



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NOTE 6  GOODWILL AND IDENTIFIED INTANGIBLE ASSETS

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

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



|                  |  |                      |        |          |   |        |  |   |       
|----------------- |  | -------------------- | ------ | -------- | - | ------ |  | - | ------
|                  |  | IntellectualProperty |        | Services |   | Total 
|December 31, 2006 |  | $                    | 24,196 |          | $ | 11,229 |  | $ | 35,425
|March 31, 2007    |  | $                    | 24,196 |          | $ | 11,229 |  | $ | 35,425

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



|                           |  |             |  |                |        |                         |   |        |     |  |             |        |                         |   |        |     |   |        |   |  |   |       
|-------------------------- |  | ----------- |  | -------------- | ------ | ----------------------- | - | ------ | --- |  | ----------- | ------ | ----------------------- | - | ------ | --- | - | ------ | - |  | - | ------
|                           |  | Average     |  | March 31, 2007 |        | December 31, 2006      
|                           |  | Life(Years) |  | GrossAssets    |        | AccumulatedAmortization |   |        | Net |  | GrossAssets |        | AccumulatedAmortization |   |        | Net
|Acquired patents           |  | 7 - 15      |  | $              | 14,587 |                         | $ | (1,176 | )   |  | $           | 13,411 |                         | $ | 11,273 |     | $ | (888   | ) |  | $ | 10,385
|Existing technology        |  | 5-10        |  |                | 39,191 |                         |   | (1,859 | )   |  |             | 37,331 |                         |   | 13,400 |     |   | (1,127 | ) |  |   | 12,273
|Trade name                 |  | 10          |  |                | 3,320  |                         |   | (234   | )   |  |             | 3,086  |                         |   | 3,320  |     |   | (151   | ) |  |   | 3,169 
|Customer contracts         |  | 4           |  |                | 1,900  |                         |   | (317   | )   |  |             | 1,583  |                         |   | 1,900  |     |   | (198   | ) |  |   | 1,702 
|Non-competition agreements |  | 2           |  |                | 1,400  |                         |   | (71    | )   |  |             | 1,329  |                         |   |       |     |   |       |   |  |   |      
|Assembled workforce        |  | 4           |  |                | 300    |                         |   | (8     | )   |  |             | 292    |                         |   |       |     |   |       |   |  |   |      
|                           |  |             |  |                |        |                         |   |        |     |  |             |        |                         |   |        |     |   |        |   |  |   |       
|                           |  |             |  | $              | 60,697 |                         | $ | (3,665 | )   |  | $           | 57,032 |                         | $ | 29,893 |     | $ | (2,364 | ) |  | $ | 27,529
|                           |  |             |  |                |        |                         |   |        |     |  |             |        |                         |   |        |     |   |        |   |  |   |       

Amortization expense for the three months ended March 31, 2007 and 2006 amounted to $1.3 million and $0.3
million, respectively.

As of March 31, 2007, the estimated future amortization expense of purchased intangible assets is as follows (in thousands):



|                          |  |   |       
|------------------------- |  | - | ------
|2007 (remaining 9 months) |  | $ | 5,919 
|2008                      |  |   | 7,558 
|2009                      |  |   | 6,917 
|2010                      |  |   | 6,660 
|2011                      |  |   | 6,306 
|Thereafter                |  |   | 23,672
|                          |  |   |       
|                          |  | $ | 57,032
|                          |  |   |       

NOTE 7  NET INCOME PER SHARE

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



|                                                   |  |                             |        |   |      |   |        |  
|-------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                   |  | Three Months EndedMarch 31, |       
|                                                   |  | 2007                        |        |   | 2006 |  
|Numerator:                                         |  |                             |        |   |      |   |        |  
|Net income                                         |  | $                           | 11,094 |   |      | $ | 1,371  |  
|                                                   |  |                            
|Denominator:                                       |  |                             |        |   |      |   |        |  
|Weighted average common shares outstanding         |  |                             | 47,432 |   |      |   | 45,529 |  
|Less: Unvested common shares subject to repurchase |  |                             | (431   | ) |      |   | (97    | )
|                                                   |  |                             |        |   |      |   |        |  
|Total sharesbasic                                 |  |                             | 47,001 |   |      |   | 45,432 |  
|                                                   |  |                            
|Effect of dilutive securities                      |  |                             |        |   |      |   |        |  
|Stock options and warrants                         |  |                             | 1,317  |   |      |   | 1,816  |  
|Unvested common shares subject to repurchase       |  |                             | 431    |   |      |   | 97     |  
|                                                   |  |                             |        |   |      |   |        |  
|Total sharesdiluted                               |  |                             | 48,749 |   |      |   | 47,345 |  
|                                                   |  |                             |        |   |      |   |        |  
|Net income per common sharebasic                  |  | $                           | 0.24   |   |      | $ | 0.03   |  
|                                                   |  |                             |        |   |      |   |        |  
|Net income per common sharediluted                |  | $                           | 0.23   |   |      | $ | 0.03   |  
|                                                   |  |                             |        |   |      |   |        |  



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

For the three months ended March 31, 2007 and 2006, a total of 924,000 and 1,336,000 common stock options were excluded from the computation of diluted net income per share.

NOTE 8  STOCK-BASED COMPENSATION

On January 1, 2006, the
Company adopted SFAS No. 123(R) under which the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors including employee stock options, restricted stock awards and employee stock
purchases under the Companys Employee Stock Purchase Plan based on estimated fair values was required. SFAS No. 123(R) supersedes the Companys 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 stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the
Companys Consolidated Statement of Operations.

The Company elected to adopt the modified prospective application method as provided by SFAS No.
123(R). Accordingly, during the three months ended March 31, 2007 and 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. The effect of recording stock-based compensation for the three months ended March 31, 2007 and 2006 was as follows (in thousands, except per shares amounts):



|                                            |  |                             |        |   |      |   |       |  
|------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ----- | -
|                                            |  | Three Months EndedMarch 31, |       
|                                            |  | 2007                        |        |   | 2006 |  
|Cost of revenues                            |  | $                           | 550    |   |      | $ | 936   |  
|Research, development & other related costs |  |                             | 508    |   |      |   | 49    |  
|Selling, general & administrative           |  |                             | 2,623  |   |      |   | 2,793 |  
|                                            |  |                             |        |   |      |   |       |  
|Total stock-based compensation              |  |                             | 3,681  |   |      |   | 3,778 |  
|Tax effect on stock-based compensation      |  |                             | (1,013 | ) |      |   | (799  | )
|                                            |  |                             |        |   |      |   |       |  
|Net effect on net income                    |  | $                           | 2,668  |   |      | $ | 2,979 |  
|                                            |  |                             |        |   |      |   |       |  

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



|                               |  |                             |       |      |   |      
|------------------------------ |  | --------------------------- | ----- | ---- | - | -----
|                               |  | Three Months EndedMarch 31,
|                               |  | 2007                        |       | 2006
|Employee stock options         |  | $                           | 2,618 |      | $ | 3,146
|Restricted stock awards        |  |                             | 788   |      |   | 534  
|Employee stock purchase plan   |  |                             | 275   |      |   | 98   
|                               |  |                             |       |      |   |      
|Total stock-based compensation |  | $                           | 3,681 |      | $ | 3,778
|                               |  |                             |       |      |   |      

During the three months ended March 31, 2007, the Company granted 198,800 stock options with an estimated total
grant-date fair value of $2.8 million before estimated forfeitures. As of March 31, 2007, the unrecorded deferred stock-based compensation balance related to stock options was $21.2 million after estimated forfeitures and an additional $10.8 million
related to restricted stock awards will be recognized over an estimated weighted average amortization period of 4.0 years. During the three months ended March 31, 2006, the Company granted 251,000 stock options with an estimated total grant-date
fair value of $4.2 million before estimated forfeitures. As of March 31, 2006, the unrecorded deferred stock-based compensation balance related to stock options was $17.3 million after estimated forfeitures and an additional $6.5 million related to
restricted stock awards will be recognized over an estimated weighted average amortization period of 4.0 years.

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



|                        |  |                             |   |  |      |  
|----------------------- |  | --------------------------- | - |  | ---- | -
|                        |  | Three Months EndedMarch 31, |  
|                        |  | 2007                        |   |  | 2006 |  
|Expected life (years)   |  | 4.0                         |   |  | 4.0  |  
|Risk-free interest rate |  | 4.8                         | % |  | 4.6  | %
|Dividend yield          |  | 0.0                         | % |  | 0.0  | %
|Expected volatility     |  | 37.9                        | % |  | 63.3 | %

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



|                        |  |                              |   |  |      |  
|----------------------- |  | ---------------------------- | - |  | ---- | -
|                        |  | Three Months Ended March 31, |  
|                        |  | 2007                         |   |  | 2006 |  
|Expected life (years)   |  | 2.0                          |   |  | 2.0  |  
|Risk-free interest rate |  | 4.9                          | % |  | 4.6  | %
|Dividend yield          |  | 0.0                          | % |  | 0.0  | %
|Expected volatility     |  | 41.5                         | % |  | 43.2 | %



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NOTE 9  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. In the case of
incentive stock options, when the optionees own stock representing more than 10% of the voting power of all classes of stock of the Company, the exercise price shall be no less than 110% of the fair value on the date of grant. All options granted to
date under the 1991 Plan have been granted at an exercise price equal to the fair value of the Companys common stock on the date of grant. 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 this plan, nor does the Company have any intention of issuing additional grants under this plan. As of March 31, 2007, there were no shares reserved for grant under
this 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. In both cases, when the optionees own stock representing more than 10% of
the voting power of all classes of stock of the Company, the exercise price shall be no less than 110% of the fair value on the date of grant. For options granted with an exercise price below fair market value, a stock-based compensation charge has
been determined. Options granted under the 1996 Plan generally have a term of ten years from the date of grant and vest over a four-year period. Shares issued in connection with the exercise of unvested options are subject to repurchase by the
Company until such options would have vested. After February 1999, no further options were granted from this plan, nor does the Company have any intention of issuing additional grants under this plan. As of March 31, 2007, there were no shares
reserved for grant under this plan.



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The 1999 Plan

In
February 1999, the Company adopted the 1999 Stock Option Plan (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 this plan, nor does the Company have any intention of issuing additional grants under this plan. As of March 31, 2007, there were no shares reserved for grant under this 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 March 31, 2007, there were 2,354,000 shares reserved for grant under this plan.

Options to
purchase 199,000 of common stock were granted to employees during the three months ended March 31, 2007 under our 2003 Plan. As of March 31, 2007, options to purchase 4,066,000 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, 2006 |  | 2,623           |   |  | 4,188               |   |  | $                            | 22.25
|                             |  |                 |   |  |                     |   |  |                              |      
|Restricted stocks granted    |  | (91             | ) |  |                     |   |  |                              |     
|Restricted stocks canceled   |  | 2               |   |  |                     |   |  |                              |     
|Options granted              |  | (199            | ) |  | 199                 |   |  |                              | 33.57
|Options exercised            |  |                |   |  | (302                | ) |  |                              | 11.55
|Option canceled              |  | 19              |   |  | (19                 | ) |  |                              | 30.08
|                             |  |                 |   |  |                     |   |  |                              |      
|Balance at March 31, 2007    |  | 2,354           |   |  | 4,066               |   |  | $                            | 21.20
|                             |  |                 |   |  |                     |   |  |                              |      

The following table summarizes the ranges of outstanding and exercisable options as of March 31, 2007 (in
thousands, except years and per share amounts):



|                          |  |                     |  |                                                   |  |                              |       |                                      |   |                |  |                                                   |  |                              |  |                                      |       |  |   |      
|------------------------- |  | ------------------- |  | ------------------------------------------------- |  | ---------------------------- | ----- | ------------------------------------ | - | -------------- |  | ------------------------------------------------- |  | ---------------------------- |  | ------------------------------------ | ----- |  | - | -----
|                          |  | Options Outstanding |  | Options Vested and Exercisable                   
|Range of exercise prices: |  | NumberofShares      |  | WeightedAverageRemainingContractualLife(in years) |  | WeightedAverageExercisePrice |       | AggregateIntrinsicValue(in millions) |   | NumberofShares |  | WeightedAverageRemainingContractualLife(in years) |  | WeightedAverageExercisePrice |  | AggregateIntrinsicValue(in millions)
|$  0.85 - $17.30          |  | 975                 |  | 5.30                                              |  | $                            | 5.98  |                                      | $ | 32.91          |  | 765                                               |  | 4.73                         |  | $                                    | 4.74  |  | $ | 26.78
|$17.75 - $28.07           |  | 962                 |  | 7.60                                              |  | $                            | 20.21 |                                      | $ | 18.77          |  | 258                                               |  | 7.21                         |  | $                                    | 19.30 |  | $ | 5.26 
|$28.20 - $32.93           |  | 1,027               |  | 8.91                                              |  | $                            | 30.09 |                                      | $ | 9.92           |  | 278                                               |  | 8.59                         |  | $                                    | 29.96 |  | $ | 2.72 
|$33.36 - $40.68           |  | 1,102               |  | 8.48                                              |  | $                            | 36.19 |                                      | $ | 3.91           |  | 401                                               |  | 8.12                         |  | $                                    | 35.94 |  | $ | 1.52 
|                          |  |                     |  |                                                   |  |                              |       |                                      |   |                |  |                                                   |  |                              |  |                                      |       |  |   |      
|$  0.85 - $40.68          |  | 4,066               |  | 7.62                                              |  | $                            | 23.63 |                                      | $ | 65.51          |  | 1,702                                             |  | 6.53                         |  | $                                    | 18.42 |  | $ | 36.29
|                          |  |                     |  |                                                   |  |                              |       |                                      |   |                |  |                                                   |  |                              |  |                                      |       |  |   |      

Employee Stock Purchase Plan

In August 2003, the Company adopted the its 2003 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.



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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 and whose customary employment is for more than five months in any calendar year may join an offering period on the first day of the offering period or the beginning of any
semi-annual purchase period within that period. Individuals who become eligible employees after the start date of an offering period may join the ESPP at the beginning of any subsequent semi-annual purchase period.

Participants may contribute up to 20% of their cash earnings through payroll deductions, and the accumulated deductions will 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.

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

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

In the event of a proposed sale of all
or substantially all of the Companys assets, or merger with or into another company, the outstanding rights under the ESPP will be assumed or an equivalent right substituted by the successor company or its parent or subsidiary. If the
successor company or its parent refuses to assume the outstanding rights or substitute an equivalent right, then all outstanding purchase rights will automatically be exercised prior to the effective date of the transaction. The purchase price will
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.

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

For three months ended March 31, 2007 and 2006, an aggregate of 87,000 and 42,000 common shares, respectively, were purchased pursuant to the ESPP.

As of March 31, 2007, there were 538,000 shares reserved for grant under the ESPP.

NOTE 10  INCOME TAXES

Effective January 1, 2007, the Company adopted the provisions of FIN No. 48, which
contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence
indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50%
likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.

As of January 1, 2007, our unrecognized tax benefits (tax contingencies) totaled $3.2 million. The adoption of FIN No. 48 resulted in no
change to the reserve for unrecognized tax benefits that existed at January 1, 2007. As such, there is no change recorded to retained earnings as a result of the adoption. As of March 31, 2007, unrecognized tax benefits totaled $3.2 million, all of
which would affect our effective tax rate if recognized.

It is the Companys policy to classify accrued interest and penalties as part of the accrued
FIN No. 48 liability and record the expense in the provision for income taxes. As of the date of adoption of FIN No. 48, the Company had no accrual for payment of interest and penalties relating to unrecognized tax benefits. For unrecognized tax
benefits that exist at March 31, 2007, the Company does not anticipate any significant changes within the next twelve months. At March 31, 2007, the 2003 through 2006 years are open and subject to potential examination in one or more jurisdictions.
The Company is not currently under federal, state or foreign income tax examination.

Income tax provision for the three months ended March 31, 2007
was $9.3 million, and was comprised of domestic income tax and foreign withholding tax. For the three months ended March 31, 2006, the income tax provision was $2.3 million. The 2006 income tax provision included the domestic income tax and
foreign withholding tax. The increase in the income tax provision for the three months ended March 31, 2007 is primarily attributable to the increase in first quarter pre-tax income. Also for the three months ended March 31, 2007, the
Company paid $18,000 of state franchise taxes.

NOTE 11  COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases its facility and office
equipment under operating leases which expire through 2011. Rent expense for the three months ended March 31, 2007 and 2006 amounted to $238,000 and $152,000, respectively. As of March 31, 2007, future minimum lease payments are as follows
(in thousands):



|           |  |       
|---------- |  | ------
|2007       |  | $ 521 
|2008       |  | 693   
|2009       |  | 692   
|2010       |  | 690   
|2011       |  | 180   
|Thereafter |  |      
|           |  |       
|           |  | $2,776
|           |  |       

Litigation

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

On November 16, 2004, after trial of the
parties contentions of breach on contract and the underlying patent issues had commenced, the parties executed a Memorandum of Understanding (MOU), agreeing to settle the litigation and ending the trial. The court conditionally
dismissed the lawsuit on November 17, 2004. Thereafter, on January 26, 2005, the parties executed a definitive Settlement Agreement and a Restated License Agreement, formalizing the MOU. The parties executed a Stipulated Dismissal with Prejudice on
February 2, 2005, which the court signed on February 4, 2005, finally dismissing the lawsuit.

Under the terms of Tesseras settlement with Samsung,
Samsung paid Tessera cash for past royalties through December 31, 2004 on the use of the TCC technology and agreed to a world-wide, non-exclusive, royalty-bearing license to Tesseras Compliant Chip (TCC) technology under which Samsung will pay
royalties to Tessera on a quarterly basis in the future with respect to the use of the TCC technology. The restated License Agreement expires on May 17, 2012, subject to Samsungs option to extend the agreement for an additional term of up to
five years at a reduced royalty rate.

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

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

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

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

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

On October 7, 2006, the Company 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. Tessera seeks to recover damages, up to treble the amount of actual damages, together with attorneys fees, interest and costs. The Company also seeks
other relief, including enjoining AMD and Spansion from continuing to infringe these patents.

On December 16, 2005, Tessera filed a first amended
complaint to add Spansion Inc. and Spansion Technology, Inc. to the lawsuit. 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 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. Discovery is ongoing. The Court has withdrawn
the previously set January 28, 2008 trial date, and is in the process of re-setting trial and related case deadlines. An adverse decision in this proceeding could significantly harm the Companys business and financial condition.

Tessera, Inc. v. Amkor Technology, Inc.

On March 2, 2006, the
Company issued a request for arbitration with Amkor Technology, Inc., or Amkor, regarding Amkors failure to pay royalties under its license agreement with Tessera. On November 1, 2006, the arbitration tribunal issued a provisional timetable
specifying a seven-day tribunal hearing starting October 1, 2007. On April 17, 2007, Tessera provided notice to Amkor of Tesseras termination of the license agreement. On May 9, 2007, the tribunal recommended to the International Chamber of
Commerce that the hearing be re-set for March 31, 2008. The Company cannot predict the outcome of this proceeding. An adverse decision in this proceeding could significantly harm the Companys business and financial condition.

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

On December 18, 2006, the Company filed a complaint against Hynix Semiconductor Inc. and Hynix Semiconductor America, Inc., (collectively, Hynix) in the Superior Court of the State of California, for the
county of Santa Clara, alleging violations of California antitrust law and California common law based on Hynixs alleged anticompetitive actions in markets related to synchronous DRAM. The Company also seeks other relief, including enjoining
Hynix from continuing their alleged anticompetitive actions. This litigation is in its early stages, and the Company cannot predict the outcome of this proceeding. An adverse decision in this proceeding could significantly harm our business and
financial condition.

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

On April 17, 2007, the Company filed a Complaint with the International Trade Commission (ITC), requesting that the ITC commence an investigation under
Section 337 of the Tariff Act of 1930, as amended. The proposed Respondents are ATI Technologies, Inc., Freescale Semiconductor, Inc., Motorola, Inc., Qualcomm, Inc., Spansion, Inc., Spansion, LLC, and ST Microelectronics N.V. Tessera requests,
among other things, that the ITC investigate infringement of U.S. Patent Nos. 5,852,326 and 6,433,419, issue an exclusion order excluding from entry into the United States infringing packaged semiconductor components, assemblies thereof, and
products containing the same, and issue cease and desist orders directing Respondents with domestic inventories to desist from activities with respect to infringing products. The ITC has not yet announced whether it will institute the investigation
requested by Tessera.An adverse decision in this proceeding could significantly harm our business and financial condition.

Tessera, Inc. v.
Motorola, Inc., et. al, Case No. 2:07cv143

On April 17, 2007, the Company filed a complaint against Motorola, Inc., Qualcomm, Inc., Freescale
Semiconductor, Inc., and ATI Technologies, Inc. in the United States District Court for the Eastern District of Texas, alleging infringement of Tesseras U.S. Patent Nos. 5,852,326 and 6,433,419, arising from, among other things, the
defendants respective manufacture, use, sale, offer to sell and/or importation of certain packaged semiconductor components and assemblies thereof. The Company seeks to recover damages, up to treble the amount of actual damages, together with
attorneys fees, interest and costs. We also seek other relief, including enjoining the defendants from continuing to infringe these patents. The defendants have not yet answered Tesseras complaint. An adverse decision in this proceeding
could significantly harm our business and financial condition.

Reexamination Proceedings

On February 9, 2007 and February 15, 2007, Silicon Precision Industries Co., Ltd. and Siliconware USA, Inc. (collectively, Siliconware) filed with the United
States Patent & Trademark Office (PTO) requests for inter partes reexamination relating to United States Patent Nos. 6,433,419 and 6,465,893, and ex parte reexamination relating to United States Patent Nos. 5,679,977,
6,133,627 and 5,852,326. On April 19, 2007, the PTO granted the requests for ex partereexamination. On May 4, 2007, the PTO granted the requests for inter partes reexamination. The PTO has not yet decided the Companys petition
to vacate the inter partes reexamination proceeding on the ground that the request did not name the real party in interest. On March 14, 2007, Siliconware filed a second request for ex partereexamination of U.S. Patent No. 5,679,977.
The PTO has not yet decided whether or not to grant this request. We cannot predict the outcome of these proceedings. An adverse decision in any of these proceedings could significantly harm our business and financial condition.

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



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NOTE 12  SEGMENT AND GEOGRAPHIC INFORMATION

The Company organizes its business units into three operating divisions: the Licensing Business, the Product Division and Emerging Markets and the Technologies Group. These divisions are reported into segment, the
Intellectual Property segment, which consists primarily of the Licensing Business and the Emerging Markets and Technologies groups, and the Services segment, which consists primarily of the Product Division. The Product Division incorporates
operational functions that are reported in both Intellectual Property and Services segments. 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 Chief Operating Decision Maker (CODM), as defined by SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information (SFAS No. 131), is the Companys President and Chief Executive Officer (CEO).
The CODM assesses the performance of the operating segment using information about its revenue and operating income (loss) before other income and income taxes. The CODM is not presented financial information for each division and the CODM does not
evaluate each division separately from the segments when evaluating the operating performance of the business.

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

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



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|                              |  |                             |        |   |      |   |        |  
|----------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                              |  | Three Months EndedMarch 31, |       
|                              |  | 2007                        |        |   | 2006 |  
|Revenues:                     |  |                             |        |   |      |   |        |  
|Intellectual Property Segment |  | $                           | 37,456 |   |      | $ | 19,595 |  
|Services Segment              |  |                             | 9,363  |   |      |   | 4,069  |  
|Corporate Overhead            |  |                             |       |   |      |   |       |  
|                              |  |                             |        |   |      |   |        |  
|Total revenues                |  |                             | 46,819 |   |      |   | 23,664 |  
|                              |  |                             |        |   |      |   |        |  
|Operating expenses:           |  |                             |        |   |      |   |        |  
|Intellectual Property Segment |  |                             | 11,529 |   |      |   | 10,998 |  
|Services Segment              |  |                             | 10,965 |   |      |   | 3,792  |  
|Corporate Overhead            |  |                             | 6,715  |   |      |   | 6,388  |  
|                              |  |                             |        |   |      |   |        |  
|Total operating expenses      |  |                             | 29,209 |   |      |   | 21,178 |  
|                              |  |                             |        |   |      |   |        |  
|Operating income (loss)       |  |                             |        |   |      |   |        |  
|Intellectual Property Segment |  |                             | 25,927 |   |      |   | 8,597  |  
|Services Segment              |  |                             | (1,602 | ) |      |   | 277    |  
|Corporate Overhead            |  |                             | (6,715 | ) |      |   | (6,388 | )
|                              |  |                             |        |   |      |   |        |  
|Total operating income        |  | $                           | 17,610 |   |      | $ | 2,486  |  
|                              |  |                             |        |   |      |   |        |  

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



|                         |  |                              |        |   |      |   |                |   |        |  |     |  
|------------------------ |  | ---------------------------- | ------ | - | ---- | - | -------------- | - | ------ |  | --- | -
|                         |  | Three Months Ended March 31, |       
|                         |  | 2007                         |        |   | 2006 |  
|                         |  | (in thousands)               |        | % |      |   | (in thousands) |   | %      | 
|United States of America |  | $                            | 12,056 |   | 26   | % |                | $ | 10,684 |  | 45  | %
|Japan                    |  |                              | 11,425 |   | 24   | % |                |   | 6,402  |  | 27  | %
|Europe                   |  |                              | 9,563  |   | 21   | % |                |   |       |  |    |  
|Asia Pacific             |  |                              | 13,709 |   | 29   | % |                |   | 6,578  |  | 28  | %
|Other                    |  |                              | 66     |   |     |   |                |   |       |  |    |  
|                         |  |                              |        |   |      |   |                |   |        |  |     |  
|                         |  | $                            | 46,819 |   | 100  | % |                | $ | 23,664 |  | 100 | %
|                         |  |                              |        |   |      |   |                |   |        |  |     |  

Net property and equipment by country was as follows (in thousands):



|                         |  |               |        |                  |   |       
|------------------------ |  | ------------- | ------ | ---------------- | - | ------
|                         |  | March 31,2007 |        | December 31,2006
|United States of America |  | $             | 22,782 |                  | $ | 22,384
|Israel                   |  |               | 2,267  |                  |   | 2,321 
|Japan                    |  |               | 831    |                  |   |      
|                         |  |               |        |                  |   |       
|                         |  | $             | 25,880 |                  | $ | 24,705
|                         |  |               |        |                  |   |       

NOTE 13  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 months ended March 31, 2007 and 2006, the Company recognized
$258,000 and $500,000 of consulting expenses. At March 31, 2007, the Company had an outstanding payable balance of $39,000.



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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, 2006, found in our Annual Report on Form 10-K filed on March 1, 2007, as amended by an amendment on Form 10-K/A filed on March 21, 2007.

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

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

Corporate Information

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

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

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

Overview

Tessera is a developer and licensor of
miniaturization technologies for the electronics industry. We enable improvements in the size, performance and cost of our customers products by applying our expertise in the electrical, thermal and mechanical properties of semiconductor
materials, and in the design and manufacturing of micro-optics. Our intellectual property includes approximately 1,100 domestic and internationally issued patents and patent applications, covering a broad range of advanced semiconductor packaging,
substrate, interconnect and micro-optics solutions. We license our chip packaging technology to our customers on a worldwide basis, enabling them to produce semiconductor chips that are smaller and faster, and 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 (PDAs), video game consoles and mobile phones. In addition, by using our
technology, we believe that our customers are also able to reduce the time to market, and the development costs of their semiconductors.

Our patented chip
packaging technology enables our customers to assemble semiconductor chips into chip-scale packages (CSPs) that are almost as small as the chip itself. This 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 several semiconductor chips and passive components to be densely combined in ultra-compact electronics modules. By reducing the
size of the semiconductor package and shortening electrical connections between the chip and the circuit board, our technology allows further miniaturization and increases in performance and functionality for electronic products. We achieve these
benefits without sacrificing reliability by allowing movement within the package, thus addressing critical problems associated with thermally-induced stress which can occur when packages decrease in size. Our technologies also enable our customers
to package semiconductor chips and micro-devices at the wafer level (wafer level packaging or WLP) and to create high-density interconnections between electronic components using flexible substrate materials.

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

We derive
license fees and royalties based upon our intellectual property, and generate fees for related services. Our semiconductor chip packaging technology has been widely adopted and is currently licensed to more than 60 companies, including Intel
Corporation, Renesas Technology Co., Samsung Electronics Co., Ltd., Sharp Corporation, Texas Instruments, Inc. and Toshiba Corporation. We believe that more than 100 companies across the semiconductor supply chain have invested in the materials,
equipment and assembly infrastructure needed to manufacture products that incorporate our packaging technology. As a result, our technology has been incorporated into more than 13.5 billion semiconductors worldwide. Based upon Gartner Dataquest, we
anticipate that the market using Tessera CSP technology will grow to almost 18 billion units in 2008, from 8.1 billion units in 2005, representing a compound annual growth rate of 30%.

We generate revenues from:



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



| |  |  | products and services, which utilize or further develop our technology offerings.
| | - |  | ---------------------------------------------------------------------------------

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

Semiconductor manufacturers and assemblers pay on-going worldwide royalties on their production or shipment of semiconductors incorporating our intellectual property. Royalty payments 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.



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

Product and service revenues include sales of wafer level and
micro-optics products, and engineering product development services for purposes of servicing strategic customers and entering new markets, as well as engineering services, including related training services. Product revenue is generated
principally from sales of wafer level and micro-optic products. We recognize revenue from product sales when fundamental criteria are met, such as title, risk and rewards of product ownership are transferred to the customer, price and terms are
fixed and the collection of the resulting receivable is reasonably assured. Revenues from services are recognized on progress toward 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. Revenues from services related to training are recognized as the services are performed

We derive a significant portion of our revenues from licensees headquartered outside of the United States, principally in Asia and Europe. For the three months ended March 31, 2007, these revenues accounted for
74% of our total revenues. For the three months ended March 31, 2006, these revenues accounted for 54% of our total revenues. We expect that these revenues will continue to account for a significant portion of revenues in future periods. All of
our revenues are denominated in U.S. dollars. For the three months ended March 31, 2007, no single customer accounted for over 10% of revenue. For the three months ended March 31, 2006, Intel Corporation, Samsung Electronics Co., Ltd. and
Texas Instruments, Inc. each accounted for over 10% of revenue.

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

Effective March 30, 2007 the legal name of Digital Optics Corporation, acquired in July 2006, was changed to Tessera North America, Inc.
(Tessera NA).

Our business units are organized in three operating divisions: the Licensing Business, the Product Division and Emerging Markets
and Technologies Group. These divisions are reported into the Intellectual Property segment, which consists primarily of our Licensing Business and Emerging Markets and Technologies group, and the Services segment, 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 Operationsand in Note 12 of the Notes to Consolidated Financial Statements included in this report are presented in
accordance with SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information. We do not present financial data to our management for each of our divisions and our management does not evaluate each division
separately from our segments when measuring the operating performance of our business. In addition to our reportable segments, we also have a Corporate 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, patent amortization, supplies and equipment depreciation costs. Cost of revenues primarily relates
to product and service revenues as the cost of revenues associated with intellectual property revenues is de minimis. Consequently, cost of revenues as a percentage of total revenues will vary based on the percentage of our revenues that is
attributable to product and service revenues.

Research, development and other related costs consist primarily of compensation and related costs for
personnel as well as costs related to patent applications and examinations, amortization of intangible assets, materials, supplies and equipment depreciation. Our research and development is conducted primarily in-house and targets CSP, multi-chip
and WLP technology. All research, development and other related costs are expensed as incurred. We believe that a significant level of research, development and other related costs will be required for us to remain competitive in the future. We have
increased our research and development personnel to 181 at March 31, 2007 from 92 at March 31, 2006, and expect to continue to increase our research and development personnel in the future.

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

Critical Accounting 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.

We account for uncertain
tax positions in accordance with FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes (FIN No. 48) an interpretation of FASB Statement No. 109 (SFAS No. 109). The application of income tax law is
inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance



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surrounding income tax laws and regulations are subject to change over time. As such, changes in our subjective assumptions and judgments can materially
affect amounts recognized in the consolidated balance sheets and statements of income. See Note 10  Income Taxes of the consolidated financial statements for additional detail on our uncertain tax positions.

Management believes there have been no other significant changes in our critical accounting policies and estimates for the three months ended March 31, 2007 from
our disclosure in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2006. For a discussion of our critical accounting policies, please see the discussion in our Annual Report on Form 10-K, as amended, for the fiscal
year ended December 31, 2006.

Results of Operations

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



|                                              |  |                             |   |  |       |  
|--------------------------------------------- |  | --------------------------- | - |  | ----- | -
|                                              |  | Three Months EndedMarch 31, |  
|                                              |  | 2007                        |   |  | 2006  |  
|Revenues:                                     |  |                             |   |  |       |  
|Royalty and license fees                      |  | 76.3                        | % |  | 81.9  | %
|Past production payments                      |  | 3.7                         |   |  | 0.9   |  
|Product and service revenues                  |  | 20.0                        |   |  | 17.2  |  
|                                              |  |                             |   |  |       |  
|Total revenues                                |  | 100.0                       |   |  | 100.0 |  
|                                              |  |                             |   |  |       |  
|                                              |  |                            
|Operating expenses:                           |  |                             |   |  |       |  
|Cost of revenues                              |  | 10.0                        |   |  | 14.5  |  
|Research, development and other related costs |  | 17.8                        |   |  | 16.4  |  
|Selling, general and administrative           |  | 34.5                        |   |  | 58.6  |  
|                                              |  |                             |   |  |       |  
|Total operating expenses                      |  | 62.4                        |   |  | 89.5  |  
|                                              |  |                             |   |  |       |  
|Operating income                              |  | 37.6                        |   |  | 10.5  |  
|Other income, net                             |  | 5.9                         |   |  | 5.1   |  
|                                              |  |                             |   |  |       |  
|Income before taxes                           |  | 43.5                        |   |  | 15.6  |  
|Income tax provision                          |  | 19.8                        |   |  | 9.8   |  
|                                              |  |                             |   |  |       |  
|Net income                                    |  | 23.7                        | % |  | 5.8   | %
|                                              |  |                             |   |  |       |  

Three Months Ended March 31, 2007 and 2006

Revenues

Revenues for the three months ended March 31, 2007 were
$46.8 million as compared with $23.7 million for the three months ended March 31, 2006, an increase of $23.1 million, or 97.5%. The overall increase in the three months ended March 31, 2007 is primarily due to the increase in other
intellectual property revenues of $16.3 million, related to on-going royalty payments due to the resolution of negotiations with four customers completed in earlier periods, as discussed below in Part II, Item 1, Legal Proceedings, and
an increase of $5.3 million in product and service revenues related to several on-going development projects and the acquisition completed in the third quarter of 2006.

Cost and expenses

Cost of Revenues

Cost of revenues primarily relates to product and service revenue as the cost of revenues associated with intellectual property revenues is de minimis. For the quarters ended March 31, 2007 and 2006, cost of
revenues represented, 50.2% and 84.4%, respectively, of product and service revenues, a decrease primarily attributed to the inclusion of results of operations of the 2006 acquisition, Tessera NA. For each associated period cost of revenues as a
percentage of total revenues varies based on the product and service revenues component of total revenues.

Cost of revenues for the three months ended
March 31, 2007 increased by $1.3 million or 37% to $4.7 million as compared to $3.4 million for the three months ended March 31, 2006. The majority of the increase was attributable to the inclusion of the cost of revenues of our
subsidiaries, Tessera NA, which was acquired in the third quarter of 2006. For the three months ended March 31, 2007, materials and subcontractor costs totaled $1.7 million as compared to $580,000 for the three months ended March 31, 2006,
an increase of $1.1 million or 190%.

Research, Development and Other Related Costs

Research, development and other related costs for the three months ended March 31, 2007 increased by $4.5 million or 115.5% to $8.4 million as compared to $3.9 million for the three months ended March 31,
2006. The increase is primarily due to the inclusion of expenses related to the 2006 acquisition.

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.



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Selling, General and Administrative

Selling, general and administrative expenses for the three months ended March 31, 2007 were $16.2 million as compared to $13.9 million for the three months ended March 31, 2006, an increase of $2.3 million,
or 16.5%. The increase is primarily attributable to the inclusion of expenses of $1.2 million related to the 2006 acquisition and the increase in SG&A payroll of $854,000 related to the remaining Tessera entities. We have increased our SG&A
headcount by 20 in the areas of licensing and business development, human resources, finance and legal as a result of the 2006 business acquisition. For the three months ended March 31, 2007 and 2006 litigation expenses were $4.7 million and
$4.9 million, respectively. The decrease in litigation expenses for the first quarter of 2007 versus the first quarter of 2006 is due to the conclusion of some of our legal actions, described below in Part II, Item 1 Legal
Proceedings.

Excluding litigation expenses, we expect that, as a percentage of revenues, our SG&A expenses may decrease over time as our revenues
continue to grow. However, we expect that litigation expenses may continue to be a material portion of our general and administrative expenses in future periods, and may increase significantly in some periods, because of our ongoing litigation, as
described below in Part II, Item 1  Legal Proceedings, and because we expect that we will become involved in other litigation from time to time in the future in order to enforce and protect our intellectual property rights.

Stock-based Compensation

Stock-based compensation for
the three months ended March 31, 2007 was $3.7 million, of which $2.6 million related to employee stock options, $788,000 related to issuances of shares of restricted stock and $275,000 related to employee stock purchases through our 2003 ESPP.
For the three months ended March 31, 2006 stock-based compensation was $3.8 million, of which $3.1 million related to employee stock options, $534,000 related to issuances of shares of restricted stock and $98,000 related to employee stock
purchases through our 2003 ESPP.

Interest and Other Income, Net

Interest and other income, net for the three months ended March 31, 2007 was $2.8 million as compared to $1.2 million for the three months ended March 31, 2006. The increase is primarily related to income
earned on higher cash balances as a result of positive cash flow generated from operations and a one-time gain in foreign currency exchange of approximately $500,000. Our cash balance at March 31, 2007 was $204.3 million as compared to $133.7
million at March 31, 2006.

Provision for Income Taxes

Income tax provision for the three months ended March 31, 2007 was $9.3 million, and was comprised of domestic income tax and foreign withholding tax. For the three months ended March 31, 2006, the income tax provision was $2.3
million. The 2006 income tax provision included domestic income tax and foreign withholding tax. The increase in the income tax provision for the three months ended March 31, 2007 is primarily attributable to the increase in first quarter 2007
pre-tax income.

Segment Operating Results

Our
business units are organized in three operating divisions: the Licensing Business, the Product Division and Emerging Markets and Technologies Group. These divisions are reported into the Intellectual Property segment, which consists primarily of our
Licensing Business, and Emerging Markets and Technologies group and the Services segment, which consists primarily of the Product Division. The Product Division incorporates operational functions that are reported in both our Intellectual Property
and Services segments.

Intellectual Property segment is primarily composed of the following:

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

Emerging Markets and
Technologies Group. Our Emerging Markets and Technologies group 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. The Emerging Markets and Technologies group also focuses on long-term growth opportunities
through new partnerships, ventures and acquisitions of complementary technology.



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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.

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



|                              |  |                             |        |   |      |   |        |  
|----------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                              |  | Three Months EndedMarch 31, |       
|                              |  | 2007                        |        |   | 2006 |  
|Revenues:                     |  |                             |        |   |      |   |        |  
|Intellectual Property Segment |  | $                           | 37,456 |   |      | $ | 19,595 |  
|Services Segment              |  |                             | 9,363  |   |      |   | 4,069  |  
|Corporate Overhead            |  |                             |       |   |      |   |       |  
|                              |  |                             |        |   |      |   |        |  
|Total revenues                |  |                             | 46,819 |   |      |   | 23,664 |  
|                              |  |                             |        |   |      |   |        |  
|                              |  |                            
|Operating expenses:           |  |                             |        |   |      |   |        |  
|Intellectual Property Segment |  |                             | 11,529 |   |      |   | 10,998 |  
|Services Segment              |  |                             | 10,965 |   |      |   | 3,792  |  
|Corporate Overhead            |  |                             | 6,715  |   |      |   | 6,388  |  
|                              |  |                             |        |   |      |   |        |  
|Total operating expenses      |  |                             | 29,209 |   |      |   | 21,178 |  
|                              |  |                             |        |   |      |   |        |  
|                              |  |                            
|Operating income (loss)       |  |                             |        |   |      |   |        |  
|Intellectual Property Segment |  |                             | 25,927 |   |      |   | 8,597  |  
|Services Segment              |  |                             | (1,602 | ) |      |   | 277    |  
|Corporate Overhead            |  |                             | (6,715 | ) |      |   | (6,388 | )
|                              |  |                             |        |   |      |   |        |  
|Total operating income        |  | $                           | 17,610 |   |      | $ | 2,486  |  
|                              |  |                             |        |   |      |   |        |  

The revenues and operating income (loss) amounts in this section have been presented on a basis consistent with
accounting principles generally accepted in the United States applied at the segment level. Corporate overhead expenses which have been excluded are primarily support services, human resources, legal, finance, IT, corporate development, procurement
activities, insurance and board fees. For the three months ended March 31, 2007 and 2006, corporate overhead expenses were $6.7 million and $6.4 million, respectively. The increase of approximately $300,000 is primarily attributable to an
increase in headcount of 13 and the related compensation expense due to the 2006 business acquisitions.

Intellectual Property Segment

Intellectual property revenues for the three months ended March 31, 2007 were $37.5 million as compared to $19.6 million for the three months ended March 31,
2006, for an increase of $17.9 million or 91.2%. The increase of $17.9 million is primarily attributed to an increase in royalty and license fee revenues of $16.3 million and an increase of $1.5 million in past production payment revenues The
increase in royalty and license fee revenues is attributable to an increase of $15.2 million from existing customers and $2.7 million from new customers.

Operating expenses for the three months ended March 31, 2007 were $11.5 million. These expenses consisted of cost of revenues of $140,000, research, development and other related costs of $3.9 million and SG&A costs of $7.5
million. Included in the research, development and other related costs were $2.5 million and $1.0 million in costs related to our research and development center in Hungary and Jerusalem, respectively. SG&A costs included $4.7 million in
litigation expenses. 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 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.
Operating expenses for the three months ended March 31, 2006 were $11.0 million. These expenses consisted of cost of revenues of $19,000, research, development and other related costs of $3.8 million and SG&A costs of $7.2 million. Included
in the SG&A expenses are litigation costs of $4.9 million.

Operating income for the three months ended March 31, 2007 and 2006 was $25.9 million
and $8.6 million, respectively, an increase of $17.3 million or 201.2%. This increase is primarily attributable to the increase in revenues of $17.9 million.

Services Segment

Service revenues for the three months ended March 31, 2007 was $9.4 million as compared to $4.1 million for the three
months ended March 31, 2006, an increase of $5.3 million or 130.1%. Of the $9.4 million in the quarter ended March 31, 2007, service revenues from government contracts made up $3.3 million. In the quarter ended March 31, 2006, service revenues
from government contracts made up $3.7 million.



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Operating expenses for the three months ended March 31, 2007 were $11.0 million, consisting of $4.6 million in cost
of revenues, $4.4 million in research, development and other related costs and $2.0 in SG&A costs. For the three months ended March 31, 2006 operating expenses were of $3.8 million and consisted of $3.4 million in cost of revenues,
approximately $115,000 in research, development and other related costs and approximately $264,000 in SG&A costs.

Operating loss for the three months
ended March 31, 2007 was $1.6 million as compared to operating income of $277,000 for the three months ended March 31, 2006, a decrease of $1.9 million. This decrease is primarily attributable to the increase in operating expenses of $7.2
million, which exceeded the increase in services revenue of $5.3 million.

Liquidity and Capital Resources

Cash and cash equivalents were $204.3 million at March 31, 2007, an increase of $10.2 million from $194.1 million at December 31, 2006. The increase was primarily the
result of $27.7 million in cash provided by operating activities and $4.0 million in net proceeds provided by financing activities, offset by $31.6 million net cash used in investing activities.

Net cash provided by operating activities for the three months ended March 31, 2007 of $27.7 million was attributable to net income of $11.1 million, adjusted for
non-cash items of depreciation and amortization and stock-based compensation of $2.9 million and $3.7 million, respectively, and an increase in income tax payable of $7.9 million. The increase was partially offset by an increase in accounts
receivable, net, of $7.4 million and a decrease in accrued liabilities and other assets of $1.6 million and $11.3 million, respectively. The amount of depreciation and amortization increased by $1.6 million as compared to that of the three months
ended March 31, 2006 primarily related to fixed and intangible assets acquired with the 2006 acquisition. Stock-based compensation expense remained flat from that of the three months ended March 31, 2006. The increase in income tax payable of $7.9
million is primarily due to increased operating income. The increase in accounts receivable of $7.4 million is primarily attributable to the timing or receipt from customers and amounts earned under our license agreements. The decrease in accrued
liabilities of $2.1 million is primarily due to the timing of cash disbursements related to insurance and services. The decrease of other assets is attributed to cash collections related to the settlement of certain patent litigation.

Net cash provided by operating activities for the three months ended March 31, 2006 of $2.5 million was attributable to net income of $1.4 million, adjusted for non-cash
items of depreciation and stock-based compensation of $1.2 million and $3.8 million, respectively, and an increase in accrued expenses and deferred revenue of approximately $600,000 and $300,000, respectively. The increase was partially offset by an
increase in accounts receivable and prepaid and other assets of $2.0 million and $2.1 million, respectively and a decrease in accounts payable of approximately $800,000. The increase in depreciation is primarily due to the amortization of certain
intangible assets purchased in the prior year from North Corporation and Shellcase, Ltd. The increase of $3.8 million in stock-based compensation is attributable to the adoption of SFAS No. 123(R) on January 1, 2006. The increase in accounts
receivable of $2.0 million is primarily attributable to the timing or receipt from customers and amounts earned under our license agreements. The increase in prepaid and other assets of $2.1 million is primarily due to the timing of cash
disbursements related to insurance and services.

Net cash used in investing activities in the three months ended March 31, 2007 of $21.6 million was
primarily attributable to the acquisitions of Eyesquad GmbH for $31.7 million, which included consideration paid of $19.5 million for all outstanding shares of capital stock and vested stock options, and transaction costs of approximately $800,000,
and the remaining interests in all patent assets and applications, trademark assets and certain license agreements from North Corporation, for approximately $1.7 million. Both acquisitions were completed in February 2007.

Net cash provided by financing activities in the three months ended March 31, 2007 and March 31, 2006 of $4.0 million and $3.8 million, respectively, was attributable to
net proceeds from the issuance of common stock under our stock option and employee stock purchase plans, partially offset by the excess tax benefit from stock-based compensation.

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

Contractual Cash Obligations

As of March 31, 2007, the
following sets forth our minimum commitments under operating leases, most of which result from a facilities lease:



|                            |  |                        |       |           |   |           |  |   |    
|--------------------------- |  | ---------------------- | ----- | --------- | - | --------- |  | - | ---
|                            |  | Payments Due by Period
|                            |  | Total                  |       | 1-3 Years |   | 4-5 Years
|                            |  | (In thousands)        
|Operating Lease Obligations |  | $                      | 2,776 |           | $ | 1,906     |  | $ | 870



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The amounts reflected in the table above for operating leases represent aggregate future minimum lease payments under
non-cancellable facility leases.

For our facilities lease, rent expense charged to operations differs from rent paid because of scheduled rent increases.
Rent expense is calculated by allocating total rental payments on a straight-line basis over the lease term. We recorded the difference between rent expense and rent paid as deferred rent, in accrued liabilities.

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

Off-Balance Sheet Arrangements

As of March 31, 2007, we did not have any off-balance sheet arrangements as defined in item 303(a)(4)(ii) of Regulation S-K.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risks
|------- | -----------------------------------------------------------

The
primary objective of our investment activities is to preserve principal while maximizing the income we receive from our investments without significantly increasing risk of loss. 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
|------- | -----------------------

Evaluation of controls and
procedures. Tessera maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934, as amended (the Exchange Act), is
recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

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

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

PART IIOTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

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

On October 7, 2006, the Company 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. Tessera seeks to recover damages, up to treble the amount of actual damages, together with
attorneys fees, interest and costs. The Company also seeks other relief, including enjoining AMD and Spansion from continuing to infringe these patents.

On December 16, 2005, Tessera filed a first amended complaint to add Spansion Inc. and Spansion Technology, Inc. to the lawsuit. 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 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.
Discovery is ongoing. The Court has withdrawn the previously set January 28, 2008 trial date, and is in the process of re-setting trial and related case deadlines. We cannot predict the outcome of these proceedings, and an adverse decision in this
proceeding could significantly harm our business and financial condition.

Tessera, Inc. v. Amkor Technology, Inc.

On March 2, 2006, the Company issued a request for arbitration with Amkor Technology, Inc., or Amkor, regarding Amkors failure to pay royalties under its license
agreement with Tessera. On November 1, 2006, the arbitration tribunal issued a provisional timetable specifying a seven-day tribunal hearing starting October 1, 2007. On April 17, 2007, Tessera provided notice to Amkor of Tesseras termination
of the license agreement. On May 9, 2007, the tribunal recommended to the International Chamber of Commerce that the hearing be re-set for March 31, 2008. The Company cannot predict the outcome of this proceeding. An adverse decision in this
proceeding could significantly harm the Companys business and financial condition.

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

On December 18, 2006, the Company filed a complaint against Hynix Semiconductor Inc. and Hynix Semiconductor America, Inc., (collectively,
Hynix) in the Superior Court of the State of California, for the county of Santa Clara, alleging violations of California antitrust law and California common law based on Hynixs alleged anticompetitive actions in markets related to
synchronous DRAM. The Company also seeks other relief, including enjoining Hynix from continuing their alleged anticompetitive actions. This litigation is in its early stages, and the Company cannot predict the outcome of this proceeding. We cannot
predict the outcome of these proceedings, and an adverse decision in this proceeding could significantly harm our business and financial condition.

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

On April 17, 2007, the Company filed a Complaint with the
International Trade Commission (ITC), requesting that the ITC commence an investigation under Section 337 of the Tariff Act of 1930, as amended. The proposed Respondents are ATI Technologies, Inc., Freescale Semiconductor, Inc.,
Motorola, Inc., Qualcomm, Inc., Spansion, Inc., Spansion, LLC, and ST Microelectronics N.V. Tessera requests, among other things, that the ITC investigate infringement of U.S. Patent Nos. 5,852,326 and 6,433,419, issue an exclusion order excluding
from entry into the United States infringing packaged semiconductor components, assemblies thereof, and products containing the same, and issue cease and desist orders directing Respondents with domestic inventories to desist from activities with
respect to infringing products. The ITC has not yet announced whether it will institute the investigation requested by Tessera.We cannot predict the outcome of these proceedings, and an adverse decision in this proceeding could significantly
harm our business and financial condition.

Tessera, Inc. v. Motorola, Inc., et. al, Case No. 2:07cv143

On April 17, 2007, the Company filed a complaint against Motorola, Inc., Qualcomm, Inc., Freescale Semiconductor, Inc., and ATI Technologies, Inc. in the United States
District Court for the Eastern District of Texas, alleging infringement of Tesseras U.S. Patent Nos. 5,852,326 and 6,433,419, arising from, among other things, the defendants respective manufacture, use, sale, offer to sell and/or
importation of certain packaged semiconductor components and assemblies thereof. The Company seeks to recover damages, up to treble the amount of actual damages, together with attorneys fees, interest and costs. We also seek other relief,
including enjoining the defendants from continuing to infringe these patents. The defendants have not yet answered Tesseras complaint. We cannot predict the outcome of these proceedings, and an adverse decision in this proceeding could
significantly harm our business and financial condition.

Reexamination Proceedings

On February 9, 2007 and February 15, 2007, Silicon Precision Industries Co., Ltd. and Siliconware USA, Inc. (collectively, Siliconware) filed with the United States Patent & Trademark Office
(PTO) requests for inter partes reexamination relating to United States Patent Nos. 6,433,419 and 6,465,893, and ex parte reexamination relating to United States Patent Nos. 5,679,977, 6,133,627 and 5,852,326. On April 19,
2007, the PTO granted the requests for ex partereexamination. On May 4, 2007, the PTO granted the requests for inter partes reexamination. The PTO has not yet decided the Companys petition to vacate the inter partes
reexamination proceeding on the ground that the request did not name the real party in interest. On March 14, 2007, Siliconware filed a second request for ex partereexamination of U.S. Patent No. 5,679,977. The PTO has not yet decided
whether or not to grant this request. We cannot predict the outcome of these proceedings. An adverse decision in any of these proceedings could significantly harm our business and financial condition.

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



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|Item 1A. | Risk Factors
|-------- | ------------

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

Our patent portfolio contains some patents that are particularly significant to our ongoing revenues and
business. If any of these key patents are invalidated, or if a court or an administrative body such as the United States Patent and Trademark Office 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. As discussed below and in
Part II, Item 1Legal Proceedings, we are currently involved in legal and administrative 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.

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

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

We cannot predict the outcome of any of these proceedings. In the event that there is an adverse
ruling in any legal or administrative proceeding relating to the infringement, validity, enforceability or ownership of any of our key patents, we could be prevented from enforcing or earning future revenues from our key patents, and our licensing
program would be materially adversely impacted. The occurrence of any of these events could significantly harm our business and financial condition. Furthermore, regardless of the merits of any claim, the continued maintenance of these legal and
administrative proceedings may result in substantial legal expenses and could also result in the diversion of our managements time and attention away from our other business operations, which could significantly harm our business. Moreover,
our enforcement proceedings historically have been protracted and complex and we have experienced significant delays in certain of these proceedings. There are myriad procedural and substantive motions in these proceedings, and we cannot predict the
outcome of any of these motions, nor can we expect to prevail in all such motions. The complexity of our litigations, their disproportionate importance to our business compared to other companies, the propensity for delay in patent litigations, and
the potential for losing particular motions as well as the overall litigations all could cause significant volatility in our stock price and ultimately could materially adversely affect our business and financial condition.



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

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

In addition, many semiconductor and package assembly companies maintain their own
internal design groups and have their own package design and manufacturing capabilities. If we believe these groups have designed technologies that infringe upon our intellectual property, and if they 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 can be difficult to protect. We protect our proprietary technology and processes, in part, through confidentiality agreements with our employees, consultants and customers.
We cannot be certain that these contracts have not been and will not be breached, that we will have adequate remedies for any breach or that our trade secrets will not otherwise become known or be independently discovered by competitors. If we fail
to use these mechanisms to protect our intellectual property, or if a court fails to enforce our intellectual property rights, our business will suffer. We cannot be certain that these protection mechanisms can be successfully asserted in the future
or will not be invalidated or challenged.

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

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

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

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



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

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

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

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

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

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

We could experience losses due to product liability claims.

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

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

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

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

We receive a significant amount of our revenues from a limited number of customers. For the three months ended March 31, 2007, there were no
customers that accounted for 10% or more of total revenue. For the three months ended March 31, 2006, revenues from three customers accounted for 10% or more of total revenue. We expect that a significant portion of our revenues will continue
to come from a limited number of customers for the foreseeable future. If we lose any of these customers or if our revenues from them decline, our revenues may decrease substantially.

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.

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.

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 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;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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

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

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

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

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



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



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



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



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

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

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

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

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

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

Failure by the semiconductor industry to adopt broadly 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.

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



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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 December 29, 2024. We need to develop and patent successful
innovations before our current patents expire and our failure to do so could significantly harm our business.

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

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

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

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

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

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

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

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

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

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



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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 74.0% and 54.0% of our total revenues for the three months ended March 31, 2007 and 2006, 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------

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.

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.



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

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

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

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



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



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



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



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

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

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

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

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

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

Our success depends, in large part, on the continued contributions of our key management, engineering, sales and marketing, legal and finance personnel, many of whom are highly skilled and would be difficult to replace. In particular, the
services of Dr. McWilliams, our President, Chief Executive Officer and the Chairman of our Board of Directors, who has led our company since May 1999 and has been the Chairman of our board of directors since February 2002, are very important to
our



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business. None of our senior management, key technical personnel or key sales personnel are bound by written employment contracts to remain with us for a
specified period. In addition, we do not currently maintain key person life insurance covering our key personnel. The loss of any of our senior management or other key personnel could harm our ability to implement our business strategy and respond
to the rapidly changing market conditions in which we operate.

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

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

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

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

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

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

Failure to comply with environmental regulations could harm our business.

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

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

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

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

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

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

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



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



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



| |  |  | regulatory requirements and prohibitions that differ between jurisdictions;
| | - |  | ---------------------------------------------------------------------------



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



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



| |  |  | natural disasters.
| | - |  | ------------------

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

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

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

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



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

Not
applicable.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

Not applicable.



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

Not applicable



|Item 5. | Other Information
|------- | -----------------

Not applicable.



|Item 6. | Exhibits
|------- | --------



|              |  |                                                                                                                                                                                                                                                                                                                       
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Title                                                                                                                                                                                                                                                                                                         
|2.1           |  | Share Purchase Agreement, dated as of January 30, 2007, among Tessera Technologies Hungary Holding LLC, Eyesquad GmbH, each of the shareholders of Eyesquad GmbH and Sharon A. Amir (filed as
Exhibit 2.1 to registrants Current Report on Form 8-K, filed on January 31, 2007, and incorporated herein by reference)
|              | 
|3.1*          |  | Restated Certificate of Incorporation                                                                                                                                                                                                                                                                                 
|              | 
|3.2           |  | Amended and Restated Bylaws (filed as Exhibit 3.1 to registrants Current Report on Form 8-K, filed on March 21, 2007, and incorporated herein by reference)                                                                                                                                                          
|              | 
|10.1          |  | Amendment to the Tessera Technologies, Inc. Third Amended and Restated 2003 Equity Incentive Plan                                                                                                                                                                                                                     
|              | 
|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 an exhibit to Tesseras Registration Statement on Form S-1 (SEC File No. 333-108518), effective November 12, 2003, and incorporated herein by reference.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



Page 35 of 37



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##### Table of Contents

SIGNATURES

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

Dated: May 11, 2007



Tessera Technologies, Inc.By:

/s/ Charles A. WebsterCharles A. WebsterExecutive Vice President and Chief Financial Officer




Page 36 of 37



---

##### Table of Contents

EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                                                       
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Title                                                                                                                                                                                                                                                                                                         
|2.1           |  | Share Purchase Agreement, dated as of January 30, 2007, among Tessera Technologies Hungary Holding LLC, Eyesquad GmbH, each of the shareholders of Eyesquad GmbH and Sharon A. Amir (filed as
Exhibit 2.1 to registrants Current Report on Form 8-K, filed on January 31, 2007, and incorporated herein by reference)
|              | 
|3.1*          |  | Restated Certificate of Incorporation                                                                                                                                                                                                                                                                                 
|              | 
|3.2           |  | Amended and Restated Bylaws (filed as Exhibit 3.1 to registrants Current Report on Form 8-K, filed on March 21, 2007, and incorporated herein by reference)                                                                                                                                                          
|              | 
|10.1          |  | Amendment to the Tessera Technologies, Inc. Third Amended and Restated 2003 Equity Incentive Plan                                                                                                                                                                                                                     
|              | 
|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 an exhibit to Tesseras Registration Statement on Form S-1 (SEC File No. 333-108518), effective November 12, 2003, and incorporated herein by reference.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



Page 37 of 37