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. 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.

Overview

We design, develop, market and license differentiated embedded memory and high speed parallel and serial interface intellectual property, or IP, for advanced Systems on Chips, or SoC, designs. 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.

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.

In June 2009, we completed the acquisition of substantially all the assets and business of Prism Circuits, Inc. (Prism Circuits), a provider of high-speed parallel and serial interface (I/O) intellectual property. The acquisition significantly expanded our product portfolio by adding high speed multi-protocol compliant interface IP, which enables communication between semiconductors in a system. We believe the integration of our patented memory IP and the newly acquired differentiated interface IP will allow us to provide a more comprehensive and competitive solution to our customers, especially in the networking and communications markets. With the acquisition, we added over fifty engineers experienced in interface IP development and analog/mixed-signal applications. We paid Prism Circuits at closing $15.0 million in cash (offset by approximately $1.4 million of cash we acquired) and assumed certain of its liabilities as consideration for the acquired assets. We also agreed to pay up to an additional $6.5 million of cash as an earn-out payment shortly after the first anniversary of the closing date, contingent upon our achievement of certain objectives relating to the Prism Circuits business during that twelve-month period. Any earn-out payment will likely be paid in the third quarter of 2010. In addition, we granted options to purchase up to 3.6 million shares of the Company's common stock to the newly hired Prism Circuits employees.

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 Use of 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 June 30, 2009, there have been no material changes to our significant accounting policies and estimates.

Results of Operations



Revenue.



The table below sets forth data concerning licensing revenue for the three and
six months ended June 30, 2009 and 2008:



                                       June 30,              Change
                                  2009         2008       2008 to 2009
                                      (dollar amounts in thousands)
Licensing - three months ended   $   306    $      667   $    (361 ) (54 )%
Percentage of total revenue           15 %          21 %
Licensing - six months ended     $   830    $    1,099   $    (269 ) (24 )%
Percentage of total revenue           18 %          18 %

Licensing revenue decreased for the three and six months ended June 30, 2009 compared with the same period of 2008 due to a decline in the number and value of license agreements for our 1T-SRAM technology licenses in 2009. These decreases were partially offset by revenue recognized in June 2009 under contracts we assumed in our acquisition of Prism Circuits. Revenue was recognized under the assumed contracts based on the fair value of the fulfillment effort. With the expanded product portfolio resulting from the acquisition of Prism Circuits, we expect our licensing revenue to increase in future periods as we pursue opportunities in the networking and communications markets.

The table below sets forth data concerning royalty revenue for the three and six months ended June 30, 2009 and 2008:

                                     June 30,             Change
                                 2009        2008      2008 to 2009
                                   (dollar amounts in thousands)
Royalty - three months ended   $   1,675    $ 2,528   $    (853 ) (34 )%
Percentage of total revenue           85 %       79 %
Royalty - six months ended     $   3,717    $ 4,913   $  (1,196 ) (24 )%
Percentage of total revenue           82 %       82 %

Royalty revenue decreased for the three and six months ended June 30, 2009 compared with the same period a year ago primarily due to a decrease in royalties earned from a major foundry licensee due to a decrease in shipments and from an IDM licensee whose product is used in the Nintendo Wii game console, which resulted from the IDM licensee transitioning to a SoC utilizing a more advanced processing node. For the new SoC being shipped by this IDM licensee, the contractual royalty reporting occurs one quarter after shipment of products compared to the same quarter reporting for the SoC at the previous process node. The decrease was partially offset by royalties received from a major OEM customer, which commenced reporting and paying royalties in the third quarter of 2008.

Cost of net revenue and gross profit.

The table below sets forth data concerning cost of net revenue for the three and six months ended June 30, 2009 and 2008:

                                                 June 30,              Change
                                            2009         2008       2008 to 2009
                                                (dollar amounts in thousands)
Cost of net revenue - three months ended   $   276    $      833   $    (557 ) (67 )%
Percentage of total revenue                     14 %          26 %
Cost of net revenue - six months ended     $   596    $    1,313   $    (717 ) (55 )%
Percentage of total revenue                     13 %          22 %

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 in absolute dollars and as a percentage of total revenues for both the three and six months ended June 30, 2009 compared with the same periods in 2008.

Cost of net revenue decreased for the three and six months ended June 30, 2009 compared with the same period a year ago primarily due to fewer license arrangements for our 1T-SRAM technology requiring significant engineering services, as well as a $0.2 million loss recorded in the second quarter of 2008 for a loss contract. 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, primarily for our newly acquired interface IP, requiring more complex development services. These development services are required as licensees shift to more advanced process geometries, including 65 nanometer and below, as well as porting of technologies to different foundry processes. Cost of net revenue included stock-based compensation expense of $40,000 and $151,000 for the three months ended June 30, 2009 and 2008, respectively, and $72,000 and $231,000 for the six months ended June 30, 2009 and 2008, respectively.

Gross profit decreased to $1.7 million for the three months ended June 30, 2009 from $2.4 million from the year ago quarter mainly due to a decrease in our licensing and royalty revenue. Gross margin percentage increased to 86% for the three months ended June 30, 2009 from 74% in the same quarter of the prior year primarily due to fewer projects requiring customization and an increase in the percentage of royalty revenue, which has no related costs, as a percentage of total revenues.

Gross profit decreased to $4.0 million for the six months ended June 30, 2009 from $4.7 million from the year ago period mainly due to a decrease in our licensing and royalty revenue, offset by a $0.2 million loss accrual recorded in the second quarter of 2008. Gross margin percentage increased to 87% for the six months ended June 30, 2009 from 78% in the same quarter of the prior year primarily due to fewer projects requiring customization and an increase in the percentage of royalty revenue, which has no related costs, as a percentage of total revenues.

Research and Development.



The table below sets forth data concerning research and development expenses for
the three and six months ended June 30, 2009 and 2008:



                                                      June 30,             Change
                                                  2009        2008      2008 to 2009
                                                    (dollar amounts in thousands)
Research and development - three months ended   $   4,072    $ 4,541   $    (469 ) (10 )%
Percentage of total revenue                           206 %      142 %
Research and development - six months ended     $   7,901    $ 8,837   $    (936 ) (11 )%
Percentage of total revenue                           174 %      147 %

Our research and development expenses include development and design of variations of the 1T-SRAM and interface technologies for use in different manufacturing processes used by licensees, development of our 1T-FLASH technology solution, and, for periods through March 31, 2009, 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. Our research and development expenses decreased in absolute dollars but increased as a percentage of total revenues for both the three and six months ended June 30, 2009 compared with the same periods a year ago.

The $0.5 million decrease for the three months ended June 30, 2009 compared with the same period a year ago was primarily due to the following:

† $1.2 million decrease in costs related to the analog/mixed-signal product lines resulting from the exit of these product lines which was completed in the first quarter of 2009;

† $0.4 million increase in costs related to the operations acquired from Prism Circuits; and

† $0.3 million increase in personnel-related costs, including payroll taxes, as we expanded our engineering team working on our non-volatile 1T-FLASH memory technology.

Research and development expenses included stock-based compensation expense of $0.3 million and $0.4 million for the three months ended June 30, 2009 and 2008, respectively.

The $0.9 million decrease for the six months ended June 30, 2009 compared with the same period a year ago was primarily due to the following:

† $1.9 million decrease in costs related to the analog/mixed-signal product lines resulting from the exit of these product lines, which was completed in the first quarter of 2009;

† $0.5 million increase in personnel-related costs, including payroll taxes, as we expanded our engineering team working on our non-volatile 1T-FLASH memory technology;

† $0.4 million increase in costs related to the operations acquired from Prism Circuits; and

† $0.1 million increase in other individually minor items.

Research and development expenses included stock-based compensation expense of $0.5 million and $0.7 million for the six months ended June 30, 2009 and 2008, respectively.

We expect that research and development expenses will increase in absolute dollars and will be lower as a percentage of net revenue for the remainder of 2009 as future costs will include costs related to our new interface IP personnel, amortization costs related to acquired intangible assets and accretive compensation charges related to our acquisition Prism Circuits' business.

Selling, General and Administrative.



The table below sets forth data concerning selling, general and administrative
(SG&A) expenses for the three and six months ended June 30, 2009 and 2008:



                                    June 30,             Change
                                2009        2008      2008 to 2009
                                  (dollar amounts in thousands)
SG&A - three months ended     $   2,461    $ 2,926   $    (465 ) (16 )%
Percentage of total revenue         124 %       92 %
SG&A - six months ended       $   4,878    $ 6,282   $  (1,404 ) (22 )%
Percentage of total revenue         107 %      104 %

Selling, general and administrative expenses consist primarily of personnel and related overhead costs for sales, marketing, customer support, finance, human resources and general management. Selling, general and administrative expenses decreased in absolute dollars but increased as a percentage of total revenues for both the three and six months ended June 30, 2009 compared with the same periods a year ago.

The $0.5 million decrease for the three months ended June 30, 2009 compared with the same period of 2008 was primarily due to the following:

† $0.4 million decrease in personnel-related costs, primarily due to headcount reductions;

†        $0.3 million decrease in stock-based compensation expense;

†        $0.3 million increase in acquisition transaction costs, primarily legal
and accounting fees, related to the acquisition of Prism Circuits; and

†        $0.1 million decrease in other individually minor items.

Selling, general and administrative expenses included stock-based compensation expense of $0.5 million and $0.8 million for the three months ended June 30, 2009 and 2008, respectively.

The $1.4 million decrease for the six months ended June 30, 2009 compared with the same period of 2008 was primarily due to the following:

†        $0.9 million decrease in stock-based compensation expense;

†        $0.6 million decrease in personnel-related costs primarily due to
headcount reductions;

†        $0.3 million increase in acquisition transaction costs, primarily legal
and accounting fees, related to the acquisition of Prism Circuits; and

†        $0.2 million decrease in other individually minor items.

Selling, general and administrative expenses included stock-based compensation expense of $0.7 million and $1.6 million for the six months ended June 30, 2009 and 2008, respectively. We expect that selling, general and administrative expenses will remain consistent in absolute dollars and will be lower as a percentage of net revenue for the remainder of 2009 as the second half of the year includes professional service costs related to accounting and regulatory compliance, which is expected to be offset by lower acquisition-related transaction costs.

Restructuring Charges.



The table below sets forth data concerning restructuring expenses for the three
and six months ended June 30, 2009 and 2008:



                                                  June 30,              Change
                                               2009       2008       2008 to 2009
                                                 (dollar amounts in thousands)
Restructuring charges - three months ended   $    431    $     -    $    431    100 %
Percentage of total revenue                        22 %        - %
Restructuring charges - six months ended     $    706    $     -    $    706    100 %
Percentage of total revenue                        16 %        - %

Restructuring charges for the three months ended June 30, 2009 resulted from the closure of our Korea research and development office resulting in the elimination of 15 positions. We recorded restructuring charges of $0.3 million, which were primarily related to employee terminations, costs to exit the leased facility and other costs related to closing the subsidiaries. We do not expect to incur additional restructuring charges related to the Korea office and all remaining cash expenditures are expected to be paid in the third and fourth quarters of 2009. Additionally, restructuring charges of $0.1 million were recorded in connection with the plan to exit the leased facility that was occupied by the newly acquired employees of Prism Circuits.

Restructuring charges for the six months ended June 30, 2009 included the items discussed above with the addition of $0.3 million of costs related to the closure of the offices in Romania and China recorded in the first quarter of 2009. The costs primarily related to employee terminations costs and costs to exit the leased facility in China. The remaining cash expenditures are expected to be paid in the third quarter of 2009.

Other Income, net.



The table below sets forth data concerning other income, net, for the three and
six months ended June 30, 2009 and 2008:



                                               June 30,              Change
                                          2009         2008       2008 to 2009
                                              (dollar amounts in thousands)
Other income, net - three months ended   $   151    $      561   $    (410 ) (73 )%
Percentage of total revenue                    8 %          18 %
Other income, net - six months ended     $   354    $    1,635   $  (1,281 ) (78 )%
Percentage of total revenue                    8 %          27 %

Other income, net, primarily consisted of interest income on our investments, which was $0.3 million and $0.6 million for the three months ended June 30, 2009 and 2008, respectively. Interest income declined $0.3 million due to lower interest rates earned on lower average investment balances than during the comparable quarter in 2008. The remaining decrease includes a $0.1 million charge to reserve for potentially uncollectible refundable foreign withholding taxes.

Interest income was $0.6 million and $1.6 million for the six months ended June 30, 2009 and 2008, respectively. Interest income for the six months ended June 30, 2009 declined $1.0 million compared with the same period a year ago due to lower interest rates earned on lower average investment balances than during the comparable period in 2008. The remaining decrease includes a $0.1 million charge to reserve for potentially uncollectible foreign withholding taxes and $0.1 million in foreign exchange transaction losses.

Provision for Income Taxes.



The table below sets forth data concerning the provision for income taxes for
the three and six months ended June 30, 2009 and 2008:



                                                       June 30,              Change
                                                   2009       2008        2008 to 2009
                                                      (dollar amounts in thousands)
Provision for income taxes - three months ended   $   (26 )  $   (46 )  $     20      43 %
Percentage of total revenue                             1 %        1 %
Provision for income taxes - six months ended     $   (33 )  $   (89 )  $     56      63 %
Percentage of total revenue                             1 %        1 %

Our income tax provisions were primarily attributable to foreign jurisdictions.

The provisions for the three and six months ended June 30, 2009 and 2008 were primarily attributable to taxes owed by 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 June 30, 2009, we had cash and cash equivalents and long and short-term investments of $45.4 million and had total working capital of $26.1 million. Our primary capital requirements are for working capital needs.

Net cash used in operating activities was $7.6 million for the first six months of 2009 and was primarily attributable to our net loss of $9.2 million, $0.3 million in changes in assets and liabilities, net of the acquisition of Prism Circuits, offset by non-cash charges, including stock-based compensation expense of $1.2 million, depreciation and amortization of $0.5 million and a non-cash restructuring charge of $0.1 million.

Net cash used in operating activities was $3.2 million for the first six months of 2008 and primarily consisted of the net loss of $8.9 million, which was partially offset by non-cash charges, including stock-based compensation expense of $2.6 million and depreciation and amortization of $0.8 million and $2.3 million generated from changes in assets and liabilities.

Net cash used in investing activities was $4.8 million for the first six months of 2009, and included $13.6 million net cash paid for the acquisition of Prism Circuits in June 2009 and $0.3 million for purchases of fixed assets. Amounts transferred to and from cash and marketable securities resulted in a $9.2 million increase in cash that did not impact our liquidity.

. . .