The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto, and with our audited financial statements and notes thereto for the fiscal year ended December 31, 2011 found in our Annual Report on Form 10-K, filed on February 17, 2012.

This Quarterly Report contains forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. 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. 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 revenues, product development, demand, acceptance and market share, growth rate, competitiveness, gross margins, levels of research, development and other related costs, 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 our common stock pursuant to the authorization of our Board of Directors, the levels of customer spending or research and development activities, general economic conditions, the sufficiency of financial resources to support future operations and capital expenditures.

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 Quarterly 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 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 3025 Orchard Parkway, San Jose, California 95134. 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, OptiML, DigitalOptics Corporation, the DigitalOptics Corporation logo, Invensas, the Invensas logo and SHELLCASE are trademarks or registered trademarks of the Company or its affiliated companies in the United States ("U.S.") 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," "we," "us" and "our" refer to Tessera Technologies, Inc. which operates its business through its subsidiaries. Unless specified otherwise, the financial results in this Quarterly Report are those of the Company and its subsidiaries on a consolidated basis.

Business Overview

Tessera Technologies, Inc. is a holding company with operating subsidiaries in two segments: Intellectual Property and DigitalOptics.

Our Intellectual Property segment is managed by Tessera Intellectual Property Corp., including managing the patent and licensing portfolios of our subsidiaries, Tessera, Inc. and Invensas Corporation ("Invensas"). Our Intellectual Property business, comprised of engineering, licensing, account administration and litigation teams, generates revenue from patented innovations through license agreements with semiconductor companies and outsourced semiconductor assembly and test companies.

Our DigitalOptics segment is operated by DigitalOptics Corporation and its subsidiaries ("DOC"). DOC delivers innovation in imaging and optics with products and capabilities that enable expanded functionality in increasingly smaller devices. DOC's miniaturized camera module solutions provide cost-effective, high-quality camera features, including Micro Electro Mechanical Systems ("MEMS")-based auto-focus, extended depth of field ("EDoF"), zoom, image enhancement and optical image stabilization. These technologies can be applied to mobile phones and other consumer electronic products. DOC also offers customized micro-optic lenses from diffractive and refractive optical elements to integrated micro-optical subassemblies.

Our segments were determined based upon the manner in which our management viewed and evaluated our operations for the period reported. As our business grows and evolves, our management may change their views of our business operations. Segment information in Note 13 - "Segment and Geographic Information" in the Notes to Condensed Consolidated Financial Statements is incorporated herein by reference and is presented per the authoritative guidance for segment reporting. At the end of 2011, we renamed our segments in and have reclassified our segment results to reflect the inclusion of our silent air cooling program in our DigitalOptics segment. Prior to that time, that program was included in our Intellectual Property segment.

Intellectual Property Segment

Research and development by our Tessera, Inc. subsidiary led to significant innovations in semiconductor packaging technology. Semiconductor packaging creates the mechanical and electrical connection between semiconductor chips and systems such as computers and communication equipment, often via connection to printed circuit boards. We patented these innovations, often referred to as chip-scale packaging, which were widely adopted in the industry. We have developed significant capabilities in licensing, technical analysis, reverse engineering, license administration and litigation as we have sought reasonable royalties from companies that adopted our technologies.

DigitalOptics Segment

DigitalOptics offers mobile camera module solutions in three main categories:
actuator technologies, image enhancement solutions and wafer-level optics. DOC's solutions help meet growing consumer demand for smaller size, lower cost and greater functionality in mobile phones and other consumer electronic products.

Actuator technologies:

DOC's silicon solutions improve image quality and enhance, extend and simplify picture taking for mobile and portable camera devices. One example is DOC's MEMS solutions, which offer superior auto-focus and shutter capabilities in a low power, small form factor solution for continuous focus video, saving time and money. MEMS Auto-Focus (AF) actuator uses MEMS technology to precisely position and move a lens inside the camera optics to focus. Positioning precision and repeatability capabilities are achieved through DOC's unique and proprietary MEMS silicon designs.

DOC's zoom solution eliminates certain drawbacks of conventional zoom technologies while significantly advancing what is possible in a mobile device. By combining a custom lens design with innovative image processing, it enables 3X zoom capabilities.

Image Enhancement Solutions:

DOC licenses software solutions for digital and video photography image enhancement. Examples include:

• Face Tools, which provide face-oriented imaging technology such as face tracking/detection, smile/blink detection, face recognition and face beautification. When combined with our hardware acceleration technology, the performance of these applications for both video and still images is enhanced.

• Panorama, which enables users to easily and automatically create panoramic images in a single step, without using a PC or editing software.

• Video Tools, which combine image enhancement software and hardware acceleration to provide real-time video image stabilization and face beautification.

Wafer Level Optics:

DOC uses the latest semiconductor manufacturing techniques to develop and deliver its micro-optic lenses, including Diffractive Optical Elements ("DOEs"), Refractive Optical Elements ("ROEs") and Integrated Micro-Optical Subassemblies ("IMOS"). DOC uses wafer-level processing to fabricate the DOEs and/or ROEs on one or two sides of the wafer, resulting in a high-precision, high-efficiency, cost effective products. The products are manufactured in DOC's state-of-the-art ISO-registered facility.

Results of Operations

Acquisitions

We have grown our business partly through acquisitions. On March 1, 2012, we entered into a Stock and Asset Purchase Agreement, pursuant to which DOC will acquire from Flextronics International Ltd. ("Flextronics") all the outstanding equity interests in Vista Point Electronic Technologies (Zhuhai) Co. Ltd., a company organized under the laws of the People's Republic of China (the "Zhuhai Entity"), and acquire certain other assets from Flextronics related to its camera module business (collectively, the "Zhuhai Transaction"). The initial closing of the Zhuhai Transaction, including the acquisition of the Zhuhai Entity, is anticipated to occur by the third quarter of this fiscal year. The costs incurred related to the Zhuhai Transaction during the three months ended March 31, 2012 have been included in the following discussion. If the Zhuhai Transaction is completed, we anticipate that we will need to make substantial additional capital expenditures, employ additional working capital and undertake additional acquisitions in order to succeed in our business plans for the DigitalOptics segment. We also anticipate that we will incur greater operating expenses in future periods than in the past, due to the manufacturing operations and additional personnel being acquired with the Zhuhai Entity.

Revenues

Our revenues are generated from royalty and license fees, past production payments, and product and service revenues. Royalty and license fees include revenues from license fees and royalty payments generated from licensing the right to use our technologies or intellectual property. Licensees generally report shipment information 30 to 60 days after the end of the quarter in which such activity takes place. Since there is no reliable basis on which we can estimate our royalty revenues prior to obtaining these reports from the licensees, we recognize royalty revenues on a one quarter lag. The timing of revenue recognition and the amount of revenue actually recognized for each type of revenues depends upon a variety of factors, including the specific terms of each arrangement, our ability to derive fair value of the element and the nature of our deliverables and obligations. In addition, our royalty revenues will fluctuate based on a number of factors such as: (a) the timing of receipt of royalty reports; (b) the rate of adoption and incorporation of our technology by licensees; (c) the demand for products incorporating semiconductors that use our licensed technology; (d) the cyclicality of supply and demand for products using our licensed technology; and (e) the impact of economic downturns.

Some of our license agreements have fixed expiration dates. We need to renew or replace these agreements prior to their expiration in order to maintain our current revenue base. For example, our license agreement with Micron Technology, Inc. will expire in May 2012. We may not be able to continue licensing customers on terms favorable to us, under the existing terms or at all, which would harm our results of operations.

In 2005, Tessera, Inc. provided two major DRAM manufacturers with volume based pricing adjustments. The effect of the volume pricing adjustments has caused our aggregate annual DRAM royalty revenues to grow less rapidly than annual growth in overall unit shipments in the DRAM segment. An additional effect has been quarter-to-quarter fluctuations in growth in our revenues from the DRAM segment, depending on the relative DRAM market share enjoyed by these two DRAM manufacturers in a given calendar quarter and their royalty payments within a calendar year.

Tessera, Inc. is in litigation with PTI, one of two customers representing 10% or more of our revenue in 2011, as described in Part II, Item 1-Legal Proceedings. If PTI stops making payments, reduces payments, or if we receive an adverse determination in that case, it may have a substantial adverse impact on our royalty revenue in the short term.

In the past, we or our subsidiaries have engaged in litigation and arbitration proceedings to directly or indirectly enforce our intellectual property rights and the terms of our license agreements, including proceedings to ensure proper and full payment of royalties by our current licensees and by third parties whose products incorporate our intellectual property rights. We believe that similar future proceedings may result in fluctuations in our revenue and expenses.

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

                                                         Three Months Ended
                                                   March 31,            March 31,
                                                     2012                 2011
  Revenues:
  Royalty and license fees                                 93 %                 92 %
  Product and service revenues                              7                    8

  Total revenues                                          100                  100
  Operating expenses:
  Cost of revenues                                         12                    8
  Research, development and other related costs            50                   27
  Selling, general and administrative                      53                   29
  Litigation expense                                        8                    9
  Restructuring charges                                    -                     3

  Total operating expenses                                123                   76
  Operating income (loss)                                 (23 )                 24
  Other income and expense, net                             2                    1

  Income (loss) before taxes                              (21 )                 25
  Provision for (benefit from) income taxes                (4 )                  8

  Net income (loss)                                       (17 )%                17 %

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

                                                                       Three Months Ended
                                               March 31,               March 31,             Increase           %
                                                  2012                    2011              (Decrease)        Change
Royalty and license fees                   $ 43,264        93 %    $ 62,258        92 %    $    (18,994 )         (31 )%
Product and service revenues                  3,409         7         5,515         8            (2,106 )         (38 )

Total revenues                             $ 46,673       100 %    $ 67,773       100 %    $    (21,100 )         (31 )%

For the three months ended March 31, 2012, revenues were $46.7 million as compared to $67.8 million for the three months ended March 31, 2011, a decrease of $21.1 million, or 31%. The overall decrease in revenues in the three months ended March 31, 2012 as compared to the same period in 2011 was primarily due to the impact of lower royalty-bearing units reported by our licensees, the timing of $2.8 million from multi-year license revenues for our DigitalOptics technologies entered into in the prior year, and a decrease of $1.8 million in lithography sales in our micro-optics products.

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 and depreciation expense of property and equipment are generally classified as a component of cost of revenues from research, development and other related costs when an in-process development project reaches commercialization. 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 technologies, the product and service revenues component of total revenues, the mix of product sales to semiconductor, optics and communications industries and the timing of property and equipment being placed in service.

Cost of revenues for the three months ended March 31, 2012 was $5.8 million, as compared to $5.5 million for the three months ended March 31, 2011. Cost of revenues for the three months ended March 31, 2012 slightly increased as compared to the same periods in 2011 as increases in depreciation and amortization of acquired intangible assets were mostly offset by lower personnel related costs and material costs on lower product sales.

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 applications and examinations, amortization of intangible assets, materials, supplies and equipment depreciation. Research and development is conducted primarily in-house and targets development of chip-scale, circuitry design, 3D architecture, high-density substrate, thermal management technology, image enhancement technology, including MEMS-based products, and micro-optic lens solutions such as diffractive and refractive optical elements to integrated micro-optical subassemblies. All research, development and other related costs are expensed as incurred.

Research, development and other related costs for the three months ended March 31, 2012 were $23.4 million, as compared to $18.6 million for the three months ended March 31, 2011, an increase of $4.8 million, or 26%. The increase was primarily due to increases in material costs of $1.4 million, patent prosecution, application and examination expenses of $1.3 million, consulting fees of $0.9 million and amortization of intangible assets of $0.6 million, offset by lower stock-based compensation of expenses of $0.7 million.

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 March 31, 2012 were $24.6 million, as compared to $19.5 million for the three months ended March 31, 2011, an increase of $5.1 million, or 26%. The increase was primarily attributable to increases in outside service and legal fees of $3.6 million which were related to the expense associated with our acquisition activities, amortization of intangible assets of $1.4 million, and personnel related expense of $1.6 million, offset by a decrease in stock-based compensation expenses of $1.3 million.

Litigation Expense

Litigation expense for the three months ended March 31, 2012 was $3.5 million, as compared to $6.0 million for the three months ended March 31, 2011, a decrease of $2.5 million, or 42%. The decrease was primarily attributable to the decrease in case activities in our legal proceedings related to our arbitration with Amkor.

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 of litigation initiated from time to time in the future in order to enforce and protect our intellectual property and contract rights.

Upon expiration of the current terms of our customers' licenses, if those licenses are not renewed, litigation may become a necessary element of a campaign to secure payment of reasonable royalties for the use of our patented technology. Were we to initiate such litigation, our future litigation expenses would increase.

Restructuring and Other Charges

We did not incur any restructuring and other charges for the three months ended March 31, 2012, as compared to $2.1 million for the three months ended March 31, 2011. In January 2011, we announced a reorganization of our DigitalOptics segment to focus on key growth opportunities including EDoF, Zoom and MEMS-based auto-focus and a reduction of DigitalOptics employees by up to 15% of our worldwide employee base along with certain headquarters support functions. Restructuring and other charges primarily consisted of severance, costs related to the continuation of certain employee benefits, and expenses related to the closure of facilities that are not expected to be recurring.

Stock-based Compensation Expense

The following table sets forth our stock-based compensation expense for the
three months ended March 31, 2012 and 2011 (in thousands):



                                                         Three Months Ended
                                                     March 31,        March 31,
                                                        2012            2011
     Cost of revenues                                $      150      $       143
     Research, development and other related costs        1,712            2,446
     Selling, general and administrative                  2,194            3,475

     Total stock-based compensation expense          $    4,056      $     6,064

Stock-based compensation expense categorized by various equity components for the three months ended March 31, 2012 and 2011 is summarized in the table below (in thousands):

                                                      Three Months Ended
                                                  March 31,        March 31,
                                                     2012            2011
         Employee stock options                   $    2,762      $     3,347
         Restricted stock awards and units               790            2,174
         Employee stock purchase plan                    504              543

         Total stock-based compensation expense   $    4,056      $     6,064

Stock-based compensation awards included employee stock options, restricted stock awards and units and employee stock purchases. Stock-based compensation expense for the three months ended March 31, 2012 and 2011 was $4.1 million and $6.1 million, respectively. The overall decrease from the three months ended March 31, 2011 was primarily related to decreases resulting from fully amortized expense as shares become vested, cancellations of restricted stock awards and units, and lower expenses related to modification of stock awards. Future stock-based compensation expense will vary due to volatility in our stock price, number and type of stock awards granted and timing of modifications to stock awards, if any.

Other Income and Expense, Net

Other income and expense, net for the three months ended March 31, 2012 was $0.7 million as compared to $0.6 million for the three months ended March 31, 2011.

Provision for (Benefit from) Income Taxes

The benefit from income taxes for the three months ended March 31, 2012 was $1.9 million and was largely comprised of a tax benefit for domestic losses as offset by foreign withholding and income taxes. The provision for income taxes for the three months ended March 31, 2011 was $5.5 million and was comprised of domestic income tax and foreign income and withholding taxes. The Company's provision for income taxes is based on its worldwide estimated annualized effective tax rate, except for jurisdictions for which a loss is expected for the year and no benefit can be realized for those losses, and the tax effect of discrete items occurring during the period. The tax for jurisdictions for which a loss is expected for the year is based on actual withholding tax for the quarter. The tax benefit for the three months ended March 31, 2012 as compared to the prior year period tax expense is largely attributable to the loss incurred in the three months ended March 31, 2012.

Segment Operating Results

We have two reportable segments: Intellectual Property and DigitalOptics. In addition to these reportable segments, the Corporate Overhead category includes certain operating amounts that are not allocated to the reportable segments because these operating amounts are not considered in evaluating the operating performance of our business segments.

Our Intellectual Property segment is managed by Tessera Intellectual Property . . .