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, 2008 found in our Annual Report on Form 10-K, filed on February 27, 2009.

This Quarterly Report (including the following section regarding Management's Discussion and Analysis of Financial Condition and Results of Operations) contains forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Certain, but not all, of the forward-looking statements in this report are specifically identified. The identification of certain statements as "forward-looking" is not intended to mean that other statements not specifically identified are not forward-looking. All statements other than statements about historical facts are statements that could be deemed forward-looking statements, including, but not limited to, statements that relate to our future revenue, product development, demand, acceptance and market share, growth rate, competitiveness, gross margins, levels of research, development and other related costs ("R&D"), expenditures, the outcome or effects of and expenses related to litigation and administrative proceedings related to our patents, our intent to enforce our intellectual property, our ability to license our intellectual property, tax expenses, cash flows, our ability to liquidate and recover the carrying value of our investments, our management's plans and objectives for our current and future operations, management's plans for repurchasing Company stock pursuant to the authorization of our Board, the levels of customer spending or R&D activities, general economic conditions, the sufficiency of financial resources to support future operations and capital expenditures. Words such as "expects," "anticipates," "plans," "believes," "seeks," "estimates," "could," "would," "may," "intends," "targets" and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Quarterly Report.

Although forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks, uncertainties, and changes in condition, significance, value and effect, including those discussed below under the heading "Risk Factors" within Part II, Item 1A of this report and other documents we file from time to time with the Securities and Exchange Commission (the "SEC"), such as our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from those expressed herein and in ways not readily foreseeable. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report and are based on information currently and reasonably known to us. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report. Readers are urged to review carefully 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 3025 Orchard Parkway, San Jose, California 95134. We also have offices, research and development and manufacturing facilities in other locations. Our telephone number is
(408) 321-6000. 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.

Tessera, the Tessera logo, µBGA, µPILR, OptiML, DigitalOptics, SHELLCASE and FotoNation are trademarks or registered trademarks of Tessera or our affiliated companies in the United States and other countries. All other company, brand and product names may be trademarks or registered trademarks of their respective companies.

In this Quarterly Report, the "Company," "Tessera," "we," "us" and "our" refer to Tessera Technologies, Inc. and its subsidiaries on a consolidated basis.

Business Overview

Tessera is a technology innovator that invests in, licenses and delivers innovative miniaturization technologies for next-generation electronic devices. Our Micro-electronics solutions enable smaller, higher-functionality devices through chip-scale, 3 dimensional ("3D") and wafer-level packaging technology, as well as high-density substrate and thermal management technology. Our Imaging & Optics solutions provide low-cost, high-quality camera functionality in electronic products and include image sensor packaging, wafer-level optics, and image enhancement intellectual property. We also offer customized micro-optic lenses, from diffractive and refractive optical elements to integrated micro-optical subassemblies. We license our technologies worldwide, as well as deliver products based on these technologies, some of which is done to promote the development of supply chain infrastructure.

Our intellectual property includes approximately 1,700 domestic and internationally issued patents and patent applications, covering a range of advanced semiconductor packaging, substrate, interconnect, imaging and optics, and thermal management technologies.

We have two reportable segments: Micro-electronics and Imaging and Optics. Micro-electronics is primarily composed of our licensing business in our core markets, including DRAM, Flash, SRAM, DSP, ASIC, ASSP, micro-controllers, general purpose logic and analog devices, and our development and licensing efforts in emerging areas of packaging, interconnect and miniaturization such as our µPILR™ platform and thermal management technology. Imaging and Optics is composed of two elements. The first is our development efforts and licensing business in our imaging and optics market, such as our wafer level image sensor packaging and image enhancement solutions. The second is our product and services business. This includes the manufacture of small form factor micro-optics and our Product Launch Services, through which we deliver state-of-the-art imaging solutions such as our OptiML single-element VGA lens directly to manufacturers.

We derive the majority of our revenues from license fees and royalties associated with our Micro-electronics technology, with a growing contribution from our Imaging & Optics technologies. Our Micro-electronics packaging technology has been widely adopted and is currently licensed to more than 70 companies, including Motorola, Inc., Intel Corporation, Hynix Semiconductor, Inc., Renesas Technology Co., Samsung Electronics Co., Ltd., Sharp Corporation, Powertech Technology, Inc., 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.

Our Technology

We develop, license and/or manufacture technologies in two key areas:

• Micro-electronics-including semiconductor packaging technologies encompassing interconnect and substrates, and thermal management technology

• Imaging & Optics-including wafer-level camera, wafer-level optics, image sensor packaging and image enhancement technologies

Micro-electronics

In the early 1990s, Tessera's founders invented packaging technology which is now widely used throughout the semiconductor industry. Our innovations include our µBGA solution, the industry's first chip-scale packaging ("CSP") technology. We have licensed many of the world's leading semiconductor companies to most of our CSP and multi-chip packaging technology under a license agreement that we refer to as Tessera's compliant chip ("TCC") technology license. This technology is widely used today in high volume packaging for a full range of applications, including:

• high performance dynamic random access memory ("DRAM") chips, such as Double-Data-Rate two and Double-Data-Rate three ("DDR2" and "DDR3") DRAM;

• Flash memory;

• static random access memory ("SRAM");

• digital signal processors ("DSPs"); and

• application-specific integrated circuits ("ASICs").

We continue to expand upon these Micro-electronics technologies.

Imaging & Optics

Advancements in Imaging & Optics technologies are enabling higher quality images in considerably smaller digital still cameras and other camera-enabled devices including cell phones, security systems and personal computers. Our portfolio of imaging and optics technologies includes:

• SHELLCASE MVP wafer-level chip-scale packaging ("WLCSP") technology, used in image sensor packaging;

• OptiML WLO technology, which enables the manufacturing and assembly of lens modules;

• OptiML WLC technology, which combines OptiML WLO with SHELLCASE MVP technology to manufacture camera modules at the wafer level;

• OptiML image enhancement technology, which improves the quality of captured cell phone images:

• OptiML Focus solution enables a high-quality image to be simultaneously brought into focus,

• OptiML UFL solution improves low-light performance; and

• FotoNation image enhancement technology, which provides a portfolio of in-camera image enhancement solutions for digital photos:

• FotoNation Red solution automatically detects and removes red- and golden-eye defects; and

• FotoNation FaceRecognition technology performs automatic identification of specific human faces in camera equipped mobile devices.

Acquisitions

We have grown our business partly through acquisitions. The impact of these acquisitions on our financial results has been included in the following discussion. In May 2009, we completed our purchase of certain intellectual property and customer agreements from Dblur Technologies Ltd., an Israeli company. In February 2008, we completed our acquisition of FotoNation, Inc., a Delaware corporation. In February 2007, we completed our acquisition of Eyesquad GmbH, a private limited liability company organized under the laws of the Federal Republic of Germany and its subsidiary, which operates in Israel. In February 2007 and May 2005, we purchased from North Corporation all of its patents and patent applications filed in the United States and in foreign jurisdictions, trademark assets and certain tangible assets. In July 2006, we completed our acquisition of Digital Optics Corporation, a Delaware corporation. In December 2005, we completed our purchase of certain assets of Shellcase, Ltd., an Israeli company.

Results of Operations

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



                                                       Three Months Ended                     Nine Months Ended
                                                September 30,      September 28,       September 30,      September 28,
                                                    2009               2008                2009               2008
Revenues:
Royalty and license fees                                   95 %               91 %                97 %               88 %
Product and service revenues                                5                  9                   3                 12


Total revenues                                            100                100                 100                100


Operating expenses:
Cost of revenues                                            6                  6                   5                  7
Research, development and other related costs              26                 25                  21                 25
Selling, general and administrative costs                  29                 28                  22                 29
Litigation expense                                          9                 46                   8                 37


Total operating expenses                                   70                105                  56                 98
Operating income (loss)                                    30                 (5 )                44                  2
Other income and expense, net                               1                 (2 )                 2                  2


Income (loss) before taxes                                 31                 (7 )                46                  4
Provision for income taxes                                 13                  1                  20                  6


Net income (loss)                                          18 %               (8 )%               26 %               (2 )%

Revenues

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



                                                 For the Three Months Ended
                                            September 30,         September 28,         Increase/          %
                                                 2009                  2008             (Decrease)       Change
Royalty and license fees                   $   62,743    95 %    $   57,587    91 %    $      5,156           9 %
Product and service revenues                    3,380     5           5,914     9            (2,534 )       (43 )

Total revenues $ 66,123 100 % $ 63,501 100 % $ 2,622 4 %

                                                 For the Nine Months Ended
                                            September 30,         September 28,         Increase/          %
                                                 2009                  2008             (Decrease)       Change
Royalty and license fees                   $  234,470    97 %    $  157,771    88 %    $     76,699          49 %
Product and service revenues                    8,500     3          21,395    12           (12,895 )       (60 )

Total revenues                             $  242,970   100 %    $  179,166   100 %    $     63,804          36 %

Revenues for the three months ended September 30, 2009 were $66.1 million as compared to $63.5 million for the three months ended September 28, 2008, an increase of $2.6 million, or 4%. Revenues for the nine months ended September 30, 2009 were $243.0 million as compared to $179.2 million for the nine months ended September 28, 2008, an increase of $63.8 million, or 36%. The overall increase in revenues in the three months ended September 30, 2009 as compared to 2008 is primarily due to royalty and license fees received from a former defendant in an ITC infringement case, revenue from one-time self audits reported by our licensees, offset by the lower demand in wireless and DRAM markets and continued softness in the photolithography industry, and a reduction in service revenue from government funded projects. The overall increase in revenues in the nine months ended September 30, 2009 as compared to 2008 is primarily due to royalty revenue of $60.6 million from Amkor Technology, Inc. ("Amkor") in February 2009, awarded by an arbitration panel for Amkor's material breach of its license agreement with Tessera, and option and license fees received from a former defendant in an ITC infringement case, offset by the overall lower demand in wireless and DRAM markets and continued softness in the photolithography industry.

Cost of Revenues

Cost of revenues primarily consists of direct compensation, materials, amortization of intangible assets related to acquired technologies, supplies and depreciation expense. Amortization of certain acquired intangible assets was reclassified as a component of cost of revenues from R&D started in the fiscal year of 2009 as revenue was generated from these assets. The amortization of acquired intangible assets as a component of cost of revenues relates primarily to royalty and license fees revenues derived from our imaging and optics technologies. Excluding amortization of acquired intangible assets, cost of revenues relates primarily to product and service revenues. For each associated period, cost of revenues as a percentage of total revenues varies based on the rate of adoption of our imaging and optics technologies, the product and service revenues component of total revenues, and on the mix of product sales to semiconductor optics and communications industries. Cost of revenues for the three months ended September 30, 2009 was $3.9 million, as compared to $4.1 million for the three months ended September 28, 2008, a decrease of $0.2 million, or 5%. Cost of revenues for the nine months ended September 30, 2009 was $11.9 million, as compared to $12.8 million for the nine months ended September 28, 2008, a decrease of $0.9 million, or 7%. The decrease in each period was primarily attributable to the transition of our resources from government funded projects into research and development projects and a decrease in personnel expense, partially offset by increases in amortization of acquired intangible assets and depreciation expense.

Research, Development and Other Related Costs

R&D costs for the three months ended September 30, 2009 were $16.8 million, an increase of $0.9 million, or 6%, as compared to $15.9 million for the three months ended September 28, 2008. The increase in the three month period was primarily due to increased personnel related and equipment expenses of $1.7 million for increased labor hours spent on various research projects, offset by a decrease in amortization expense of acquired intangible assets of $1.0 million reclassified to cost of revenues as revenue was generated utilizing these assets. R&D costs for the nine months ended September 30, 2009 were $50.3 million, an increase of $5.4 million, or 12%, as compared to $44.9 million for the nine months ended September 28, 2008. The increase in the nine month period was primarily due to increased personnel related and equipment expenses of $5.6 million primarily related to increased labor hours spent on various research projects in line with our research and development strategy, increased stock-based compensation expense of $2.9 million, increased outside services of $1.0 million and increased depreciation expense of $0.6 million related to capital additions. These increases were offset by the one-time charge of $2.5 million occurring in the first quarter of 2008 related to in-process research and development acquired through an acquisition and also by a decrease in amortization expense of acquired intangible assets of $2.8 million reclassified to cost of revenues. R&D headcount decreased from 280 at September 28, 2008 to a total of 269 at September 30, 2009.

We believe that a significant level of research and development expenses will be required for us to remain competitive in the future.

Selling, General and Administrative

Selling expenses consist primarily of compensation and related costs for sales and marketing personnel, marketing programs, public relations, promotional materials, travel, trade show expenses, and stock-based compensation expense. General and administrative expenses consist primarily of compensation and related costs for general management, information technology, finance and accounting personnel, legal expenses, facilities costs, stock-based compensation expense, and professional services. Our general and administrative expenses, other than facilities related expenses, are not allocated to other expense line items.

Selling, general and administrative ("SG&A") expenses for the three months ended September 30, 2009 were $19.5 million, an increase of $1.6 million, or 9%, as compared to $17.9 million for the three months ended September 28, 2008. The increase was mainly attributable to increased legal, tax and consulting expenses of $1.1 million related to corporate development activity in pursuit of our ongoing investigations of various businesses and technologies that we might acquire to further our strategic goals, increased amortization and depreciation expense of $0.5 million from acquired intangible assets and capital additions, and increased stock-based compensation expense of $0.3 million, offset by a decrease in travel and entertainment spending of $0.3 million. SG&A expenses for the nine months ended September 30, 2009 were $54.2 million, an increase of $3.4 million, or 7%, as compared to $50.8 million for the nine months ended September 28, 2008. The increase was primarily attributable to an increase of $1.6 million in legal, tax and consulting expenses, $1.2 million in amortization and depreciation expense from acquired intangible assets and capital additions, $0.8 million in facilities expense related to the new corporate headquarters and $0.5 million in stock-based compensation expense.

Litigation Expense. Litigation expense for the three months ended September 30, 2009 was $6.1 million, a decrease of $23.1 million, or 79%, as compared to $29.2 million for the three months ended September 28, 2008. Litigation expense for the nine months ended September 30, 2009 was $20.2 million, a decrease of $46.4 million, or 70%, as compared to $66.6 million for the nine months ended September 28, 2008. The decreases were primarily attributable to a decrease in case activities in our legal proceedings in 2009. Refer to Part II, Item 1-Legal Proceedings for additional details.

We expect that litigation expense will continue to be a material portion of our operating expenses in future periods, and may fluctuate significantly in some periods, because of our ongoing litigation, as described 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 Expense

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



                                              Three Months Ended                       Nine Months Ended
                                      September 30,       September 28,        September 30,        September 28,
                                          2009                 2008                 2009                2008
Cost of revenues                     $           199     $             92     $            450     $           345
Research, development & other
related costs                                  2,379                2,457                8,489               5,571
Selling, general &
administrative                                 4,312                4,046               11,498              10,966

Total stock-based compensation
expense                              $         6,890     $          6,595     $         20,437     $        16,882

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

                                              Three Months Ended                       Nine Months Ended
                                      September 30,       September 28,        September 30,        September 28,
                                          2009                 2008                 2009                2008
Employee stock options               $         4,152     $          3,906     $         12,106     $         9,430
Restricted stock awards and
units                                          2,298                2,480                7,016               6,479
Employee stock purchase plan                     440                  209                1,315                 973

Total stock-based compensation
expense                              $         6,890     $          6,595     $         20,437     $        16,882

Stock-based compensation awards included employee stock options, restricted stock and employee stock purchases under our 2003 Employee Stock Purchase Plan. Stock-based compensation expense for the three months ended September 30, 2009 and September 28, 2008 was $6.9 million and $6.6 million, respectively. Stock-based compensation expense for the nine months ended September 30, 2009 and September 28, 2008 was $20.4 million and $16.9 million, respectively. The overall increase was primarily related to an increase in grants of stock awards to employees based on our compensation incentive program and additional stock-based compensation expense resulted from modification of stock awards to employees terminated from the company. Future stock-based compensation expense and unrecognized stock-based compensation expense will increase as we grant additional stock awards.

Other Income and Expense, Net

Other income and expenses, net, for the three and nine months ended September 30, 2009 was income of $0.6 million and $4.4 million, respectively. Other income and expenses, net, for the three and nine months ended September 28, 2008 was expense of $1.0 million and income of $3.3 million, respectively. Other income and expense, net for the three month period ended September 30, 2009 increased as compared to 2008 primarily due to $2.4 million of other-than-temporary impairment of our asset-backed securities, including our mortgage-backed securities (collectively "ABS") and minority equity investment in 2008, offset by decrease in interest income contributed by lower interest rates on our investments despite increase in our cash balance. Other income and expense, net, for the nine month period ended September 30, 2009 increased as compared to 2008 primarily due to $3.5 million interest payment from Amkor in February 2009 on the $60.6 million awarded by the arbitration panel for Amkor's material breach of its license agreement, offset by a decrease in interest income as a result of lower interest rates on our investments.

Provision for Income Taxes

The provision for income taxes for the three and nine months ended September 30, 2009 and 2008 was $8.3 million and $47.3 million, respectively, and was comprised of domestic income tax and foreign income and withholding tax. The provision for income taxes for the three months and nine months ended September 28, 2008 was $0.8 million and $10.4 million, respectively, and was comprised of domestic income tax and foreign income and withholding tax. Our income tax provision is based on our worldwide estimated annualized effective . . .