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, our ability to become a leading supplier of integrated camera modules in the mobile phone market, 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, and 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 reverse 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. Included in the Intellectual Property segment are a number of advanced technology research and development programs.

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 14 - "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 recast 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. Tessera, Inc. 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 Tessera, Inc.'s 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 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 June 28, 2012, DOC acquired from Flextronics International Ltd. ("Flextronics") all the outstanding equity interests in DigitalOptics Corporation Technology Zhuhai Co., Ltd. (formerly known as Vista Point Electronic Technologies (Zhuhai) Co. Ltd.), a company organized under the laws of the People's Republic of China (the "Zhuhai Entity"), and acquired certain other assets from Flextronics related to its camera module business (collectively, the "Zhuhai Transaction"). The costs incurred related to the Zhuhai Transaction during the three and six months ended June 30, 2012 have been included in the following discussion. As a result of the Zhuhai Transaction, we anticipate that we will need to make substantial additional capital expenditures and employ additional working capital 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, due to the manufacturing operations and additional personnel 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 revenue 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.

From time to time we enter into license agreements that have fixed expiration dates. Upon expiration of such agreements, we need to renew or replace these agreements in order to maintain our revenue base. 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. For example, our license agreement with Micron Technology, Inc. expired in May 2012. Micron Technology, Inc. accounted for 10% or more of revenue for the year ended December 31, 2011 and has since announced that it intends to acquire Elpida Memory Inc., a leading dynamic random access memory ("DRAM") manufacturer. If we fail to replace the expired Micron Technology, Inc. license agreement it will have a negative impact on our revenue and our results of operations.

Tessera, Inc. is in litigation with Powertech Technology Inc. ("PTI"), a customer representing 10% or more of our revenue in 2011, as described in Part II, Item 1 - Legal Proceedings. In June 2012, PTI notified Tessera, Inc. of its purported termination of its license agreement with Tessera, Inc. and that PTI will make a final payment under the license agreement in July 2012. If we are not able to replace the revenue from PTI or if we receive an adverse determination in the litigation with PTI, it could have a substantial adverse impact on our royalty revenue in the near 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                    Six Months Ended
                                                  June 30,            June 30,          June 30,           June 30,
                                                    2012                2011              2012               2011
Revenues:
Royalty and license fees                                 95 %                92 %              94 %               92 %
Product and service revenues                              5                   8                 6                  8

Total revenues                                          100                 100               100                100
Operating expenses:
Cost of revenues                                          9                   8                11                  8
Research, development and other related costs            40                  27                45                 27
Selling, general and administrative                      40                  32                45                 31
Litigation expense                                       11                  10                 9                 10
Restructuring charges                                    -                   -                 -                   1

Total operating expenses                                100                  77               110                 77
Operating income (loss)                                  -                   23               (10 )               23
Other income and expense, net                             2                   1                 1                  1

Income (loss) before taxes                                2                  24                (9 )               24
Provision for (benefit from) income taxes                 3                   8                (1 )                8

Net income (loss)                                        (1 )%               16 %              (8 )%              16 %

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

                                                                      Three Months Ended
                                              June 30,                 June 30,              Increase           %
                                                2012                     2011               (Decrease)        Change
Royalty and license fees                 $  58,185        95 %    $  65,402        92 %    $     (7,217 )         (11 )%
Product and service revenues                 3,239         5          5,328         8            (2,089 )         (39 )

Total revenues                           $  61,424       100 %    $  70,730       100 %    $     (9,306 )         (13 )%


                                                                       Six Months Ended
                                              June 30,                 June 30,              Increase           %
                                                2012                     2011               (Decrease)        Change
Royalty and license fees                 $ 101,449        94 %    $ 127,660        92 %    $    (26,211 )         (21 )%
Product and service revenues                 6,648         6         10,843         8            (4,195 )         (39 )

Total revenues                           $ 108,097       100 %    $ 138,503       100 %    $    (30,406 )         (22 )%

Total revenue for the second quarter of 2012 was $61.4 million, compared to $70.7 million of total revenue in the second quarter of the prior year. Intellectual Property revenue for the second quarter of 2012 was $53.0 million, compared to $60.5 million in the second quarter of the prior year, which included a nonrecurring $1.0 million license fee. The decrease was primarily due to the timing of a renewed contract with a major DRAM customer which resulted comparatively in lower revenues of $6.1 million and lower unit volumes reported by customers totaling $9.8 million, offset by audit payments in the second quarter of 2012 of approximately $9.4 million.

DigitalOptics revenue for the second quarter of 2012 was $8.4 million, compared to $10.2 million in the second quarter of the prior year. The decrease was due primarily to an EDoF customer whose reported units were lower than the prior year and weaker demand for the Company's Micro-Optics products.

For the six months ended June 30, 2012, revenues were $108.1 million as compared to $138.5 million for the six months ended June 30, 2011, a decrease of $30.4 million, or 22%. Intellectual Property revenue for the first half of 2012 was $92.0 million, compared to $114.1 million in the first half of the prior year, which included a nonrecurring $1.0 million license fee. The overall decrease in revenues in the six months ended June 30, 2012 as compared to the same period in 2011 was primarily due to the timing of a renewed contract with a major DRAM customer which resulted comparatively in lower revenues of $6.1 million and lower unit volumes reported by customers totaling $24.4 million, offset by audit payments in the second quarter of 2012 of approximately $9.4 million.

DigitalOptics revenue for the for the six months ended June 30, 2012 was $16.1 million, compared to $24.4 million in the first half of the prior year. The decrease was due primarily to lower revenues related to Wafer Level Packaging, an EDoF customer whose reported units were lower than the prior year and weaker demand for the Company's 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. We anticipate our cost of revenues will increase as our product mix includes more products and services as we grow our DigitalOptics business through the manufacturing operations we acquired in June 2012 and the investments we are making in our lens design and manufacturing capability.

Cost of revenues for the three months ended June 30, 2012 was $5.6 million, as compared to $5.4 million for the three months ended June 30, 2011, an increase of $0.2 million, or 4%. Cost of revenues for the six months ended June 30, 2012 was $11.4 million, as compared to $10.9 million for the six months ended June 30, 2011, an increase of $0.5 million, or 5%. The slight increase as compared to the same periods in 2011 resulted from increases in depreciation and amortization of acquired intangible assets which 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, wafer-level packaging technology, high-density substrate, thermal management technology, image sensor packaging, 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 June 30, 2012 were $24.9 million, as compared to $18.8 million for the three months ended June 30, 2011, an increase of $6.1 million, or 32%. The increase was primarily due to increases in personnel related expenses of $2.2 million, material costs of $1.4 million, consulting fees of $1.2 million and amortization of intangible assets of $0.6 million, offset by lower stock-based compensation expense of $0.5 million. Research, development and other related costs for the six months ended June 30, 2012 were $48.3 million, as compared to $37.4 million for the six months ended June 30, 2011, an increase of $10.9 million, or 29%. The increase was primarily due to increases in personnel related expenses of $2.9 million, material costs of $2.8 million, consulting fees of $2.1 million and amortization of intangible assets of $1.2 million, offset by lower stock-based compensation expense of $1.2 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, reverse engineering personnel and services, 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 fees and 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 June 30, 2012 were $24.4 million, as compared to $22.8 million for the three months ended June 30, 2011, an increase of $1.6 million, or 7%. The increase was primarily attributable to increases in outside service and legal fees of $2.6 million which were related to our acquisition activities, amortization of intangible assets of $1.3 million, and facility and insurance expense of $0.5 million, offset by a decrease in stock-based compensation expense of $3.3 million. SG&A expenses for the six months ended June 30, 2012 were $49.0 million, as compared to $42.2 million for the six months ended June 30, 2011, an increase of $6.8 million, or 16%. The increase was primarily attributable to increases in outside service and legal fees of $6.2 million which were related to our acquisition activities and amortization of intangible assets of $2.7 million, offset by a decrease in stock-based compensation expense of $4.6 million.

Litigation Expense

Litigation expense for the three months ended June 30, 2012 was $6.7 million, as compared to $7.2 million for the three months ended June 30, 2011, a decrease of $0.5 million, or 7%. Litigation expense for the six months ended June 30, 2012 was $10.2 million, as compared to $13.2 million for the six months ended June 30, 2011, a decrease of $3.0 million, or 23%. The decreases were primarily attributable to the decrease in case activities in our docket of legal proceedings. The case management orders in a number of proceedings have delayed the timing of costs that will be incurred in those proceedings until the second half of 2012, 2013 and 2014.

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. If we initiate such litigation, our future litigation expenses would significantly increase.

Stock-based Compensation Expense

. . .