This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying condensed consolidated financial statements and notes included in this report. This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which include, without limitation, statements about the market for our technology, our strategy, competition, expected financial performance, all information disclosed under Item 3 of this Part I, and other aspects of our business identified in the Company's most recent annual report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2009 and in other reports that

we file from time to time with the Securities and Exchange Commission. Any statements about our business, financial results, financial condition and operations contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "expects," "intends," "plans," "projects," or similar expressions are intended to identify forward-looking statements. Our actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors described below in Risk Factors and elsewhere in this report and under Item 1A of our annual report on Form 10-K for the year ended December 31, 2008, which we filed with the Securities and Exchange Commission on March 17, 2008. We undertake no obligation to update publicly any forward-looking statements for any reason, except as required by law, even as new information becomes available or events occur in the future.

Company Overview

We design, develop, market and license memory intellectual property, or IP, used by the semiconductor industry. Our patented memory solutions include 1T-SRAM and 1T-FLASH high-density and/or high performance alternatives to traditional volatile and non-volatile embedded memory. We license these technologies to companies that incorporate, or embed, memory on complex integrated circuits, such as Systems on Chips, or SoCs.

Our customers typically include fabless semiconductor companies, integrated device manufacturers, or IDMs, and foundries. We generate revenue from the licensing of our IP, and our customers pay us fees for licensing, non-recurring engineering services, royalties and maintenance and support. Royalty revenues are typically earned under our license agreements when our licensees manufacture or sell products that incorporate any of our technologies. Generally, we expect our total sales cycle, or the period from our initial discussion with a prospective licensee to our receipt of royalties from the licensee's use of our technologies, to run from 18 to 24 months. The portion of our sales cycle from the initial discussion to the receipt of license fees may run from 6 to 12 months, depending on the complexity of the proposed project and degree of development services required.

Sources of Revenue

We generate two types of revenue: licensing and royalties.

Licensing. Licensing revenue consists of fees earned from license agreements, development services, prepaid pre-production royalties, and support and maintenance.

Our license agreements involve long sales cycles, which make it difficult to predict when the agreements will be signed. In addition, our licensing revenues fluctuate from period to period, and it is difficult for us to predict the timing and magnitude of such revenue from quarter to quarter. Moreover, we believe that the amount of licensing revenue for any period is not necessarily indicative of results in any future period.

Our licensing revenue consists primarily of fees for providing circuit design, layout and design verification and granting licenses to customers that embed our technology into their products. License fees generally range from $100,000 to several million dollars per contract, depending on the scope and complexity of the development project, and the extent of the licensee's rights. The licensee generally pays the license fees in installments at the beginning of the license term and upon the attainment of specified milestones. The vast majority of our contracts allow for milestone billing based on work performed. Fees billed prior to revenue recognition are recorded as deferred revenue.

Royalty. Royalty revenue represents amounts earned under provisions in our licensing contracts that require our licensees to report royalties and make payments at a stated rate based on actual units manufactured or sold by licensees for products that include our technologies. We generally recognize royalties in the quarter in which we receive the licensee's report.

Generally our license agreements provide for royalty payments at a stated rate. We negotiate royalty rates by taking into account such factors as the anticipated volume of the licensee's sales of products utilizing our technologies and the cost savings to be achieved by the licensee through the use of our technology. Our license agreements generally require the licensee to report the manufacture or sale of products that include our technology after the end of the quarter in which the sale or manufacture occurs.

As with our licensing revenue, the timing and level of royalties are difficult to predict. They depend on the licensee's ability to market, produce and sell products incorporating our technology. Many of the products of our licensees that are currently subject to licenses from us are used in consumer products, such as electronic game consoles, for which demand can be seasonal.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis we make these estimates based on our historical experience and on assumptions that we consider reasonable under the circumstances. Actual results may differ from these estimates, and reported results could differ under different assumptions or conditions. Our significant accounting policies and estimates are disclosed in Note 1 of the "Notes to Consolidated Financial Statements" in our Annual Report on Form 10-K for the year ended December 31, 2008. As of March 31, 2009, there have been no material changes to our significant accounting policies and estimates.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007) (SFAS No. 141(R)), "Business Combinations." SFAS No. 141(R) significantly changes the accounting for business combinations in a number of areas including the treatment of contingent consideration, acquired contingencies, transaction costs, in-process research and development and restructuring costs. In addition, under SFAS No. 141(R), changes in an acquired entity's deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We expect SFAS No. 141(R) will have an impact on our consolidated financial statements for any acquisitions we consummate in the future, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions.

In April 2009, the FASB issued FASB Staff Position (FSP) No. 141R-1 (FSP No. 141R-1), "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies." FSP No. 141R-1 amends the provisions in SFAS No. 141(R) for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. FSP No. 141R-1 eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria in SFAS No. 141(R) and instead carries forward most of the provisions in SFAS No. 141 for acquired contingencies. FSP No. 141R-1 is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We expect FSP No. 141R-1 will have an impact on our consolidated financial statements for any acquisitions we consummate in the future, but the nature and magnitude of the specific effects will depend upon the nature, term and size of the acquired contingencies.

In April 2009, the FASB issued three related Staff Positions: (i) FSP 157-4 (FSP 157-4), "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions That Are Not Orderly," (ii) FSP 115-2 and FSP 124-2 (FSP 115-2 and FSP 124-2), "Recognition and Presentation of Other-Than-Temporary Impairments," and
(iii) SFAS No. 107-1 and APB 28-1 (SFAS No. 107-1 and APB 28-1),"Interim Disclosures about Fair Value of Financial Instruments," which are effective for interim and annual periods ending after June 15, 2009 and will be adopted by us beginning in the second quarter of 2009. FSP 157-4 provides guidance on how to determine the fair value of assets and liabilities under SFAS No. 157 in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. FSP 115-2 and 124-2 provide operational guidance for determining other-than-temporary impairments for debt securities. SFAS No. 107-1 and APB 28-1 enhance the disclosure of instruments under the scope of SFAS No. 157 for both interim and annual periods. Although we will continue to evaluate the application of these Staff Positions, we do not currently believe adoption of these accounting pronouncements will have a material impact on our financial condition or operating results.

Results of Operations



Revenue.



                                       Three Months Ended       Year-Over-Year
                                            March 31,               Change
                                        2009         2008        2008 to 2009
                                             (dollar amounts in thousands)
        Licensing                     $     524         432   $      92        21 %
        Percentage of total revenue          20 %        15 %

Licensing revenue consists of fees earned from license agreements, development services and support and maintenance.

Licensing revenue increased for the three months ended March 31, 2009 compared with the same period a year ago primarily due to the timing of revenue recognition related to the license of 1T-SRAM Classic Memory Macros, which required no customization and the license fees were recognized as revenue upon delivery.

                                        Three Months Ended      Year-Over-Year
                                            March 31,               Change
                                         2009         2008       2008 to 2009
                                            (dollar amounts in thousands)
        Royalty                       $    2,042    $  2,385   $     (343 )  (14 )%
        Percentage of total revenue           80 %        85 %

Royalty revenue represents amounts earned under provisions in our licensing contracts that require our licensees to report royalties and make payments at a stated rate based on actual units manufactured or sold by licensees for products that include our technologies. We generally recognize royalties in the quarter in which we receive the licensee's report.

Royalty revenue decreased for the three months ended March 31, 2009 compared with the same period a year ago primarily due to a decrease in royalties earned on the sale of the Nintendo Wii game console, resulting from the licensee transitioning to a SoC utilizing a more advanced processing node in which the contractual royalty reporting occurs one quarter after shipment of products compared to the same quarter reporting for the SoC at the larger process node. The decrease was partially offset by royalties received from a major OEM customer, which commenced in the third quarter of 2008.

Cost of net revenue and gross profit.

                                        Three Months Ended      Year-Over-Year
                                            March 31,               Change
                                        2009         2008        2008 to 2009
                                            (dollar amounts in thousands)
        Cost of net revenue           $     320    $     480   $     (160 )  (33 )%
        Percentage of total revenue          12 %         17 %

Cost of net revenue consists of personnel costs for engineers assigned to revenue-generating licensing arrangements and related overhead allocation costs.

Cost of net revenue decreased for the three months ended March 31, 2009 compared with the same period a year ago primarily due to fewer license arrangements for our 1T-SRAM technology requiring significant engineering services. We expect that the cost of licensing revenue will grow in absolute dollars and will be higher as a percentage of net revenue for the remainder of 2009 because we anticipate entering into license agreements requiring more complete development services, primarily due to the shift by many licensees to more advanced process geometries, including 65 nanometer and below. Cost of net revenue included stock-based compensation expense of $32,000 and $80,000 for the three months ended March 31, 2009 and 2008, respectively.

Gross profit decreased to $2.2 million for the three months ended March 31, 2009 from $2.3 million from the year ago quarter mainly due to a decrease in royalty revenue, which has no related costs. Gross margin percentage increased to 88% for the three months ended March 31, 2009 from 83% in the same quarter of the prior year primarily due to fewer projects requiring customization in the first quarter of 2009.

Research and Development.



                                        Three Months Ended      Year-Over-Year
                                            March 31,               Change
                                         2009         2008       2008 to 2009
                                            (dollar amounts in thousands)
        Research and development      $    3,829    $  4,296   $     (467 )  (11 )%
        Percentage of total revenue          149 %       153 %

Our research and development expenses include development and design of variations of the 1T-SRAM technologies for use in different manufacturing processes used by licensees, development of our 1T-FLASH technology solution and costs related to our analog/mixed-signal design technology, including the subsidiaries in China and Romania. We expense research and development costs as they are incurred.

The $0.5 million decrease for the three months ended March 31, 2009 compared with the same period a year ago was primarily due to the following:

† $0.7 million decrease in costs related to the analog/mixed-signal product lines resulting from the exit of these product lines;

† $0.2 million decrease in amortization of intangible assets due to the impairment of these assets in the fourth quarter of 2008;

† $0.2 million decrease in stock-based compensation expense;

† $0.4 million increase in personnel-related costs, including payroll taxes, as we expanded our engineering team working on our non-volatile 1T-FLASH memory technology;

† $0.1 million increase in license costs for our CAD tools; and

† $0.1 million increase in tape-out charges incurred to complete validation of our designs in silicon.

Research and development expenses included stock-based compensation expense of $0.2 million and $0.4 million for the three months ended March 31, 2009 and 2008, respectively. We expect that research and development expenses will decrease in absolute dollars and will be lower as a percentage of net revenue for the remainder of 2009 as we will not incur additional expenses for the analog/mixed-signal product lines, which we incurred for a portion of the first quarter of 2009.

Selling, General and Administrative.



                                            Three Months Ended      Year-Over-Year
                                                March 31,               Change
                                             2009         2008       2008 to 2009
                                                (dollar amounts in thousands)
    Selling, general and administrative   $    2,417    $  3,356   $     (939 )  (28 )%
    Percentage of total revenue                   94 %       119 %

Selling, general and administrative expenses consist primarily of personnel and related overhead costs for sales, marketing, customer support, finance, human resources and general management.

The $0.9 million decrease for the three months ended March 31, 2009 compared with the same period a year ago was primarily due to the following:

†          $0.6 million decrease in stock-based compensation expense;

†          $0.2 million decrease in personnel-related costs primarily due to
headcount reductions; and

†          $0.1 million decrease in sales commissions.

Selling, general and administrative expenses included stock-based compensation expense of $0.2 million and $0.8 million for the three months ended March 31, 2009 and 2008, respectively. We expect that selling, general and administrative expenses will decrease in absolute dollars and will be lower as a percentage of net revenue for the remainder of 2009 as our professional services costs related to compliance are generally highest in the first quarter.

Restructuring Charge.



                                        Three Months Ended       Year-Over-Year
                                            March 31,                Change
                                          2009         2008       2008 to 2009
                                             (dollar amounts in thousands)
        Restructuring charge          $        275     $   -   $     275       100 %
        Percentage of total revenue             11 %       -

In the fourth quarter of 2008, our management approved and initiated a plan to exit the unprofitable analog/mixed-signal product lines, which we had acquired in 2007 through asset purchase agreements with Atmel and LDIC. This plan resulted in the elimination of approximately 90 employees, mainly located in our subsidiaries in China and Romania. Total costs in 2009 associated with the restructuring primarily related to accrued employee severance, costs to exit the leased facility in China and other termination costs. We do not expect to incur additional restructuring charges related to this exit initiative in the future. The remaining cash expenditures of approximately $0.3 million are expected to be paid out in the second and third quarters of 2009. This product line exit is expected to result in approximately a $5.5 million reduction in annual operating expenses.

Other Income, net.



                                 Three Months Ended       Year-Over-Year
                                     March 31,                Change
                                2009          2008         2008 to 2009
                                     (dollar amounts in thousands)

Other income, net primarily consisted of interest income on our investments, which was $0.3 million and $1.0 million for the three months ended March 31, 2009 and 2008, respectively. Interest income declined $0.7 million due to lower interest rates earned on lower average investment balances than during the comparable quarter in 2008. The remaining decrease includes $0.1 million of non-investment interest income attributable to an income tax refund received in the first quarter of 2008 resulting from an amended tax return and $0.1 million of foreign exchange losses in the first quarter of 2009.

Provision for Income Taxes.



                                 Three Months Ended          Year-Over-Year
                                      March 31,                  Change
                                2009           2008           2008 to 2009
                                       (dollar amounts in thousands)

Our income tax provisions were primarily attributable to foreign jurisdictions.

The provision for the three months ended March 31, 2009 was primarily attributable to taxes for our foreign subsidiaries and branches and minimum U.S. state income tax liabilities. We believe that, based on the history of our operating losses and other factors, the weight of available evidence indicates that it is more likely than not that we will not be able to realize the benefit of our net operating losses. Accordingly, a full valuation reserve has been recorded against our net deferred tax assets.

Liquidity and Capital Resources; Changes in Financial Condition

Cash Flows

As of March 31, 2009, we had cash and cash equivalents and long and short-term investments of $62.0 million and had total working capital of $37.2 million. Our primary capital requirements are for working capital needs.

Net cash used in operating activities was $4.6 million for the first three months of 2009 and was primarily attributable to our net loss of $4.1 million and $1.2 million in changes in assets and liabilities, offset by non-cash charges, including stock-based compensation expense of $0.4 million, depreciation of $0.2 million and a non-cash restructuring charge of $0.1 million.

Net cash used in operating activities was $1.0 million for the first three months of 2008 and resulted from the net loss of $4.3 million, offset by non-cash charges, including stock-based compensation expense of $1.3 million and depreciation and amortization expense of $0.4 million, and $1.6 million in changes in assets and liabilities.

For the first three months of 2009, we spent approximately $0.3 million on expenditures for property and equipment. Amounts transferred to and from cash and marketable securities resulted in a $1.9 million reduction of cash that did not impact our liquidity. During the first three months of 2008, we made capital expenditures of approximately $0.1 million. Amounts transferred to and from cash and marketable securities resulted in a $4.7 million increase in cash.

Net cash used in financing activities was $0.9 million for the first three months of 2009 was attributable to shares repurchased under a stock repurchase program that was suspended in February 2009. There was no cash impact from financing activities for the first three months of 2008.

Our future liquidity and capital requirements are expected to vary from quarter-to-quarter, depending on numerous factors, including:

† level and timing of licensing and royalty revenues;

† cost, timing and success of technology development efforts, including meeting customer design specifications;

† market acceptance of our existing and future technologies and products;

† competing technological and market developments;

† cost of maintaining and enforcing patent claims and intellectual property rights;

† variations in manufacturing yields, materials costs and other manufacturing risks;

† costs of acquiring other businesses and integrating the acquired operations; and

† profitability of our business.

We expect our existing cash, cash equivalents and investments, along with our existing capital and cash generated from operations, if any, to be sufficient to meet our capital requirements for the foreseeable future. We cannot be certain, however, that we will not require additional financing at some point in time. Should our cash resources prove inadequate, we may need to raise additional funding through public or private financings. There can be no assurance that such additional funding will be available to us on favorable terms, if at all. The failure to raise capital when needed could have a material, adverse effect on our business and financial condition. We expect that a licensing business such as ours generally will require less cash to support operations.