Rambus 10Q 2008 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-22339

RAMBUS INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		94-3112828 (I.R.S. Employer Identification No.)

4440 El Camino Real, Los Altos, CA 94022
(Address of principal executive offices) (zip code)

Registrant’s telephone number, including area code: (650) 947-5000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares outstanding of the registrant’s Common Stock, par value $.001 per share, was 104,801,363 as of September 30, 2008.

RAMBUS INC.
TABLE OF CONTENTS


		PAGE

	Special Note Regarding Forward-Looking Statements		3
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2008 and December 31, 2007		5
	Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2008 and 2007		6
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2008 and 2007		7
	Notes to Unaudited Condensed Consolidated Financial Statements		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		44
Item 4.	Controls and Procedures		46
PART II.	OTHER INFORMATION		47
Item 1.	Legal Proceedings		47
Item 1A.	Risk Factors		47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		63
Item 3.	Defaults Upon Senior Securities		63
Item 4.	Submission of Matters to a Vote of Security Holders		63
Item 5.	Other Information		63
Item 6.	Exhibits		63
Signature			64
Exhibit Index			65
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements. These forward-looking statements include, without limitation, predictions regarding the following aspects of our future:

	•		Outcome and effect of current and potential future intellectual property litigation;

	•		Litigation expenses;

	•		Resolution of the Federal Trade Commission and European Commission matters involving us;

	•		Protection of intellectual property;

	•		Amounts owed under licensing agreements;

	•		Terms of our licenses;

	•		Indemnification and technical support obligations;

	•		Success in the markets of our or our licensees’ products;

	•		Research and development costs and improvements in technology;

	•		Sources, amounts and concentration of revenue, including royalties;

	•		Effective tax rates;

	•		Realization of deferred tax assets/release of deferred tax valuation allowance;

	•		Product development;

	•		Sources of competition;

	•		Pricing policies of our licensees;

	•		Success in renewing license agreements;

	•		Operating results;

	•		International licenses and operations, including our design facility in Bangalore, India;

	•		Methods, estimates and judgments in accounting policies;

	•		Growth in our business;

	•		Acquisitions, mergers or strategic transactions;

	•		Ability to identify, attract, motivate and retain qualified personnel;

	•		Trading price of our Common Stock;

	•		Internal control environment;

	•		Corporate governance;

	•		Accounting, tax, regulatory, legal and other outcomes and effects of the stock option investigation;

	•		Consequences of the derivative, class-action and other lawsuits related to the stock option investigation;

	•		The level and terms of our outstanding debt;

	•		Engineering, marketing and general and administration expenses;

	•		Contract revenue;

	•		Interest and other income, net;

	•		Adoption of new accounting pronouncements;

	•		Likelihood of paying dividends;

	•		Effects of changes in the economy and credit market on our industry and business; and

	•		Restructuring activities.

You can identify these and other forward-looking statements by the use of words such as “may,” “future,” “shall,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.

Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Item 1A, “Risk Factors.” All forward-looking statements included in this document are based on our assessment of information available to us at this time. We assume no obligation to update any forward-looking statements.

RAMBUS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)


	September 30,			December 31,
	2008			2007
	(In thousands, except shares
	and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	106,786		$	119,391
Marketable securities		272,186			321,491
Accounts receivable		1,740			442
Unbilled receivables		690			1,478
Prepaids and other current assets		8,141			8,349
Deferred taxes		222			11,595

Total current assets		389,765			462,746
Restricted cash		1,238			2,286
Deferred taxes, long-term		2,613			116,209
Intangible assets, net		8,040			13,441
Property and equipment, net		23,672			24,587
Goodwill		4,454			4,454
Other assets		4,791			3,624

Total assets	$	434,573		$	627,347

LIABILITIES
Current liabilities:
Accounts payable	$	9,091		$	11,283
Accrued salaries and benefits		9,478			9,985
Accrued litigation expenses		13,636			26,234
Income taxes payable		479			834
Other accrued liabilities		4,988			5,060
Deferred revenue		2,329			2,756

Total current liabilities		40,001			56,152
Deferred revenue, less current portion		33			—
Convertible notes		160,000			160,000
Long-term income taxes payable		3,020			2,917
Other long-term liabilities		771			1,194

Total liabilities		203,825			220,263

Commitments and contingencies (Note 7 and 13)

STOCKHOLDERS’ EQUITY
Convertible preferred stock, $.001 par value:
Authorized: 5,000,000 shares
Issued and outstanding: no shares at September 30, 2008 and December 31, 2007		—			—
Common stock, $.001 par value:
Authorized: 500,000,000 shares
Issued and outstanding: 104,801,363 shares at September 30, 2008 and 105,294,534 shares at December 31, 2007		105			105
Additional paid-in capital		644,760			601,821
Accumulated deficit		(412,436	)		(194,966	)
Accumulated other comprehensive (loss) income		(1,681	)		124

Total stockholders’ equity		230,748			407,084

Total liabilities and stockholders’ equity	$	434,573		$	627,347

See Notes to Unaudited Condensed Consolidated Financial Statements

RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(In thousands, except per share amounts)
Revenue:
Royalties	$	25,793		$	35,327		$	91,174		$	118,263
Contract revenue		3,635			6,388			13,707			21,145

Total revenue		29,428			41,715			104,881			139,408

Costs and expenses:
Cost of contract revenue*		4,611			5,781			18,411			18,878
Research and development*		17,511			18,312			59,048			60,339
Marketing, general and administrative*		31,288			29,914			88,377			79,657
Restructuring costs*		4,024			—			4,024			—
Impairment of intangible asset		2,158			—			2,158			—
Costs of restatement and related legal activities		392			4,169			3,564			18,631

Total costs and expenses		59,984			58,176			175,582			177,505

Operating loss		(30,556	)		(16,461	)		(70,701	)		(38,097	)
Interest and other income, net		2,704			5,645			10,207			16,496

Loss before income taxes		(27,852	)		(10,816	)		(60,494	)		(21,601	)
Provision for (benefit from) income taxes (Note 9)		92			(4,318	)		124,748			(8,495	)

Net loss	$	(27,944	)	$	(6,498	)	$	(185,242	)	$	(13,106	)

Net loss per share:
Basic	$	(0.27	)	$	(0.06	)	$	(1.77	)	$	(0.13	)

Diluted	$	(0.27	)	$	(0.06	)	$	(1.77	)	$	(0.13	)

Weighted average shares used in per share calculation
Basic		104,897			103,820			104,795			103,820

Diluted		104,897			103,820			104,795			103,820



* Includes stock-based compensation:
Cost of contract revenue	$	1,321		$	1,333		$	4,604		$	4,069
Research and development	$	3,326		$	3,190		$	10,997		$	9,821
Marketing, general and administrative	$	4,371		$	4,138		$	12,899		$	14,512
Restructuring costs	$	547		$	—		$	547		$	—

See Notes to Unaudited Condensed Consolidated Financial Statements

RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	Nine Months Ended
	September 30,
	2008			2007
	(In thousands)
Cash flows from operating activities:
Net loss	$	(185,242	)	$	(13,106	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock-based compensation		28,500			28,402
Depreciation		8,440			8,635
Amortization of intangible assets		3,543			3,963
Restructuring costs (non-cash)		547			—
Impairment of intangible asset		2,158			—
Deferred tax provision (benefit)		124,290			(9,425	)
Loss on disposal of property and equipment		15			—
Change in operating assets and liabilities, net of effect of business acquisitions:
Accounts receivable and unbilled receivables		(510	)		(587	)
Prepaids and other assets		(92	)		(3,373	)
Accounts payable		(812	)		6,956
Accrued salaries and benefits and other accrued liabilities		(1,663	)		(3,289	)
Accrued litigation expenses		(12,598	)		2,168
Income taxes payable		(252	)		674
Increases in deferred revenue		2,203			19,117
Decreases in deferred revenue		(2,597	)		(21,145	)

Net cash provided by (used in) operating activities		(34,070	)		18,990

Cash flows from investing activities:
Purchases of property and equipment		(8,197	)		(5,659	)
Acquisition of intangible assets		(300	)		(30	)
Purchases of marketable securities		(304,574	)		(428,219	)
Maturities of or proceeds from the sale of marketable securities		352,322			616,059
Cash paid for acquisition of business		—			(1,139	)
Decrease in restricted cash		1,048			56

Net cash provided by investing activities		40,299			181,068

Cash flows from financing activities:
Payments under installment payment arrangement		(1,250	)		(4,250	)
Proceeds from issuance of common stock under employee stock plans		17,277			—
Repurchase and retirement of Company common stock		(34,921	)		—

Net cash used in financing activities		(18,894	)		(4,250	)

Effect of exchange rates on cash and cash equivalents		60			146

Net increase(decrease) in cash and cash equivalents		(12,605	)		195,954
Cash and cash equivalents at beginning of period		119,391			73,304

Cash and cash equivalents at end of period	$	106,786		$	269,258

Supplemental disclosure of cash flow information:
Property and equipment received and accrued in accounts payable and other accrued liabilities	$	89		$	1,119

See Notes to Unaudited Condensed Consolidated Financial Statements

RAMBUS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Rambus Inc. (“Rambus” or the “Company”) and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements. Investments in entities with less than 20% ownership and in which Rambus does not have the ability to significantly influence the operations of the investee are being accounted for using the cost method and are included in other assets.

In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring items) necessary to state fairly the financial position and results of operations for each interim period shown. Interim results are not necessarily indicative of results for a full year.

The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable to interim financial information. Certain information and footnote disclosures included in financial statements prepared in accordance with generally accepted accounting principles have been omitted in these interim statements pursuant to such SEC rules and regulations. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto in Form 10-K for the year ended December 31, 2007.

We have reclassified certain prior year balances to conform to the current year’s presentation. None of these reclassifications had an impact on reported net loss for any of the periods presented.

2. Recent Accounting Pronouncements

In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 162, “The Hierarchy of General Accepted Accounting Principle.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. This statement shall be effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With General Accepted Accounting Principles.” The Company believes the adoption of this pronouncement will not have a material impact on the Company’s financial statements.

In May 2008, the FASB issued FASB Staff Position (“FSP”) APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”), which clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement. FSP APB 14-1 specifies that an issuer of such instruments should separately account for the liability and equity components of the instruments in a manner that reflect the issuer’s non-convertible debt borrowing rate when interest costs are recognized in subsequent periods. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008, and retrospective application is required for all periods presented. The Company is currently evaluating the potential impact of the adoption of FSP APB 14-1 on its financial statements. FSP APB 14-1 will apply to the Company and it expects to record additional non-cash interest expense related to its outstanding convertible debt instruments beginning in the first quarter of 2009.

In April 2008, the FASB issued FSP FAS 142-3, “Determination of Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS 142, “Goodwill and Other Intangible Assets.” FSP FAS 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. Earlier adoption is not permitted. The Company is currently evaluating the potential impact the adoption of FAS FSP 142-3 will have on its financial statements.

In February 2008, the FASB issued FASB Staff Position 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (“FSP 157-1”) and FSP 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. The provisions of SFAS No. 157 were adopted by the Company, as it applies to its financial instruments, effective beginning January 1, 2008. The impact of adoption of SFAS No. 157 is discussed in Note 14, “Fair Value of Financial Instruments.”

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations.” This Statement replaces SFAS No. 141. SFAS No. 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS No. 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R 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. The Company believes the adoption of this pronouncement will not have a material impact on the Company’s financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51.” SFAS No. 160 requires that ownership interests in subsidiaries held by parties other than the parent, and the amount of consolidated net income, be clearly identified, labeled, and presented in the consolidated financial statements within equity, but separate from the parent’s equity. It also requires that once a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value. Sufficient disclosures are required to clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The provisions of SFAS No. 160 will be effective for the Company beginning January 1, 2009. The Company believes the adoption of this pronouncement will not have a material impact on the Company’s financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” SFAS No. 159 is effective for the Company in the fiscal year beginning January 1, 2008. SFAS No. 159 permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. SFAS No. 159 became effective in the first quarter of fiscal 2008. The Company has not elected to apply the fair value option to any of its financial instruments that are presently accounted for at cost.

3. Revenue Recognition

Overview

Rambus recognizes revenue when persuasive evidence of an arrangement exists, Rambus has delivered the product or performed the service, the fee is fixed or determinable and collection is reasonably assured. If any of these criteria are not met, Rambus defers recognizing the revenue until such time as all criteria are met. Determination of whether or not these criteria have been met may require the Company to make judgments, assumptions and estimates based upon current information and historical experience.

Rambus’ revenue consist of royalty revenue and contract revenue generated from agreements with semiconductor companies, system companies and certain reseller arrangements. Royalty revenue consists of patent license and product license royalties. Contract revenue consist of fixed license fees, fixed engineering fees and service fees associated with integration of Rambus’ chip interface products into its customers’ products. Contract revenue may also include support or maintenance. Reseller arrangements generally provide for the pass-through of a percentage of the fees paid to the reseller by the reseller’s customer for use of Rambus’ patent and product licenses. Rambus does not recognize revenue for these arrangements until it has received notice of revenue earned by and paid to the reseller, accompanied by the pass-through payment from the reseller. Rambus does not pay commissions to the reseller for these arrangements.

Many of Rambus’ licensees have the right to cancel their licenses. In such arrangements, revenue is only recognized to the extent that is consistent with the cancellation provisions. Cancellation provisions within such contracts generally provide for a prospective cancellation with no refund of fees already remitted by customers for products provided and payment for services rendered prior to the date of cancellation. Unbilled receivables represent enforceable claims and are deemed collectible in connection with the Company’s revenue recognition policy.

Royalty Revenue

Rambus recognizes royalty revenue upon notification by its licensees. The terms of the royalty agreements generally either require licensees to give Rambus notification and to pay the royalties within 60 days of the end of the quarter during which the sales occur or are based on a fixed royalty that is due within 45 days of the end of the quarter. From time to time, Rambus engages accounting firms other than its independent registered public accounting firm to perform, on Rambus’ behalf, periodic audits of some of the licensee’s reports of royalties to Rambus and any adjustment resulting from such royalty audits is recorded in the period such adjustment is determined. Rambus has two types of royalty revenue: (1) patent license royalties and (2) product license royalties.

Patent licenses.Rambus licenses its broad portfolio of patented inventions to semiconductor and systems companies who use these inventions in the development and manufacture of their own products. Such licensing agreements may cover the license of part, or all, of Rambus’ patent portfolio. Rambus generally recognizes revenue from these arrangements as amounts become due. The contractual terms of the agreements generally provide for payments over an extended period of time.

Product licenses.Rambus develops proprietary and industry-standard chip interface products, such as RDRAM and XDR that Rambus provides to its customers under product license agreements. These arrangements include royalties, which can be based on either a percentage of sales or number of units sold. Rambus recognizes revenue from these arrangements (except for those royalties subject to the FTC order discussed below) upon notification from the licensee of the royalties earned and when collectability is deemed reasonably assured.

On February 2, 2007, the Federal Trade Commission (the “FTC”) issued an order requiring Rambus to limit the royalty rates charged for certain SDR and DDR SDRAM memory and controller products sold after April 12, 2007. The FTC stayed this requirement on March 16, 2007, subject to certain conditions. One such condition of the stay limits the royalties Rambus can receive under certain contracts so that they do not exceed the FTC’s Maximum Allowable Royalties (“MAR”). Amounts in excess of MAR that are subject to the order are excluded from revenue. On April 22, 2008, the United States Court of Appeals for the District of Columbia (the “CADC”) overturned the FTC decision and remanded the matter back to the FTC for further proceedings consistent with the Court’s opinion. On June 6, 2008, the FTC petitioned the CADC to rehear the case en banc. On August 26, 2008, the Court denied the FTC’s petition for rehearing of this matter en banc, and on September 9, 2008, the Court issued its mandate setting aside the FTC’s order and instructing the FTC to take actions consistent with the Court’s ruling. The FTC did not seek, nor did it receive, a stay of the Court’s ruling, and thus the FTC’s order in the case has been vacated. On October 16, 2008, the FTC issued an order (“FTC Disposition Order”) authorizing Rambus to receive the excess consideration that customers have previously deducted from their quarterly payments made to Rambus under the Patent License Agreement (see Note 13 “Litigation and Asserted Claims”).

At the time of the issuance of the mandate on September 9, 2008, $6.2 million had been determined as amounts in excess of MAR and had been excluded from revenue. As the FTC’s order has been vacated, the Company will recognize the previously unrecognized revenue in excess of MAR of $6.2 million as revenue when the corresponding cash payments are received. In the three months ended September 30, 2008, $0.9 million of the amounts in excess of MAR was previously received and recognized as revenue in the third quarter of 2008. The remaining $5.3 million will be recognized when the payments are received from the customers.

Contract Revenue

Rambus generally recognizes revenue in accordance with the provisions of SOP 81-1 for development contracts related to licenses of its chip interface products, such as XDR and FlexIO that involve significant engineering and integration services. Revenue derived from such license and engineering services is recognized using the completed contract or percentage-of-completion method. For all license and service agreements accounted for using the percentage-of-completion method, Rambus determines progress to completion using input measures based upon contract costs incurred. Prior to the first quarter of 2008, Rambus determined progress to completion using labor-hours incurred. The change to input measures better reflects the overall gross margin over the life of the contract. This change did not have a significant impact on the Company’s results of operations. Rambus has evaluated use of output measures versus

input measures and has determined that its output is not sufficiently uniform with respect to cost, time and effort per unit of output to use output measures as a measure of progress to completion. Part of these contract fees may be due upon the achievement of certain milestones, such as provision of certain deliverables by Rambus or production of chips by the licensee. The remaining fees may be due on pre-determined dates and include significant up-front fees.

A provision for estimated losses on fixed price contracts is made, if necessary, in the period in which the loss becomes probable and can be reasonably estimated. If Rambus determines that it is necessary to revise the estimates of the total costs required to complete a contract, the total amount of revenue recognized over the life of the contract would not be affected. However, to the extent the new assumptions regarding the total efforts necessary to complete a project were less than the original assumptions, the contract fees would be recognized sooner than originally expected. Conversely, if the newly estimated total efforts necessary to complete a project were longer than the original assumptions, the contract fees will be recognized over a longer period.

In certain periods, the estimated cost of contract revenue may exceed contract revenue that did not factor in the expected stream of future royalty payments. This can be further impacted by timing of expensing of pre-contract costs as research and development expenses and expensing of completed contract costs where the realizability of an asset is uncertain. As of September 30, 2008, the Company had accrued a liability of approximately $0.8 million related to estimated loss contracts. These expenses are recognized in cost of contract revenue during the quarter when such loss is determined.

If application of the percentage-of-completion method results in recognizable revenue prior to an invoicing event under a customer contract, the Company will recognize the revenue and record an unbilled receivable. Amounts invoiced to Rambus’ customers in excess of recognizable revenue are recorded as deferred revenue. The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenue or unbilled receivables in any given period.

If there is significant uncertainty about the time to complete or the deliverables by either party, Rambus evaluates the appropriateness of applying the completed contract method of accounting under SOP 81-1. Such evaluation is completed on a contract-by-contract basis. For all contracts where revenue recognition must be delayed until the contract deliverables are substantially complete, Rambus evaluates the realizability of the assets which the accumulated costs would represent and defers or expenses as incurred based upon the conclusions of its realization analysis.

Rambus also recognizes revenue in accordance with SOP 97-2, SOP 98-4 and SOP 98-9 for development contracts related to licenses of its chip interface products that involve non-essential engineering services and post contract support (“PCS”). These SOPs apply to all entities that earn revenue on products containing software, where software is not incidental to the product as a whole. Contract fees for the products and services provided under these arrangements are comprised of license fees and engineering service fees which are not essential to the functionality of the product. Rambus’ rates for PCS and for engineering services are specific to each development contract and not standardized in terms of rates or length. Because of these characteristics, the Company does not have a sufficient population of contracts from which to derive vendor specific objective evidence for each of the elements.

Therefore, as required by SOP 97-2, after Rambus delivers the product, if the only undelivered element is PCS, Rambus will recognize all revenue ratably over either the contractual PCS period or the period during which PCS is expected to be provided. Rambus reviews assumptions regarding the PCS periods on a regular basis. If Rambus determines that it is necessary to revise the estimates of the support periods, the total amount of revenue to be recognized over the life of the contract would not be affected. However, if the new estimated periods were shorter than the original assumptions, the contract fees would be recognized ratably over a shorter period. Conversely, if the new estimated periods were longer than the original assumptions, the contract fees would be recognized ratably over a longer period.

4. Comprehensive Loss

Rambus’ comprehensive loss consists of its net loss plus other comprehensive income (loss) consisting of foreign currency translation adjustments and unrealized gains and losses on marketable securities, net of taxes.

The components of comprehensive loss, net of tax, are as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands)	2008			2007			2008			2007
Net loss	$	(27,944	)	$	(6,498	)	$	(185,242	)	$	(13,106	)
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax		—			114			60			146
Unrealized gain (loss) on marketable securities, net of tax		(1,112	)		217			(1,865	)		536

Other comprehensive income (loss)		(1,112	)		331			(1,805	)		682

Total comprehensive loss	$	(29,056	)	$	(6,167	)	$	(187,047	)	$	(12,424	)

As a result of providing a full valuation allowance of the net deferred tax assets in the U.S., the Company reversed $0.5 million of unrealized gain (loss) previously recorded in other comprehensive income (loss) during the quarter ended June 30, 2008.

5. Stock-Based Compensation and Employee Stock Plans

For the nine months ended September 30, 2008 and 2007, the Company maintained stock plans covering a broad range of potential equity grants including stock options, nonvested equity stock and equity stock units and performance based instruments. In addition, the Company sponsors an ESPP, whereby eligible employees are entitled to purchase Common Stock semi-annually, by means of limited payroll deductions, at a 15% discount from the fair market value of the Common Stock as of specific dates.

Stock Options: During the three and nine months ended September 30, 2008, Rambus granted 90,990 and 1,854,880 stock options, respectively, with an estimated total grant-date fair value of $1.0 million and $21.1 million, respectively. During the three and nine months ended September 30, 2008, Rambus recorded stock-based compensation related to stock options of $8.6 million and $25.9 million, respectively. These amounts include approximately $0.2 million of accrued stock-based compensation expense related to the next quarter in connection with the restructuring effort.

During the three and nine months ended September 30, 2007, Rambus granted 108,500 and 2,867,950 stock options, respectively, with an estimated total grant-date fair value of $0.9 million and $35.2 million, respectively. During the three and nine months ended September 30, 2007, Rambus recorded stock-based compensation expense related to stock options of $8.8 million and $27.4 million, respectively, for all unvested options granted, including the modification charge for the extension of expiring options discussed below.

The effect of recording stock-based compensation for the three and nine months ended September 30, 2007 includes a charge resulting from the Company’s modifying the terms of 33 and 138 grants, respectively, by offering an extension of time to exercise. An additional charge was taken during the nine month period to extend the time of the extension of the 59 grants previously extended in 2006. The total modification charge was $0.4 million and $3.2 million during the three and nine months ended September 30, 2007, respectively.

The total intrinsic value of options exercised was $2.3 million and $12.5 million for the three and nine months ended September 30, 2008, respectively. There were no option exercises in the first nine months of 2007. Intrinsic value is the total value of exercised shares based on the price of the Company’s common stock at the time of exercise less the cash received from the employees to exercise the options.

During the three and nine periods ended September 30, 2008, proceeds from employee stock option exercises totaled approximately $4.5 million and $14.8 million, respectively.

There were no tax benefits realized as a result of employee stock option exercises, stock purchase plan purchases, and vesting of equity stock and stock units for the nine months ended September 30, 2008 and 2007 calculated in accordance with SFAS No. 123(R).

Valuation Assumptions

The fair value of stock awards is estimated as of the grant date using the Black-Scholes Merton option-pricing model assuming a dividend yield of 0% and the additional weighted-average assumptions as listed in the following table:


	Stock Option Plans
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007

Stock Option Plans
Expected stock price volatility		70	%		53%-68	%		63-70	%		53%-69	%
Risk free interest rate		3.3	%		4.4%-4.9	%		3.0-3.3	%		4.4%-4.9	%
Expected term (in years)		5.3			6.2			5.3			6.2
Weighted-average fair value of stock options granted	$	10.25		$	8.44		$	11.35		$	12.28


	Employee Stock Purchase Plan
	Three Months Ended				Nine Months Ended
	September30,				September 30,
	2008 (1)		2007(1)		2008			2007(1)

Employee Stock Purchase Plan
Expected stock price volatility		—		—		58	%		—
Risk free interest rate		—		—		1.7	%		—
Expected term (in years)		—		—		0.5			—
Weighted-average fair value of purchase rights granted under the purchase plan		—		—	$	7.41			—


(1)		No grants were made under the employee stock purchase plan during the three and nine months ended September 30 2007 or the three months ended September 30, 2008.

In the first quarter of 2008, the Company changed its methodology for determining estimated expected term for employee stock options from the Monte Carlo simulation model to observed historical exercise patterns. The change in methodology resulted from an analysis of observed historical exercise patterns which better approximates the actual expected term. The impact of this change was not significant to the Company’s results from operations.

See Note 9 “Income Taxes” for additional information related to tax effects of stock-based compensation.

Summary of shares available for grant under stock option plans

As of September 30, 2008, 2,214,659 shares of the 8,400,000 shares approved under the 2006 Plan remain available for grant. The 2006 Plan is now Rambus’ only plan for providing stock-based incentive compensation to eligible employees, executive officers and non-employee directors and consultants.

A summary of shares available for grant under the Company’s plans is as follows:


	Shares Available
	for Grant
Shares available as of December 31, 2007		4,589,131
Stock options granted		(1,854,880	)
Stock options forfeited		1,024,684
Stock options expired under former plans		(636,776	)
Nonvested equity stock and stock units granted (1)		(907,500	)

Total shares available for grant as of September 30, 2008		2,214,659


(1)		For purposes of determining the number of shares available for grant under the 2006 Plan against the maximum number of shares authorized, each restricted stock granted reduces the number of shares available for grant by 1.5 shares and each restricted stock forfeited increases shares available for grant by 1.5 shares.

General Stock Option Information

The following table summarizes stock option activity under the 1997, 1999 and 2006 Plans for the nine months ended September 30, 2008 and information regarding stock options outstanding, exercisable, and vested and expected to vest as of September 30, 2008.


	Options Outstanding
						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	Number of			Exercise Price		Contractual		Intrinsic
	Shares			Per Share		Term		Value
	(Dollars in thousands, except per share amounts)
Outstanding as of December 31, 2007		18,750,738		$	20.17
Options granted		1,854,880			19.83
Options exercised		(1,323,529	)		11.18
Options forfeited		(1,024,684	)		23.33

Outstanding as of September 30, 2008		18,257,405			20.60		5.62	$	23,500

Vested or expected to vest at September 30, 2008		16,773,498			21.27		5.61		17,335
Options exercisable at September 30, 2008		11,348,116			21.55		4.58		17,261

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value for in-the-money options at September 30, 2008, based on the $12.85 closing stock price of Rambus’ Common Stock on September 30, 2008 on the Nasdaq Global Select Market, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options outstanding and exercisable as of September 30, 2008 was 3,387,975 and 2,719,811, respectively.

As of September 30, 2008, there was $57.4 million of total unrecognized compensation cost, net of expected forfeitures, related to unvested stock-based compensation arrangements granted under the stock option plans. That cost is expected to be recognized over a weighted-average period of 2.9 years. The total fair value of options vested as of September 30, 2008 was $211.0 million.

Employee Stock Purchase Plans

Under the 2006 Employee Stock Purchase Plan, the Company issued 146,633 shares at a price of $16.77 per share during the nine months ended September 30, 2008. No purchases were made under the Employee Stock Purchase Plans during the nine months ended September 30, 2007. As of September 30, 2008, 1,453,367 shares under the 2006 Purchase Plan remain available for issuance. During the three months ended September 30, 2008, the Company commenced a restructuring effort which reduced overall headcount. As a

result, the Company revised its estimate of expected compensation expense related to the Employee Stock Purchase Plan. For the three and nine months ended September 30, 2008, the Company recorded compensation expense related to the Employee Stock Purchase Plan of $0.3 million and $1.3 million, respectively. As of September 30, 2008, there was $0.1 million of total unrecognized compensation cost related to share-based compensation arrangements granted under the Employee Stock Purchase Plan. That cost is expected to be recognized over one month.

Nonvested Equity Stock and Stock Units

For the three and nine months ended September 30, 2008, Rambus granted nonvested equity stock units to certain officers and employees, totaling 408,000 shares and 605,000 shares, respectively. These nonvested equity stock units have a service condition, generally a service period of four years. Included in the 2008 grants are 48,000 nonvested equity stock units which were granted to its chief executive officer with vesting subject to the achievement of certain performance conditions related to revenue goals and other factors. For the nine months ended September 30, 2008, the Company has not recognized any compensation expense for these performance equity stock units granted to its chief executive officer since the Company does not currently believe that the performance conditions will be met. During the second quarter of 2008, the Company updated the estimated forfeiture rate for all other nonvested equity stock units based on management’s future expectations. The nonvested equity stock units were valued at the date of grant giving them a fair value of approximately $11.3 million.

For the three and nine months ended September 30, 2008, Rambus recorded stock-based compensation expense of approximately $0.6 million and $1.8 million, respectively, related to all outstanding unvested equity stock grants. For the three and nine months ended September 30, 2007, Rambus recorded stock-based compensation expense of approximately $0.3 million and $1.0 million, respectively, related to all outstanding unvested equity stock grants. Unrecognized stock-based compensation related to all nonvested equity stock grants, net of an estimate of forfeitures, was approximately $12.6 million at September 30, 2008.

The following table reflects the activity related to nonvested equity stock and stock units for the nine months ended September 30, 2008:


				Weighted-
				Average
				Grant-Date
Nonvested Equity Stock and Stock Units	Shares			Fair Value
Nonvested at December 31, 2007		244,177		$	21.41
Granted		605,000			18.73
Vested		(59,177	)		20.26

Nonvested at September 30, 2008		790,000		$	19.45

Contingent Unvested Options

As of December 31, 2007, there were 635,348 contingent unvested options, which vest upon the achievement of certain milestones by Intel relating to shipment volumes of RDRAM 850E chipsets. Intel has since phased out the 850E chipset and as a result the unvested options will never vest. The impact of the unvested options has been excluded from the calculation of net loss per share. During the nine months ended September 30, 2008, 40,300 contingent unvested options were forfeited. The forfeitures of the contingent unvested options are included in the forfeitures in the table summarizing stock option activity.

As of September 30, 2008, there were 595,048 contingent unvested options, none of which are expected to vest.

6. Marketable Securities

Rambus invests its excess cash primarily in U.S. government agency and treasury notes, commercial paper, corporate notes and bonds, money market funds and municipal notes and bonds that mature within three years.

All cash equivalents and marketable securities are classified as available-for-sale and are summarized as follows:


	September 30, 2008
								Weighted
					Unrealized			Rate of
(dollars in thousands)	Fair Value		Book Value		Gain (Loss), net			Return
Money Market Funds	$	84,819	$	84,819	$	—			1.74	%
Municipal Bonds and Notes		1,004		1,000		4			3.85	%
U.S. Government Bonds and Notes		191,604		192,015		(411	)		3.04	%
Corporate Notes, Bonds, and Commercial Paper		98,519		99,390		(871	)		3.01	%

Total cash equivalents and marketable securities		375,946		377,224		(1,278	)
Cash		3,026		3,026		—

Total cash, cash equivalents and marketable securities	$	378,972	$	380,250	$	(1,278	)


	December 31, 2007
							Weighted
					Unrealized		Rate of
(dollars in thousands)	Fair Value		Book Value		Gain, net		Return
Money Market Funds	$	104,836	$	104,836	$	—		4.82	%
Municipal Bonds and Notes		3,008		3,000		8		4.81	%
U.S. Government Bonds and Notes		108,660		108,568		92		4.39	%
Corporate Notes, Bonds, and Commercial Paper		219,734		219,668		66		4.90	%

Total cash equivalents and marketable securities		436,238		436,072		166
Cash		4,644		4,644		—

Total cash, cash equivalents and marketable securities	$	440,882	$	440,716	$	166

Available-for-sale securities are reported at fair value on the balance sheets and classified as follows:


	September 30,		December 31,
(dollars in thousands)	2008		2007
Cash equivalents	$	103,760	$	114,747
Short term marketable securities		272,186		321,491

Total cash equivalents and marketable securities		375,946		436,238
Cash		3,026		4,644

Total cash, cash equivalents and marketable securities	$	378,972	$	440,882

The estimated fair value of cash equivalents and marketable securities classified by date of contractual maturity and the associated unrealized gain (loss) at September 30, 2008 and December 31, 2007 are as follows:


	As of				Unrealized Gain (Loss), net
	September 30,		December 31,		September 30,			December 31,
	2008		2007		2008			2007
	(In thousands)
Contractual maturity:
Due within one year	$	244,021	$	361,974	$	(748	)	$	27
Due from one year through three years		131,925		74,264		(530	)		139

	$	375,946	$	436,238	$	(1,278	)	$	166

The unrealized losses were insignificant in relation to our total available-for-sale portfolio. The unrealized losses can be attributed to present credit market conditions.

The Company adopted SFAS No. 157 effective January 1, 2008 for financial assets and liabilities measured on a recurring basis. SFAS No. 157 applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. For the discussion regarding the impact of the adoption of SFAS No. 157 on the Company’s marketable securities, see Note 14, “Fair Value of Financial Instruments.”

7. Commitments and Contingencies

On February 1, 2005, Rambus issued $300.0 million aggregate principal amount of zero coupon convertible senior notes (the “convertible notes”) due February 1, 2010 to Credit Suisse First Boston LLC and Deutsche Bank Securities as initial purchasers who then sold the convertible notes to institutional investors. Rambus elected to pay the principal amount of the convertible notes in cash when they are due. Subsequently, Rambus repurchased a total of $140.0 million face value of the outstanding convertible notes in 2005. The convertible notes outstanding as of September 30, 2008 were $160.0 million and were classified as a non-current liability in the accompanying condensed consolidated balance sheets.

As of September 30, 2008, Rambus’ material contractual obligations were:


	Payment Due by Year
			Remainder of
	Total		2008		2009		2010		2011		2012		Thereafter
	(In thousands)
Contractual obligations(1)
Operating leases	$	17,404	$	2,624	$	7,381	$	6,277	$	645	$	477	$	—
Convertible notes		160,000		—		—		160,000		—		—		—
Purchased software license agreements(2)		1,014		507		507		—		—		—		—

Total	$	178,418	$	3,131	$	7,888	$	166,277	$	645	$	477	$	—


(1)		The above table does not reflect possible payments in connection with uncertain tax benefits associated with FASB Interpretation No. (“FIN”) 48 of approximately $14.1 million, including $11.1 million recorded as a reduction of long-term deferred tax assets and $3.0 million in long-term income taxes payable, as of September 30, 2008. As noted below in Note 9, “Income Taxes,” although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, the Company cannot reasonably estimate the outcome at this time.

(2)		Rambus has commitments with various software vendors for non-cancellable license agreements that generally have terms greater than one year. The above table summarizes those contractual obligations as of September 30, 2008, which are also included on Rambus’ condensed consolidated balance sheets under current and other long-term liabilities.

Rent expense was approximately $1.7 million and $5.2 million for the three and nine months ended September 30, 2008, respectively. Rent expense was approximately $1.6 million and $4.8 million for the three and nine months ended September 30, 2007, respectively.

Deferred rent, included primarily in other long-term liabilities, was approximately $1.2 million and $1.5 million as of September 30, 2008 and December 31, 2007, respectively.

In connection with certain litigation taking place in Germany, the German courts have requested that the Company set aside adequate funds to cover potential court cost claims. Accordingly, approximately $0.6 million is restricted as to withdrawal, managed by a third party subject to certain limitations under the Company’s investment policy and included in restricted cash, long-term, to cover the German court requirements.

Indemnifications

Rambus enters into standard license agreements in the ordinary course of business. Although Rambus does not indemnify most of its customers, there are times when an indemnification is a necessary means of doing business. Indemnifications cover customers for losses suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement claim by any third party with respect to Rambus’ products. The maximum amount of indemnification Rambus could be required to make under these agreements is generally limited to fees received by Rambus. Rambus estimates the fair value of its indemnification obligation as insignificant, based upon its history of litigation concerning product and patent infringement claims. Accordingly, Rambus has no liabilities recorded for indemnification under these agreements as of September 30, 2008 or December 31, 2007.

Several securities fraud class actions, private lawsuits and shareholder derivative actions were filed in state and federal courts against certain of the Company’s current and former officers and directors related to the stock option granting actions. As permitted under Delaware law, Rambus has agreements whereby its officers and directors are indemnified for certain events or occurrences while the officer or director is, or was serving, at Rambus’ request in such capacity. The term of the indemnification period is for the officer’s or director’s term in such capacity. The maximum potential amount of future payments Rambus could be required to make under these indemnification agreements is unlimited. Rambus has a director and officer insurance policy that reduces Rambus’ exposure and enables Rambus to recover a portion of future amounts to be paid. As a result of these indemnification agreements, Rambus continues to make payments on behalf of current and former officers. As of September 30, 2008, the Company had made payments of approximately $6.8 million on their behalf, including $0.4 million in the quarter ended September 30, 2008. As of September 30, 2007, the Company had made payments of approximately $5.2 million on their behalf, including $0.8 million in the quarter ended September 30, 2007. These payments were recorded under costs of restatement and related legal activities in the condensed consolidated statements of operations.

Warranties

Rambus offers some of its customers a warranty that its products will conform to their functional specifications. To date, there have been no payments or material costs incurred related to fulfilling these warranty obligations. Accordingly, Rambus has no liabilities recorded for these warranties as of September 30, 2008 or December 31, 2007, respectively. Rambus assesses the need for a warranty accrual on a quarterly basis, and there can be no guarantee that a warranty accrual will not become necessary in the future.

8. Stockholders’ Equity

Share Repurchase Program

In October 2001, Rambus’ Board of Directors (the “Board”) approved a share repurchase program of its Common Stock, principally to reduce the dilutive effect of employee stock options. To date, the Board has approved the authorization to repurchase up to 19.0 million shares of the Company’s outstanding Common Stock over an undefined period of time. For the three months ended September 30, 2008, 0.6 million shares were repurchased with an aggregate value of $10.0 million. During the nine months ended September 30, 2008, the Company repurchased approximately 2.0 million shares with an aggregate value of $34.9 million. As of September 30, 2008, Rambus had repurchased a cumulative total of approximately 15.2 million shares of its Common Stock with an aggregate value of approximately $219.5 million since the commencement of this program. As of September 30, 2008, there remained an outstanding authorization to repurchase approximately 3.8 million shares of Rambus’ outstanding Common Stock.

Rambus records stock repurchases as a reduction to stockholders’ equity. As prescribed by Accounting Principles Board (“APB”) Opinion No. 6, “Status of Accounting Research Bulletins,” Rambus records a portion of the purchase price of the repurchased shares as an increase to accumulated deficit when the cost of the shares repurchased exceeds the average original proceeds per share received from the issuance of Common Stock. During the nine months ended September 30, 2008, the cumulative price of the shares repurchased exceeded the proceeds received from the issuance of the same number of shares. The excess of $32.2 million was recorded as an increase to accumulated deficit for the nine months ended September 30, 2008. During the nine months ended September 30, 2007, the Company did not repurchase any Common Stock.

9. Income Taxes

The effective tax rate for the quarter ended September 30, 2008 was 0.3% which is lower than the U.S. statutory tax rate applied to the Company’s net loss primarily due to the establishment of a full valuation allowance on our U.S. net deferred tax assets in the second quarter of 2008. The effective tax rate for the quarter ended September 30, 2007 was 40.0% which was higher than the U.S. statutory tax rate applied to the Company’s net loss primarily due to research and development tax credits, non-deductible stock-based compensation expense related to our executives and other employees, state income taxes and foreign income taxes.

As of September 30, 2008, the Company’s condensed consolidated balance sheet included net deferred tax assets, before valuation allowance, of approximately $152.9 million, which consists of net operating loss carryovers, tax credit carryovers, depreciation and amortization, employee stock-based compensation expenses and certain liabilities. For the quarter ended June 30, 2008, the Company recorded a non-cash income tax provision of $130.5 million to establish a valuation allowance to fully reserve previously recorded net

tax benefits generated from pre-tax losses in the U.S. Management periodically evaluates the realizability of the Company’s net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is solely dependent on the Company’s ability to generate sufficient future taxable income during periods prior to the expiration of tax statutes to fully utilize these assets. As previously disclosed in the Company’s 2007 Form 10-K for the year ended December 31, 2007, the Company’s forecasted future operating results are highly influenced by, among other factors, assumptions regarding (1) the Company’s ability to achieve its forecasted revenue, (2) its ability to effectively manage its expenses in line with its forecasted revenue and (3) general trends in the semiconductor industry.

The Company weighed both positive and negative evidence and determined that there is a need for the valuation allowance during the quarter ended June 30, 2008 due to the existence of three years of historical cumulative losses and a revised forecast that projected future losses from operations in the U.S., which the Company considered significant verifiable negative evidence. Though considered positive evidence, projected income from favorable patent litigation and related settlements were not included in the determination for the valuation allowance due to the Company’s inability to reliably estimate the timing and amounts of such settlements. The Company intends to maintain the valuation allowance until sufficient positive evidence exists to support reversal of the valuation allowance.

Rambus maintains liabilities for uncertain tax benefits within its non-current income taxes payable accounts. These liabilities involve judgment and estimation and are monitored by management based on the best information available including changes in tax regulations, the outcome of relevant court cases and other information.

As of September 30, 2008, the Company had $14.1 million of unrecognized tax benefits, including $11.1 million recorded as a reduction of long-term deferred tax assets and $3.0 million in long-term income taxes payable. If recognized, approximately $0.5 million would be recorded as an income tax benefit. No benefit would be recorded for the remaining unrecognized tax benefits as the recognition would require a corresponding increase in the valuation allowance. As of December 31, 2007, the Company had $14.0 million of unrecognized tax benefits, including $8.5 million recorded as a reduction of long-term deferred tax assets, which is net of approximately $2.6 million of federal tax benefits, and including $2.9 million in long-term income taxes payable.

Although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, the Company cannot reasonably estimate the outcome at this time.

Rambus recognizes interest and penalties related to uncertain tax positions as a component of the income tax provision (benefit). At December 31, 2007 and September 30, 2008, an insignificant amount of interest and penalties are included in long-term income taxes payable.

Rambus files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. Rambus is currently under a payroll examination by the Internal Revenue Service for the years ended December 31, 2004 and 2005. The Company is also under examination by the California Franchise Tax Board for the fiscal year ended March 31, 2003 and the years ended December 31, 2003 and 2004. Although the outcome of any tax audit is uncertain, the Company believes it has adequately provided for any additional taxes that may be required to be paid as a result of such examinations. If the Company determines that no payment will ultimately be required, the reversal of these tax liabilities may result in tax benefits being recognized in the period when that conclusion is reached. However, if an ultimate tax assessment exceeds the recorded tax liability for that item, an additional tax provision may need to be recorded. The impact of such adjustments in the Company’s tax accounts could have a material impact on the consolidated results of operations in future periods.

The Company is subject to general examination by the IRS for tax years ended 2005 through 2007. The Company is also subject to examination by the State of California for tax years ended March 31, 2003 through December 31, 2007. In addition, any research and development credit carryforwards and net operating loss generated in prior years and utilized in these or future years may also be subject to examination by the IRS and the State of California. The Company is also subject to examination in various other jurisdictions for various periods.

10. Earnings (Loss) Per Share

Earnings (loss) per share is calculated in accordance with SFAS No. 128, “Earnings Per Share.” Basic earnings (loss) per share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing the earnings (loss) by the weighted average number of common shares and

potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of incremental common shares issuable upon exercise of stock options, employee stock purchases, restricted stock and restricted stock units and shares issuable upon the conversion of convertible notes. The dilutive effect of the convertible notes is calculated under the if-converted method. The dilutive effect of outstanding shares under the Company’s stock plans is reflected in diluted earnings per share by application of the treasury stock method. This method includes consideration of the amounts to be paid by the employees, the amount of excess tax benefits that would be recognized in equity if the instrument was exercised and the amount of unrecognized stock-based compensation related to future services. No potential dilutive common shares are included in the computation of any diluted per share amount when a net loss is reported.

The following table sets forth the computation of basic and diluted loss per share:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(In thousands, except per share amounts)
Numerator:
Net loss	$	(27,944	)	$	(6,498	)	$	(185,242	)	$	(13,106	)

Denominator:
Weighted average shares used to compute basic EPS		104,897			103,820			104,795			103,820
Dilutive potential shares from stock options, ESPP and nonvested equity stock and stock units		—			—			—			—

Weighted average shares used to compute diluted EPS		104,897			103,820			104,795			103,820

Net loss per share:
Basic	$	(0.27	)	$	(0.06	)	$	(1.77	)	$	(0.13	)
Diluted	$	(0.27	)	$	(0.06	)	$	(1.77	)	$	(0.13	)

For the three and nine months ended September 30, 2008 and 2007, approximately 5.9 million shares that would be issued upon the conversion of the contingently issuable convertible notes were excluded from the calculation of earnings per share because the conversion price was higher than the average market price of the Common Stock during these periods. For the three months ended September 30, 2008 and 2007, options to purchase approximately 11.9 million and 12.5 million shares, respectively, and for the nine months ended September 30, 2008 and 2007, options to purchase approximately 10.5 million and 11.0 million shares, respectively, were excluded from the calculation because they were anti-dilutive after considering proceeds from exercise, taxes and related unrecognized stock-based compensation expense. For the three and nine months ended September 30, 2008, an additional 2.7 million and 3.4 million shares, respectively, including nonvested equity stock and stock units, that would be dilutive have been excluded from the weighted average dilutive shares because there was a net loss for the period.

11. Business Segments, Exports and Major Customers

Rambus operates in a single industry segment, the design, development and licensing of chip interface technologies and architectures. Five customers accounted for 23%, 13%, 13%, 13% and 10%, respectively, of revenue in the three months ended September 30, 2008. Four customers accounted for 19%, 16%, 15% and 10%, respectively, of revenue in the three months ended September 30, 2007. Six customers accounted for 20%, 14%, 12%, 11%, 10% and 10%, respectively, of revenue in the nine months ended September 30, 2008. Three customers accounted for 21%, 16% and 14%, respectively, of revenue in the nine months ended September 30, 2007. Rambus expects that its revenue concentration will decrease over the long term as Rambus licenses new customers.

Rambus sells its chip interfaces and licenses to customers in the Far East, North America, and Europe. Revenue is attributed to individual countries according to the countries in which the licensees are headquartered. Revenue from customers in the following geographic regions is recognized as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
*(In thousands)*	2008		2007		2008		2007
Japan	$	23,279	$	25,619	$	83,839	$	93,985
North America		5,857		6,593		18,518		20,454
Taiwan		10		875		532		1,025
Korea		102		373		541		859
Singapore		114		532		288		532
Europe		66		7,723		1,163		22,553

	$	29,428	$	41,715	$	104,881	$	139,408

At September 30, 2008, of the $23.7 million of total long-lived assets, approximately $20.3 million are located in the United States, $2.7 million are located in India and $0.7 million are located in other foreign locations. At December 31, 2007, of the $24.6 million of total long-lived assets, approximately $20.2 million were located in the United States, $3.6 million were located in India and $0.8 million were located in other foreign locations.

12. Amortizable Intangible Assets

The components of the Company’s intangible assets as of September 30, 2008 and December 31, 2007 were as follows:


	As of September 30, 2008
	Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount
	(In thousands)
Patents	$	9,941	$	(5,236	)	$	4,705
Intellectual property		10,384		(9,313	)		1,071
Customer contracts and contractual relationships		4,000		(2,102	)		1,898
Existing technology		2,700		(2,334	)		366
Non-competition agreement		100		(100	)		—

Total intangible assets	$	27,125	$	(19,085	)	$	8,040


	As of December 31, 2007
	Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount
	(In thousands)
Patents	$	9,941	$	(4,363	)	$	5,578
Intellectual property		10,084		(7,759	)		2,325
Customer contracts and contractual relationships		8,000		(3,344	)		4,656
Existing technology		2,700		(1,828	)		872
Non-competition agreement		100		(90	)		10

Total intangible assets	$	30,825	$	(17,384	)	$	13,441

Amortization expense for intangible assets for the three and nine months ended September 30, 2008 was $0.8 million and $3.5 million, respectively. Amortization expense for intangible assets for the three and nine months ended September 30, 2007 was $1.3 million and $3.9 million, respectively.

During the three months ended September 30, 2008, based on communication it received from a customer, the Company determined that approximately $2.2 million of its intangible assets had no alternative future use and was impaired as a result of a customer’s change in technology requirements. The intangible asset relates to a contractual relationship acquired in the Velio acquisition during December 2003.

The estimated future amortization expense of intangible assets as of September 30, 2008 was as follows (amounts in thousands):


Years Ending December 31:	Amount
2008 (remaining 3 months)	$	796
2009		2,708
2010		1,521
2011		1,193
2012		921
Thereafter		901

	$	8,040

The valuation and useful lives of the acquired intangible assets were allocated based on estimated fair values at the acquisition dates. The value of the agreements, along with interviews and management’s estimates were used to determine the useful lives of the assets. The income approach, which includes an analysis of the cash flows and risks associated with achieving such cash flows, was the primary technique utilized in valuing the acquired patented technology. Key assumptions included estimates of revenue growth, cost of revenue, operating expenses and income taxes. The discount rates used in the valuation of intangible assets reflected the level of risk associated with the particular technology and the current return on investment requirements of the market.

13. Litigation and Asserted Claims

Hynix Litigation

U.S District Court of the Northern District of California

On August 29, 2000, Hynix (formerly Hyundai) and various subsidiaries filed suit against Rambus in the U.S. District Court for the Northern District of California. The complaint, as amended and narrowed through motion practice, asserts claims for fraud, violations of federal antitrust laws and deceptive practices in connection with Rambus’ participation in a standards setting organization called JEDEC, and seeks a declaratory judgment that the Rambus patents-in-suit are unenforceable, invalid and not infringed by Hynix, compensatory and punitive damages, and attorneys’ fees. Rambus denied Hynix’s claims and filed counterclaims for patent infringement against Hynix.

The case was divided into three phases. In the first phase, Hynix tried its unclean hands defense beginning on October 17, 2005 and concluding on November 1, 2005. In its January 4, 2006 Findings of Fact and Conclusions of Law, the court held that Hynix’s unclean hands defense failed. Among other things, the court found that Rambus did not adopt its document retention policy in bad faith, did not engage in unlawful spoliation of evidence, and that while Rambus disposed of some relevant documents pursuant to its document retention policy, Hynix was not prejudiced by the destruction of Rambus documents.

The second phase of the Hynix-Rambus trial — on patent infringement, validity and damages — began on March 15, 2006, and was submitted to the jury on April 13, 2006. On April 24, 2006, the jury returned a verdict in favor of Rambus on all issues and awarded Rambus a total of approximately $307 million in damages, excluding prejudgment interest. Specifically, the jury found that each of the ten selected patent claims was supported by the written description, and was not anticipated or rendered obvious by prior art; therefore, none of the patent claims were invalid. The jury also found that Hynix infringed all eight of the patent claims for which the jury was asked to determine infringement; the court had previously determined on summary judgment that Hynix infringed the other two claims at issue in the trial. On July 17, 2006, the court granted Hynix’s motion for a new trial on the issue of damages unless Rambus agreed to a reduction of the total jury award to approximately $134 million. The court found that the record supported a maximum royalty rate of 1% for SDR SDRAM and 4.25% for DDR SDRAM, which the court applied to the stipulated U.S. sales of infringing Hynix products through December 31, 2005. On July 27, 2006, Rambus elected remittitur of the jury’s award to approximately $134 million. On June 24, 2008, the court heard oral argument on Rambus’ motion to supplement the damages award and for equitable relief related to Hynix’s infringement of Rambus patents. No opinion has issued to date on Hynix’s post-trial motions for judgment as a matter of law and new trial on certain issues relating to validity and infringement, nor has any opinion issued to date on Rambus’ motions for equitable relief, supplemental damages, and prejudgment interest. Hynix filed a motion on July 7, 2008 to reduce the amount of remitted damages and any supplemental damages that the court may award, as well as to limit the products that could be affected by any injunction that the court may grant, on the grounds of patent exhaustion. Following a hearing on August 29, 2008, the court denied Hynix’s motion.

The third phase of the Hynix-Rambus trial involved Hynix’s affirmative JEDEC-related antitrust and fraud allegations against Rambus. On April 24, 2007, the court ordered a coordinated trial of certain common JEDEC-related claims alleged by the manufacturer parties (i.e., Hynix, Micron, Nanya and Samsung) and defenses asserted by Rambus inHynix v Rambus, Case No. C 00-20905 RMW, and three other cases pending before the same court (Rambus Inc. v. Samsung Electronics Co. Ltd. et al., Case No. 05-02298 RMW,Rambus Inc. v. Hynix Semiconductor Inc., et al., Case No. 05-00334, andRambus Inc. v. Micron Technology, Inc., et al., Case No. C 06-00244 RMW, each described in further detail below). On December 14, 2007, the court excused Samsung from the coordinated trial based on Samsung’s agreement to certain conditions, including trial of its claims against Rambus by the court within six months following the conclusion of the coordinated trial. The coordinated trial involving Rambus, Hynix, Micron and Nanya began on January 29, 2008, and was submitted to the jury on March 25, 2008. On March 26, 2008, the jury returned a verdict in favor of Rambus and against Hynix, Micron, and Nanya on each of their claims. Specifically, the jury found that Hynix, Micron, and Nanya failed to meet their burden of proving that: (1) Rambus engaged in anticompetitive conduct; (2) Rambus made important representations that it did not have any intellectual property pertaining to the work of JEDEC and intended or reasonably expected that the representations would be heard by or repeated to others including Hynix, Micron or Nanya; (3) Rambus uttered deceptive half-truths about its intellectual property coverage or potential coverage of products compliant with synchronous DRAM standards then being considered by JEDEC by disclosing some facts but failing to disclose other important facts; or (4) JEDEC members shared a clearly defined expectation that members would disclose relevant knowledge they had about patent applications or the intent to file patent applications on technology being considered for adoption as a JEDEC standard. Hynix, Micron, and Nanya filed motions for a new trial and for judgment on certain of their equitable claims and defenses. A hearing on those motions was held on May 1, 2008. A further hearing on the equitable claims and defenses was held on May 27, 2008. On July 24, 2008, the court issued an order denying Hynix, Micron, and Nanya’s motion for new trial. The court has not yet ruled on their equitable claims and defenses.

European Patent Infringement Case

Beginning on September 4, 2000, Rambus filed suit against Hynix in multiple European jurisdictions for infringement of EP 0 525 068 (the “’068 patent”). Rambus later filed a further infringement action against Hynix in Mannheim, Germany on a second patent, EP 1 022 642 (the “’642 patent”). Both patents were opposed by Hynix, Micron, and Infineon in the European Patent Office (EPO). The ’068 patent was revoked by an Appeal Board in 2004, and a hearing in the opposition with respect to the ’642 patent has not yet been scheduled. On January 8, 2008, the Mannheim court issued an Order of Cost with respect to the ’068 proceeding requiring Rambus to reimburse Hynix court fees in the amount of $0.6 million. This amount has since been paid.

Micron Litigation

U.S District Court in Delaware: Case No. 00-792-SLR

On August 28, 2000, Micron filed suit against Rambus in the U.S. District Court in Delaware. The suit asserts violations of federal antitrust laws, deceptive trade practices, breach of contract, fraud and negligent misrepresentation in connection with Rambus’ participation in JEDEC. Micron seeks a declaration of monopolization by Rambus, compensatory and punitive damages, attorneys’ fees, a declaratory judgment that eight Rambus patents are invalid and not infringed, and the award to Micron of a royalty-free license to the Rambus patents. Rambus has filed an answer and counterclaims disputing Micron’s claims and asserting infringement by Micron of twelve U.S. patents.

This case has been divided into three phases in the same general order as in theHynix 00-20905 action: (1) unclean hands; (2) patent infringement; and (3) antitrust, equitable estoppel, and other JEDEC-related issues. A bench trial on Micron’s unclean hands defense began on November 8, 2007 and concluded on November 15, 2007. The court ordered post-trial briefing on the issue of when Rambus became obligated to preserve documents because it anticipated litigation. A hearing on that issue was held on May 20, 2008. The court ordered further post-trial briefing on the remaining issues from the unclean hands trial, and a hearing on those issues was held on September 19, 2008. The matter was taken under submission, and no decision has issued to date.

U.S. District Court of the Northern District of California

On January 13, 2006, Rambus filed suit against Micron in the U.S. District Court in the Northern District of California. Rambus alleges that fourteen Rambus patents are infringed by Micron’s DDR2, DDR3, GDDR3, and other advanced memory products. Rambus seeks compensatory and punitive damages, attorneys’ fees, and injunctive relief. Micron has denied Rambus’ allegations and is alleging counterclaims for violations of federal antitrust laws, unfair trade practices, equitable estoppel, fraud and negligent misrepresentation in connection with Rambus’ participation in JEDEC. Micron seeks a declaration of monopolization by Rambus, injunctive relief, compensatory and punitive damages, attorneys’ fees, and a declaratory judgment of invalidity, unenforceability, and noninfringement of the fourteen patents in suit.

As explained above, the court ordered a coordinated trial (without Samsung) of certain common JEDEC-related claims and defenses asserted inHynix v Rambus, Case No. C 00-20905 RMW,Rambus Inc. v. Samsung Electronics Co. Ltd. et al., Case No. 05-02298 RMW,Rambus Inc. v. Hynix Semiconductor Inc., et al., Case No. 05-00334, andRambus Inc. v. Micron Technology, Inc., et al., Case No. C 06-00244 RMW. The coordinated trial involving Rambus, Hynix, Micron and Nanya began on January 29, 2008, and was submitted to the jury on March 25, 2008. On March 26, 2008, the jury returned a verdict in favor of Rambus and against Hynix, Micron, and Nanya on each of their claims. Specifically, the jury found that Hynix, Micron, and Nanya failed to meet their burden of proving that: (1) Rambus engaged in anticompetitive conduct; (2) Rambus made important representations that it did not have any intellectual property pertaining to the work of JEDEC and intended or reasonably expected that the representations would be heard by or repeated to others including Hynix, Micron or Nanya; (3) Rambus uttered deceptive half-truths about its intellectual property coverage or potential coverage of products compliant with synchronous DRAM standards then being considered by JEDEC by disclosing some facts but failing to disclose other important facts; or (4) JEDEC members shared a clearly defined expectation that members would disclose relevant knowledge they had about patent applications or the intent to file patent applications on technology being considered for adoption as a JEDEC standard. Hynix, Micron, and Nanya filed motions for a new trial and for judgment on certain of their equitable claims and defenses. A hearing on those motions was held on May 1, 2008. A further hearing on the equitable claims and defenses was held on May 27, 2008. On July 24, 2008, the court issued an order denying Hynix, Micron, and Nanya’s motion for new trial. The court has not yet ruled on their equitable claims and defenses.

In these cases (except for theHynix00-20905 action), a hearing on claim construction and the parties’ cross-motions for summary judgment on infringement and validity was held on June 4 and 5, 2008. On July 10, 2008, the court issued its claim construction order relating to the Farmwald/Horowitz patents in suit and denied Hynix, Micron, Nanya, and Samsung’s (collectively, the “Manufacturers”) motions for summary judgment of noninfringement and invalidity based on their proposed claim construction. The court issued claim construction orders relating to the Ware patents in suit on July 25 and August 27, 2008, and denied the Manufacturers’ motion for summary judgment of noninfringement of certain claims. On September 4, 2008, at the court’s direction, Rambus elected to proceed to trial on twelve patent claims, each from the Farmwald/Horowitz family. On September 16, 2008, Rambus granted a covenant not to assert any claim of patent infringement against the Manufacturers under the Ware patents in suit (U.S. Patent Nos. 6,493,789 and 6,496,897), and each party’s claims relating to those patents were dismissed with prejudice. One or more trials on Rambus’ patent infringement claims is set to begin on January 19, 2009.

European Patent Infringement Cases

On September 11, 2000, Rambus filed suit against Micron in multiple European jurisdictions for infringement of its ’068 patent (described above), which was later revoked. Additional suits were filed pertaining to the ’642 patent and a third Rambus patent, EP 1 004 956 (the “’956 patent”). Rambus’ suit against Micron for infringement of the ’642 patent in Mannheim, Germany, has not been active. The Mannheim court issued an Order of Cost with respect to the ’068 proceeding requiring Rambus to reimburse Micron attorneys fees in the amount of $0.45 million. This amount has since been paid.

One proceeding in Italy relating to the ’642 patent was adjourned at a hearing on June 15, 2007, each party bearing its own costs. In two other proceedings in Italy relating to the ’956 patent, the court has scheduled hearings for May 6, 2009, regarding continuation of the proceedings. On September 29, 2005, Rambus received a letter from Micron seeking to toll a statute of limitations period in Italy for a purported cause of action resulting from a seizure of evidence in Italy in 2000 carried out by Rambus pursuant to a court order. Micron asserts that its damages allegedly caused by this seizure equal or exceed $30.0 million. Micron formally filed suit against Rambus relating to this seizure in February 2006. Rambus filed its written defense on April 24, 2006. The Italian court has ordered further briefing on issues related to Rambus’ suit in Italy for infringement of its ’068 patent. No decision has issued to date.

DDR2, GDDR2 & GDDR3 Litigation (“DDR2”)

U.S District Court in the Northern District of California

On January 25, 2005, Rambus filed a patent infringement suit in the U.S. District Court in the Northern District of California court against Hynix, Infineon, Nanya, and Inotera. Infineon and Inotera were subsequently dismissed from this litigation and Samsung was added as a defendant. Rambus alleges that certain of its patents are infringed by certain of the defendants’ SDRAM, DDR, DDR2,

DDR3, gDDR2, GDDR3, GDDR4 and other advanced memory products. Hynix, Samsung and Nanya have denied Rambus’ claims and asserted counterclaims against Rambus for, among other things, violations of federal antitrust laws, unfair trade practices, equitable estoppel, and fraud in connection with Rambus’ participation in JEDEC.

As explained above, the court ordered a coordinated trial of certain common JEDEC-related claims and defenses asserted inHynix v Rambus, Case No. C 00-20905 RMW,Rambus Inc. v. Samsung Electronics Co. Ltd. et al., Case No. 05-02298 RMW,Rambus Inc. v. Hynix Semiconductor Inc., et al., Case No. 05-00334, andRambus Inc. v. Micron Technology, Inc., et al., Case No. C 06-00244 RMW. The court subsequently excused Samsung from the coordinated trial on December 14, 2007, based on Samsung’s agreement to certain conditions, including trial of its claims against Rambus within six months following the conclusion of the coordinated trial. That trial is currently scheduled to begin on September 22, 2008. The coordinated trial involving Rambus, Hynix, Micron and Nanya began on January 29, 2008, and was submitted to the jury on March 25, 2008. On March 26, 2008, the jury returned a verdict in favor of Rambus and against Hynix, Micron, and Nanya on each of their claims. Specifically, the jury found that Hynix, Micron, and Nanya failed to meet their burden of proving that: (1) Rambus engaged in anticompetitive conduct; (2) Rambus made important representations that it did not have any intellectual property pertaining to the work of JEDEC and intended or reasonably expected that the representations would be heard by or repeated to others including Hynix, Micron or Nanya; (3) Rambus uttered deceptive half- truths about its intellectual property coverage or potential coverage of products compliant with synchronous DRAM standards then being considered by JEDEC by disclosing some facts but failing to disclose other important facts; or (4) JEDEC members shared a clearly defined expectation that members would disclose relevant knowledge they had about patent applications or the intent to file patent applications on technology being considered for adoption as a JEDEC standard. Hynix, Micron, and Nanya filed motions for a new trial and for judgment on certain of their equitable claims and defenses. A hearing on those motions was held on May 1, 2008. A further hearing on the equitable claims and defenses was held on May 27, 2008. On July 24, 2008, the court issued an order denying Hynix, Micron, and Nanya’s motion for new trial. The court has not yet ruled on their equitable claims and defenses.

In these cases (except for theHynix00-20905 action), a hearing on claim construction and the parties’ cross-motions for summary judgment on infringement and validity was held on June 4 and 5, 2008. On July 10, 2008, the court issued its claim construction order relating to the Farmwald/Horowitz patents in suit and denied the Manufacturers’ motions for summary judgment of noninfringement and invalidity based on their proposed claim construction. The court issued claim construction orders relating to the Ware patents in suit on July 25 and August 27, 2008, and denied the Manufacturers’ motion for summary judgment of noninfringement of certain claims. On September 4, 2008, at the court’s direction, Rambus elected to proceed to trial on twelve patent claims, each from the Farmwald/Horowitz family. On September 16, 2008, Rambus granted a covenant not to assert any claim of patent infringement against the Manufacturers under U.S. Patent Nos. 6,493,789 and 6,496,897, and each party’s claims relating to those patents were dismissed with prejudice. One or more trials on Rambus’ remaining patent infringement claims is set to begin on January 19, 2009.

Samsung Litigation

U.S District Court in the Northern District of California

On June 6, 2005, Rambus filed a patent infringement suit against Samsung in the U.S. District Court in the Northern District of California alleging that Samsung’s SDRAM and DDR SDRAM parts infringe nine of Rambus’ patents. Samsung has denied Rambus’ claims and asserted counterclaims for non-infringement, invalidity and unenforceability of the patents, violations of various antitrust and unfair competition statutes, breach of license, and breach of duty of good faith and fair dealing. Samsung has also counterclaimed that Rambus aided and abetted breach of fiduciary duty and intentionally interfered with Samsung’s contract with a former employee by knowingly hiring a former Samsung employee who allegedly misused proprietary Samsung information. Rambus has denied Samsung’s counterclaims.

Ware patents in suit on July 25 and August 27, 2008, and denied the Manufacturers’ motion for summary judgment of noninfringement of certain claims. On September 4, 2008, at the court’s direction, Rambus elected to proceed to trial on twelve patent claims, each from the Farmwald/Horowitz family. On September 16, 2008, Rambus granted a covenant not to assert any claim of patent infringement against the Manufacturers under U.S. Patent Nos. 6,493,789 and 6,496,897, and each party’s claims relating to those patents were dismissed with prejudice. One or more trials on Rambus’ remaining patent infringement claims is set to begin on January 19, 2009.

On August 11, 2008, the Court granted summary judgment in Rambus’ favor on Samsung’s claims for aiding and abetting a breach of fiduciary duty, intentional interference with contract, and certain aspects of Samsung’s unfair competition claim. On September 16, 2008, the Court entered a stipulation and order of dismissal with prejudice of certain of Samsung’s claims and defenses (including those based on Rambus’ alleged JEDEC conduct) and Rambus’ defenses corresponding to Samsung’s claims. A bench trial on the remaining claims and defenses that are unique to Samsung (breach of license, breach of duty of good faith and fair dealing, and estoppel based on those claims) was held between September 22 and October 1, 2008. Post-trial briefing on these issues as well as Samsung’s claims and defenses related to its allegations that Rambus spoliated evidence has been completed, but no decision has issued to date.

U.S District Court in the Eastern District of Virginia

On June 7, 2005, Samsung sued Rambus in the U.S. District Court in the Eastern District of Virginia seeking a declaratory judgment that four Rambus patents are invalid, unenforceable and/or not infringed. Rambus answered the complaint, disputing Samsung’s claims. Rambus granted Samsung covenants not to sue Samsung for infringement of the four patents for which Samsung sought declaratory relief. Rambus subsequently offered to pay Samsung’s attorneys’ fees, but Samsung did not accept the offer. On November 8, 2005, the Virginia court granted Rambus’ motion to dismiss with respect to Samsung’s claims for declaratory judgment but denied Rambus’ motion with respect to Samsung’s claim for attorneys’ fees pursuant to 35 U.S.C. § 285. On July 19, 2006, the Virginia court issued orders finding that: (1) it had subject matter jurisdiction over Samsung’s motions; (2) Samsung is a “prevailing party;” (3) Rambus had spoliated evidence in anticipation of litigation against DRAM manufacturers such as Samsung; (4) Rambus’ spoliation rendered the case exceptional; (5) Rambus did not assert its counterclaims in subjective bad faith or for the purpose of vexation; (6) Rambus’ counterclaims were not objectively baseless at the time they were filed; and (7) Samsung was not entitled to an award of attorneys’ fees.

�� Rambus filed a notice of appeal to the United States Court of Appeals for the Federal Circuit (the “CAFC”) on August 16, 2006. Oral argument was heard on August 7, 2007. On April 29, 2008, the CAFC vacated the orders of the Virginia court denying Samsung’s application for attorney fees and entering findings with respect to the alleged spoliation of evidence. The CAFC held that the Virginia court’s findings with respect to alleged spoliation constituted an impermissible advisory opinion. The CAFC further held that Rambus’ offer to pay Samsung’s attorneys’ fees rendered the case moot, and that the Virginia court did not thereafter have independent jurisdiction to assess whether the case was exceptional. The CAFC remanded the matter to the Virginia court with the instruction that the court dismiss Samsung’s complaint. On May 30, 2008, the Virginia court dismissed Samsung’s complaint pursuant to the CAFC’s opinion.

On July 28, 2008, Samsung filed a petition seeking review of the CAFC decision by the United States Supreme Court. On October 6, 2008, the United States Supreme Court denied Samsung’s petition.

FTC Complaint

On June 19, 2002, the FTC filed a complaint against Rambus. The FTC alleged that through Rambus’ action and inaction at JEDEC, Rambus violated Section 5 of the FTC Act in a way that allowed Rambus to obtain monopoly power in — or that by acting with intent to monopolize it created a dangerous probability of monopolization in — synchronous DRAM technology markets. The FTC also alleged that Rambus’ action and practices at JEDEC constituted unfair methods of competition in violation of Section 5 of the FTC Act. As a remedy, the FTC sought to enjoin Rambus’ right to enforce patents with priority dates prior to June 1996 as against products made pursuant to certain existing and future JEDEC standards.

On February 17, 2004, the FTC Chief Administrative Law Judge issued his initial decision dismissing the FTC’s complaint against Rambus on multiple independent grounds (the “Initial Decision”). The FTC’s Complaint Counsel appealed this decision.

On August 2, 2006, the FTC released its July 31, 2006, opinion and order reversing and vacating the Initial Decision and determining that Rambus violated Section 5 of the Federal Trade Commission Act. Following further briefing and oral argument on issues relating to remedy, the FTC released its opinion and order on remedy on February 5, 2007. The remedy order set the maximum royalty rate that Rambus could collect on the manufacture, use or sale in the United States of certain JEDEC-compliant parts after the effective date of the Order. The order also mandated that Rambus offer a license for these products at rates no higher than the maximums set by the FTC, including a further cap on rates for the affected non-memory products. The order further required Rambus to take certain steps to comply with the terms of the order and applicable disclosure rules of any standard setting organization of which it may become a member.

The FTC’s order explicitly did not set maximum rates or other conditions with respect to Rambus’ royalty rates for DDR2 SDRAM, other post-DDR JEDEC standards, or for non-JEDEC-standardized technologies such as those used in RDRAM or XDR DRAM.

On March 16, 2007, the FTC issued an order granting in part and denying in part Rambus’ motion for a stay of the remedy pending appeal. The March 16 order permitted Rambus to acquire rights to royalty payments for use of the patented technologies affected by the February 2 remedy order during the period of the stay in excess of the FTC-imposed maximum royalty rates on SDRAM and DDR SDRAM products, provided that funds above the maximum allowed rates be either placed into an escrow account to be distributed, or payable pursuant a contingent contractual obligation, in accordance with the ultimate decision of the court of appeals. In an opinion accompanying its order, the FTC clarified that it intended its remedy to be “forward-looking” and “prospective only,” and therefore unlikely to be construed to require Rambus to refund royalties already paid or to restrict Rambus from collecting royalties for the use of its technologies during past periods.

On April 27, 2007, the FTC issued an order granting in part and denying in part Rambus’ petition for reconsideration of the remedy order. The FTC’s order and accompanying opinion on Rambus’ petition for reconsideration clarified the remedy order in certain respects. For example, (a) the FTC explicitly stated that the remedy order did not require Rambus to make refunds or prohibit it from collecting royalties in excess of maximum allowable royalties that accrue up to the effective date of the remedy order; (b) the remedy order was modified to specifically permit Rambus to seek damages in litigation up to three times the specified maximum allowable royalty rates on the ground of willful infringement and any allowable attorneys’ fees; and (c) under the remedy order, licensees were permitted to pay Rambus a flat fee in lieu of running royalties, even if such an arrangement resulted in payments above the FTC’s rate caps in certain circumstances.

Rambus appealed the FTC’s liability and remedy orders to the United States Court of Appeals for the District of Columbia (the “CADC”). Oral argument was heard February 14, 2008. On April 22, 2008, the CADC issued an opinion which requires vacatur of the FTC’s orders. The CADC held that the FTC failed to demonstrate that Rambus’ conduct was exclusionary, and thus failed to establish its allegation that Rambus unlawfully monopolized any relevant market. The CADC’s opinion set aside the FTC’s orders and remanded the matter to the FTC for further proceedings consistent with the opinion. Regarding the chance of further proceedings on remand, the CADC expressed serious concerns about the strength of the evidence relied on to support some of the Commission’s crucial findings regarding the scope of JEDEC’s patent disclosure policies and Rambus’ alleged violation of those policies. On August 26, 2008, the CADC denied the FTC’s petition to rehear the case en banc. On October 16, 2008, the FTC issued an order explicitly authorizing Rambus to receive amounts above the maximum rates allowed by the FTC’s now-vacated order payable pursuant to any contingent contractual obligation.

Indirect Purchaser Class Action

On August 10, 2006, the first of nine class action lawsuits were filed against Rambus in 2006 alleging violations of federal and state antitrust laws, violations of state consumer protection laws, and various common law claims based almost entirely on the same conduct which was the subject of the FTC’s July 31, 2006 opinion. Three of these lawsuits filed outside of California were dismissed pursuant to agreement of the parties. The remaining six of these cases were consolidated under the caption,In re Rambus Antitrust Litigation, 06-4852 RMW (N.D. Cal.). The consolidated complaint seeks injunctive and declaratory relief, disgorgement, restitution and compensatory and punitive damages in an unspecified amount, and attorneys’ fees and costs. On March 28, 2007, Rambus filed a motion to dismiss the consolidated complaint. On July 27, 2007, the court heard oral argument on Rambus’ motion and took the matter under submission. No final order has been issued to date.

European Commission Competition Directorate-General

On or about April 22, 2003, Rambus was notified by the European Commission Competition Directorate-General (Directorate) (the “European Commission”) that it had received complaints from Infineon and Hynix. Rambus answered the ensuing requests for information prompted by those complaints on June 16, 2003. Rambus obtained a copy of Infineon’s complaint to the European Commission in late July 2003, and on October 8, 2003, at the request of the European Commission, filed its response. The European Commission sent Rambus a further request for information on December 22, 2006, which Rambus answered on January 26, 2007. On August 1, 2007, Rambus received a statement of objections from the European Commission. The statement of objections alleges that through Rambus’ participation in the JEDEC standards setting organization and subsequent conduct, Rambus violated European Union competition law. Rambus filed a response to the statement of objections on October 31, 2007, and a hearing was held on December 4 and 5, 2007. The matter is currently under submission by the European Commission.

Superior Court of California for the County of San Francisco

On May 5, 2004, Rambus filed a lawsuit against Micron, Hynix, Infineon and Siemens in San Francisco Superior Court (the “San Francisco court”) seeking damages for conspiring to fix prices (California Bus. & Prof. Code §§ 16720et seq.), conspiring to monopolize under the Cartwright Act (California Bus. & Prof. Code §§ 16720et seq.), intentional interference with prospective economic advantage, and unfair competition (California Bus. & Prof. Code §§ 17200et seq.). This lawsuit alleges that there were concerted efforts beginning in the 1990’s to deter innovation in the DRAM market and to boycott Rambus and/or deter market acceptance of Rambus’ RDRAM product. Subsequently, Infineon and Siemens were dismissed from this action (as a result of a settlement with Infineon) and three Samsung-related entities were added as defendants.

On June 28, 2007, Hynix filed a motion for summary judgment on the ground that Rambus’ claims should be dismissed on the grounds that they allegedly were compulsory counterclaims in theHynix 00-20905 action. Following briefing and oral argument, the court denied Hynix’s motion in an order filed November 2, 2007. Hynix sought review of the trial court’s order by the California Court of Appeal, which the appellate court summarily denied on January 17, 2008. On January 28, 2008, Hynix filed a petition for review of this decision by the California Supreme Court. Rambus filed an answer requesting that Hynix’s petition be denied. On March 19, 2008, the California Supreme Court issued an order denying Hynix’s petition.

On May 28, 2008, defendants filed a motion for judgment on the pleadings in their favor on what they refer to as Rambus’ cause of action for “price fixing in and of itself.” At a hearing held on July 23, 2008, the San Francisco court denied defendants’ motion from the bench. A hearing on Rambus’ motion for summary judgment on the grounds that Micron’s cross-complaint is barred by the statute of limitations was held on August 1, 2008. At the hearing, the San Francisco court granted Rambus’ motion as to Micron’s first cause of action (alleged violation of California’s Cartwright Act) and continued the motion as to Micron’s second and third causes of action (alleged violation of unfair business practices act and alleged intentional interference with prospective economic advantage). No further order has issued on Rambus’ motion.

Trial is scheduled to begin on March 16, 2009.

Stock Option Investigation Related Claims

On May 30, 2006, the Audit Committee commenced an internal investigation of the timing of past stock option grants and related accounting issues.

On May 31, 2006, the first of three shareholder derivative actions was filed in the Northern District of California against Rambus (as a nominal defendant) and certain current and former executives and board members. These actions have been consolidated for all purposes under the caption,In re Rambus Inc. Derivative Litigation, Master File No. C-06-3513-JF (N.D. Cal.), and Howard Chu and Gaetano Ruggieri were appointed lead plaintiffs. The consolidated complaint, as amended, alleges violations of certain federal and state securities laws as well as other state law causes of action. The complaint seeks disgorgement and damages in an unspecified amount, unspecified equitable relief, and attorneys’ fees and costs.

On August 22, 2006, another shareholder derivative action was filed in Delaware Chancery Court against Rambus (as a nominal defendant) and certain current and former executives and board members (Bell v. Tate et al., 2366-N (Del. Chancery)). On May 16, 2008, this case was dismissed pursuant to a notice filed by the plaintiff.

On October 18, 2006, the Board of Directors formed a Special Litigation Committee (the “SLC”) to evaluate potential claims or other actions arising from the stock option granting activities. The Board of Directors appointed J. Thomas Bentley, Chairman of the Audit Committee, and Abraham Sofaer, a retired federal judge and Chairman of the Legal Affairs Committee, both of whom joined the Rambus Board of Directors in 2005, to comprise the SLC.

On August 24, 2007, the final written report setting forth the findings of the SLC was filed with the court. As set forth in its report, the SLC determined that all claims should be terminated and dismissed against the named defendants inIn re Rambus Inc. Derivative Litigationwith the exception of claims against named defendant Ed Larsen, who served as Vice President, Human Resources from September 1996 until December 1999, and then Senior Vice President, Administration until July 2004. The SLC entered into settlement agreements with certain former officers of the Company. These settlements are conditioned upon the dismissal of the claims asserted against these individuals inIn re Rambus Inc. Derivative Litigation. The aggregate value of the settlements to the Company exceeds $6.5 million in cash and estimated equivalent value as well as substantial additional value to the Company relating to the relinquishment of claims to over 2.7 million stock options. The SLC stated its intention to assert control over the litigation. The conclusions and recommendations of the SLC are subject to review by the court. On October 5, 2007, Rambus filed a motion to terminate in accordance with the SLC’s recommendations. Pursuant to the parties’ agreement, that motion was taken off calendar.

On August 30, 2007, another shareholder derivative action was filed in the Southern District of New York against Rambus (as a nominal defendant) and PricewaterhouseCoopers LLP (Francl v. PricewaterhouseCoopers LLP et al., No. 07-Civ. 7650 (GBD)). On November 21, 2007, the New York court granted PricewaterhouseCoopers LLP’s motion to transfer the action to the Northern District of California.

Subject to court approval, the parties have agreed in principle to settleIn re Rambus Inc. Derivative LitigationandFrancl v. PricewaterhouseCoopers LLP et al., No. 07-Civ. 7650 (GBD). The settlement, which is subject to review by the court, provides for a payment by Rambus of $2.0 million and would lead to a dismissal with prejudice of all claims against all defendants, with the exception of claims against Ed Larsen, in these actions. The $2.0 million was accrued for during the quarter ended June 30, 2008 within accrued litigation expenses.

On July 17, 2006, the first of six class action lawsuits was filed in the Northern District of California against Rambus and certain current and former executives and board members. These lawsuits were consolidated under the caption,In re Rambus Inc. Securities Litigation, C-06-4346-JF (N.D. Cal.). The settlement of this action was preliminarily approved by the court on March 5, 2008. Pursuant to the settlement agreement, Rambus paid $18.3 million into a settlement fund on March 17, 2008. Some alleged class members requested exclusion from the settlement. A final fairness hearing was held on May 14, 2008. That same day the court entered an order granting final approval of the settlement agreement and entered judgment dismissing with prejudice all claims against all defendants in the consolidated class action litigation.

On March 1, 2007, a pro se lawsuit was filed in the Northern District of California by two alleged Rambus shareholders against Rambus, certain current and former executives and board members, and PricewaterhouseCoopers LLP (Kelley et al. v. Rambus, Inc. et al.C-07-01238-JF (N.D. Cal.)). This action was consolidated with a substantially identical pro se lawsuit filed by another purported Rambus shareholder against the same parties. The consolidated complaint against Rambus alleges violations of federal and state securities laws, and state law claims for fraud and breach of fiduciary duty. Following several rounds of motions to dismiss, on April 17, 2008, the court dismissed all claims with prejudice except for plaintiffs’ claims under sections 14(a) and 18(a) of the Securities and Exchange Act of 1934 as to which leave to amend was granted. On June 2, 2008, plaintiffs filed an amended complaint containing substantially the same allegations as the prior complaint although limited to claims under sections 14(a) and 18(a) of the Securities and Exchange Act of 1934. Rambus’ motion to dismiss the amended complaint was heard on September 12, 2008. The court took the matter under submission, and no decision has issued to date.

On September 11, 2008, the same pro se plaintiffs filed a separate lawsuit in Santa Clara County Superior Court against Rambus, certain current and former executives and board members, and PricewaterhouseCoopers LLP (Kelley et al. v. Rambus, Inc. et al., Case No. 1-08-CV-122444). The complaint alleges violations of certain California state securities statues as well as fraud and negligent misrepresentation based on substantially the same underlying factual allegations contained in the pro se lawsuit filed in federal court. Rambus’ response to the complaint is not yet due.

On August 25, 2008, an amended complaint was filed by certain individuals and entities in Santa Clara County Superior Court against Rambus, certain current and former executives and board members, and PricewaterhouseCoopers LLP (Steele et al. v. Rambus Inc. et al., Case No. 1-08-CV-113682). The amended complaint alleges violations of certain California state securities statutes as well as fraud and negligent misrepresentation. On October 10, 2008, Rambus filed a demurrer to the amended complaint, and a hearing is scheduled for December 5, 2008.

NVIDIA Litigation

U.S District Court in the Northern District of California

On July 10, 2008, Rambus filed suit against NVIDIA Corporation (“NVIDIA”) in the U.S. District Court for the Northern District of California alleging that NVIDIA’s products with memory controllers for at least the SDR, DDR, DDR2, DDR3, GDDR and GDDR3 technologies infringe 17 patents. On August 29, 2008, NVIDIA filed a motion to dismiss or strike the complaint, or in the alternative, for more definite statement. A hearing is currently scheduled for November 14, 2008. On September 16, 2008, Rambus granted a covenant not to assert any claim of patent infringement against NVIDIA under U.S. Patent Nos. 6,493,789 and 6,496,897.

U.S. District Court in the Middle District of North Carolina

On July 11, 2008, one day after Rambus filed suit, NVIDIA filed its own action against Rambus in the U.S. District Court for the Middle District of North Carolina alleging that Rambus committed antitrust violations of the Sherman Act; committed antitrust violations of North Carolina law; and engaged in unfair and deceptive practices in violation of North Carolina law. NVIDIA seeks injunctive relief, damages, and attorneys’ fees and costs. On September 8, 2008, Rambus filed a motion to dismiss the complaint. On September 17, 2008, Rambus filed a motion to transfer this action to the Northern District of California where Rambus’ first-filed patent infringement suit is pending against NVIDIA. No hearing dates have been scheduled for either of these motions, and no rulings have issued to date.

Potential Future Litigation

In addition to the litigation described above, participants in the DRAM and controller markets continue to adopt Rambus technologies into various products. Rambus has notified many of these companies of their use of Rambus technology and continues to evaluate how to proceed on these matters. There can be no assurance that any ongoing or future litigation will be successful. Rambus spends substantial company resources defending its intellectual property in litigation, which may continue for the foreseeable future given the multiple pending litigations. The outcomes of these litigations — as well as any delay in their resolution — could affect Rambus’ ability to license its intellectual property going forward.

The Company records a contingent liability when it is probable that a loss has been incurred and the amount is reasonably estimable in accordance with SFAS No. 5, “Accounting for Contingencies.”

14. Fair Value of Financial Instruments

The Company adopted SFAS No. 157 effective January 1, 2008 for financial assets and liabilities measured on a recurring basis. SFAS No. 157 applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. There was no impact for adoption of SFAS No. 157 to the consolidated financial statements. SFAS No. 157 requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurement be classified and disclosed in one of the following three categories:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The following table summarizes the valuation of our cash equivalents and marketable securities by the above SFAS No. 157 pricing levels as of September 30, 2008:

As of September 30, 2008

Quoted

market

Significant

prices in

other

Significant

active

observable

unobservable

markets

inputs

(in thousands)

Total

(Level 1)

(Level 2)

(Level 3)

Available-for-sale securities

375,946

84,819

291,127

—

The following table presents the financial instruments that are not carried at fair value but which require fair value disclosure as of September 30, 2008 and December 31, 2007:


	As of September 30, 2008				As of December 31, 2007
	Carrying				Carrying
(in thousands)	Value		Fair Value		Value		Fair Value
Convertible notes	$	160,000	$	158,710	$	160,000	$	164,482

The fair value of the convertible notes are determined based on recent quoted market prices for these notes. The carrying value of other financial instruments, including cash, accounts receivable, accounts payable and other payables, approximate fair value due to their short maturities.

The Company monitors its investments for other than temporary losses by considering current factors, including the economic environment, market conditions, operational performance and other specific factors relating to the business underlying the investment, reductions in carrying values when necessary and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery in the market. Any other than temporary loss is reported under “Interest and other income, net” in the condensed consolidated statement of operations. As of September 30, 2008 and December 31, 2007, the Company has not incurred any impairment loss on its investments.

The Company has adopted SFAS No. 159 effective January 1, 2008. The Company has not elected the fair value option for financial instruments not already carried at fair value.

15. Restructuring Costs

During the third quarter of 2008, the Company initiated a workforce reduction in certain areas of excess capacity. The cash severance, including continuance of certain employee benefits, totaled approximately $3.5 million and non-cash employee severance of approximately $0.5 million of stock-based compensation expense. The total restructuring charge for the three and nine month period ended September 30, 2008 was approximately $4.0 million. The Company paid approximately $1.6 million of severance and benefits during the quarter. The remaining $1.9 million of severance and benefits will be paid during the fourth quarter of 2008. The Company expects to complete its restructuring activities during the fourth quarter of 2008.

The following table provides a summary of the restructuring activities for the period indicated:


	Employee			Employee
	Termination/Severance			Termination/Severance
	and Related Benefits			and Related Benefits			Other Expenses
	Cash			Non-Cash					Total

	(in thousands)
Balance at December 31, 2007	$	—		$	—		$	—	$	—
Charges to operations		3,477			547			—		4,024
Charges utilized/paid		(1,553	)		(547	)		—		(2,100	)

Balance at September 30, 2008	$	1,924		$	—		$	—	$	1,924

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report 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. These statements relate to our expectations for future events and time periods. All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including any statements regarding trends in future revenue or results of operations, gross margin or operating margin, expenses, earnings or losses from operations, synergies or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning developments, performance or industry ranking; any statements regarding future economic conditions or performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Generally, the words “anticipate,” “believes,” “plans,” “expects,” “future,” “intends,” “may,” “should,” “estimates,” “predicts,” “potential,” “continue” and similar expressions identify forward-looking statements. Our forward-looking statements are based on current expectations, forecasts and assumptions and are subject to risks, uncertainties and changes in condition, significance, value and effect. As a result of the factors described herein, and in the documents incorporated herein by reference, including, in particular, those factors described under “Risk Factors,” we undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this report with the Securities and Exchange Commission.

Rambus, RDRAM, XDR, FlexIO and FlexPhase are trademarks or registered trademarks of Rambus Inc. Other trademarks that may be mentioned in this quarterly report on Form 10-Q are the property of their respective owners.

Industry terminology, used widely throughout this annual report, has been abbreviated and, as such, these abbreviations are defined below for your convenience:


Advanced Backplane		ABP
Double Data Rate		DDR
Dynamic Random Access Memory		DRAM
Fully Buffered-Dual Inline Memory Module		FB-DIMM
Gigabits per second		Gb/s
Graphics Double Data Rate		GDDR
Input/Output		I/O
Peripheral Component Interconnect		PCI
Rambus Dynamic Random Access Memory		RDRAM
Single Data Rate		SDR
Synchronous Dynamic Random Access Memory		SDRAM
eXtreme Data Rate		XDR

From time to time we will refer to the abbreviated names of certain entities and, as such, have provided a chart to indicate the full names of those entities for your convenience.


Advanced Micro Devices Inc.		AMD
ARM Holdings plc		ARM
Cadence Design Systems, Inc.		Cadence
Cisco Systems, Inc.		Cisco
Elpida Memory, Inc.		Elpida
Fujitsu Limited		Fujitsu
GDA Technologies, Inc.		GDA
Hewlett-Packard Company		Hewlett-Packard
Hynix Semiconductor, Inc.		Hynix
Infineon Technologies AG		Infineon
Inotera Memories, Inc.		Inotera
Intel Corporation		Intel
International Business Machines Corporation		IBM
Joint Electron Device Engineering Council		JEDEC
Juniper Networks, Inc.		Juniper
Matsushita Electrical Industrial Co.		Matsushita
Micron Technologies, Inc.		Micron


Nanya Technology Corporation		Nanya
NEC Electronics Corporation		NECEL
Optical Internetworking Forum		OIF
Qimonda AG (formerly Infineon’s DRAM operations)		Qimonda
Peripheral Component Interconnect — Special Interest Group		PCI-SIG
Renesas Technology Corporation		Renesas
S3 Graphics, Inc.		S3 Graphics
Samsung Electronics Co., Ltd.		Samsung
Sony Computer Electronics		Sony
Spansion, Inc.		Spansion
ST Microelectronics		ST Micro
Synopsys Inc.		Synopsys
Tessera Technologies, Inc.		Tessera
Texas Instruments Inc.		Texas Instruments
Toshiba Corporation		Toshiba
Velio Communications		Velio

Business Overview

We design, develop and license chip interface technologies and architectures that are foundational to nearly all digital electronics products. Our chip interface technologies are designed to improve the time-to-market, performance and cost-effectiveness of our customers’ semiconductor and system products for computing, communications and consumer electronics applications.

As of September 30, 2008, our chip interface technologies are covered by more than 730 U.S. and foreign patents. Additionally, we have approximately 500 patent applications pending. These patents and patent applications cover important inventions in memory and logic chip interfaces, in addition to other technologies. We believe that our chip interface technologies provide a higher performance, lower risk, and more cost-effective alternative for our customers than can be achieved through their own internal research and development efforts.

We offer our customers two alternatives for using our chip interface technologies in their products:

First, we license our broad portfolio of patented inventions to semiconductor and system companies who use these inventions in the development and manufacture of their own products. Such licensing agreements may cover the license of part, or all, of our patent portfolio. Patent license agreements are royalty bearing.

Second, we develop “leadership” (which are Rambus-proprietary products widely licensed to our customers) and industry-standard chip interface products that we provide to our customers under license for incorporation into their semiconductor and system products. Because of the often complex nature of implementing state-of-the art chip interface technology, we offer our customers a range of engineering services to help them successfully integrate our chip interface products into their semiconductors and systems. Product license agreements may have both a fixed price (non-recurring) component and ongoing royalties. Engineering services are customarily bundled with our product licenses, and are performed on a fixed price basis. Further, under product licenses, our customers may receive licenses to our patents necessary to implement the chip interface in their products with specific rights and restrictions to the applicable patents elaborated in their individual contracts with us.

We derive the majority of our annual revenue by licensing our broad portfolio of patents for chip interfaces to our customers. Such licenses may cover part or all of our patent portfolio. Leading semiconductor and system companies such as AMD, Elpida, Fujitsu, Qimonda, Intel, Matsushita, NECEL, Renesas, Spansion and Toshiba have licensed our patents for use in their own products.

We derive additional revenue by licensing our leadership and industry-standard chip interface products to our customers for use in their semiconductor and system products. Our customers include leading companies such as Fujitsu, Elpida, IBM, Intel, Matsushita, Texas Instruments, Sony, ST Micro, Qimonda and Toshiba. Due to the complex nature of implementing our technologies, we provide engineering services under certain of these licenses to help successfully integrate our chip interface products into their semiconductors and systems. Additionally, product licensees may receive, as an adjunct to their chip interface license agreements, patent licenses as necessary to implement the chip interface in their products with specific rights and restrictions to the applicable patents elaborated in their individual contracts.

Royalties represent a substantial portion of our total revenue. The remaining part of our revenue is contract services revenue which includes license fees and engineering services fees. The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenue or unbilled receivables in any given period.

We have a high degree of revenue concentration, with our top five licensees representing approximately 72% and 67% of our revenue for the three and nine months ended September 30, 2008, respectively. This compares with the three and nine months ended September 30, 2007, in which revenue from our top five licensees accounted for approximately 68% of our revenue respectively. For the three months ended September 30, 2008, revenue from Fujitsu, Matsushita, NEC, AMD and Sony each accounted for 10% or more of our total revenue. For the nine months ended September 30, 2008, revenue from Fujitsu, Elpida, Sony, AMD, Matsushita and NEC each accounted for 10% or more of our total revenue. For the three months ended September 30, 2007, revenue from Qimonda, Fujitsu, Elpida and Toshiba each accounted for 10% or more of our total revenue. For the nine months ended September 30, 2007, revenue from Fujitsu, Qimonda and Elpida each accounted for 10% or more of our total revenue.

Our revenue from companies headquartered outside of the United States accounted for approximately 80% and 82% of our total revenue for the three and nine months ended September 30, 2008, respectively, as compared to 84% and 85% for the three and nine months ended September 30, 2007, respectively. We expect that we may continue to experience significant revenue concentration and have significant revenue from sources outside the United States for the foreseeable future.

Historically, we have been involved in significant litigation stemming from the unlicensed use of our inventions. Our litigation expenses have been high and difficult to predict and we anticipate future litigation expenses will continue to be significant, volatile and difficult to predict. If we are successful in the litigation and/or related licensing, our revenue could be substantially higher in the future; if we are unsuccessful, our revenue would likely decline. Furthermore, our success in litigation matters pending before courts and regulatory bodies that relate to our intellectual property rights have impacted and will likely continue to impact our ability and the terms upon which we are able to negotiate new or renegotiate existing licenses for our technology.

We expect that revenue derived from international licensees will continue to represent a significant portion of our total revenue in the future. To date, all of the revenue from international licensees have been denominated in U.S. dollars. However, to the extent that such licensees’ sales to systems companies are not denominated in U.S. dollars, any royalties that we receive as a result of such sales could be subject to fluctuations in currency exchange rates. In addition, if the effective price of licensed semiconductors sold by our foreign licensees were to increase as a result of fluctuations in the exchange rate of the relevant currencies, demand for licensed semiconductors could fall, which in turn would reduce our royalties. We do not use financial instruments to hedge foreign exchange rate risk.

Results of Operations

The following table sets forth, for the periods indicated, the percentage of total revenue represented by certain items reflected in our unaudited condensed consolidated statements of operations:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenue:
Royalties		87.7	%		84.7	%		86.9	%		84.8	%
Contract revenue		12.3	%		15.3	%		13.1	%		15.2	%

Total revenue		100.0	%		100.0	%		100.0	%		100.0	%

Costs and expenses:
Cost of contract revenue*		15.7	%		13.9	%		17.6	%		13.5	%
Research and development*		59.5	%		43.9	%		56.3	%		43.3	%
Marketing, general and administrative*		106.3	%		71.7	%		84.2	%		57.1	%
Restructuring costs*		13.7	%		—	%		3.8	%		—	%
Impairment of asset		7.3	%		—	%		2.1	%		—	%
Costs of restatement and related legal activities		1.3	%		10.0	%		3.4	%		13.4	%

Total costs and expenses		203.8	%		139.5	%		167.4	%		127.3	%

Operating loss		(103.8	)%		(39.5	)%		(67.4	)%		(27.3	)%
Interest and other income, net		9.2	%		13.5	%		9.7	%		11.8	%

Loss before income taxes		(94.6	)%		(26.0	)%		(57.7	)%		(15.5	)%
Provision for (benefit from) income taxes		0.3	%		(10.4	)%		118.9	%		(6.1	)%

Net loss		(94.9	)%		(15.6	)%		(176.6	)%		(9.4	)%

* Includes stock-based compensation:
Cost of contract revenue		4.5	%		3.2	%		4.4	%		2.9	%
Research and development		11.3	%		7.6	%		10.5	%		7.0	%
Marketing, general and administrative		14.9	%		9.9	%		12.3	%		10.4	%
Restructuring costs		1.9	%		—	%		0.5	%		—	%


	Three Months							Nine Months
	Ended September 30,				Change in			Ended September 30,					Change in
(Dollars in millions)	2008		2007		Percentage			2008		2007			Percentage
Total Revenue
Royalties	$	25.8	$	35.3		(27.0	)%	$	91.2	$	118.3	��		(22.9	)%
Contract revenue		3.6		6.4		(43.1	)%		13.7		21.1			(35.2	)%

Total revenue	$	29.4	$	41.7		(29.5	)%	$	104.9	$	139.4			(24.8	)%

Royalty Revenue

Patent Licenses

In the three and nine months ended September 30, 2008, our largest source of royalties was related to the license of our patents for SDR and DDR-compatible products. Royalties decreased approximately $9.8 million and $31.8 million for SDR and DDR-compatible products in the three and nine months ended September 30, 2008, respectively, as compared to the same periods in 2007, primarily due to decreased royalty revenue from Qimonda, Fujitsu and Elpida.

We are in negotiations with prospective and existing licensees. We expect SDR and DDR-compatible royalties will continue to vary from period to period based on our success in renewing existing license agreements and adding new licensees, as well as the level of variation in our licensees’ reported shipment volumes, sales price and mix, offset in part by the proportion of licensee payments that are fixed. In July 2008, we announced our decision to defer negotiations with Elpida related to patent license renewal, which will decrease revenue from patent royalties in future quarters.

On February 2, 2007, the Federal Trade Commission (the “FTC”) issued an order requiring us to limit the royalty rates charged for certain SDR and DDR SDRAM memory and controller products sold after April 12, 2007. The FTC stayed this requirement on March 16, 2007, subject to certain conditions. One such condition of the stay limits the royalties we can receive under certain contracts so that they do not exceed the FTC’s Maximum Allowable Royalties (“MAR”). On June 6, 2008, the FTC petitioned the CADC to rehear the case en banc. On August 26, 2008 the Court denied the FTC’s petition for rehearing of this matter en banc, and on September 9, 2008, the Court issued its mandate setting aside the FTC’s order and instructing the FTC to take actions consistent with the Court’s ruling. The FTC did not seek, nor did it receive, a stay of the Court’s ruling, and thus the FTC’s order in the case has been vacated. On October 16, 2008, the FTC issued an order (“FTC Disposition Order”) authorizing Rambus to receive the excess consideration that customers have previously deducted from their quarterly payments made to Rambus under the Patent License Agreement.

At the time of the issuance of the mandate on September 9, 2008, $6.2 million had been determined as amounts in excess of MAR and had been excluded from revenue. As the FTC’s order has been vacated, we will recognize the previously unrecognized revenue in excess of MAR of $6.2 million as revenue when the corresponding cash payments are received. In the three months ended September 30, 2008, $0.9 million of the amounts in excess of MAR was previously received and recognized as revenue in Q3’08. The remaining $5.3 million will be recognized when the payments are received from the customers.

Product Licenses

In the three and nine months ended September 30, 2008, royalties from XDR, FlexIO, DDR and serial link-compatible products represented the second largest category of royalties. Royalties from XDR, FlexIO, DDR and serial link-compatible products increased approximately $0.6 million and $4.3 million during the three and nine months ended September 30, 2008, respectively, as compared to the same period in 2007. This increase was primarily due to higher royalties from DDR and serial link-compatible products. In the future, we expect royalties from XDR, FlexIO, DDR and serial link-compatible products will continue to vary from period to period based on our licensees’ shipment volumes, sales prices and product mix.

In the three and nine months ended September 30, 2008, royalties from RDRAM-compatible products represented the third largest source of royalties. Royalties from RDRAM memory chips and controllers decreased approximately $0.4 million and increased approximately $0.4 million during the three and nine months ended September 30, 2008, respectively, as compared to the same period in 2007. The variance was primarily due to the fluctuation of royalties from RDRAM controllers.

Contract Revenue

Percentage-of-Completion Contracts

Percentage of completion contract revenue decreased approximately $0.4 million and $1.3 million for the three and nine months ended September 30, 2008, respectively, as compared to the same period in 2007 due to lower revenue from various leadership chip interface contracts. We believe that percentage-of-completion contract revenue recognized will continue to fluctuate over time, based on our ongoing contractual requirements, the amount of work performed, and by changes to work required, as well as new contracts booked in the future.

Other Contracts

Revenue for other contracts decreased approximately $2.3 million and $6.1 million for the three and nine months ended September 30, 2008, respectively, as compared to the corresponding period in 2007 due to decreased revenue from leadership chip interface contracts including FlexIO and XDR and industry standard chip interface contracts. We believe that other contracts revenue will continue to fluctuate over time based on our ongoing contract requirements, the timing of completing engineering deliverables, as well as new contracts booked in the future.

Engineering costs:


	Three Months Ended							Nine Months Ended
	September 30,				Change in			September 30,				Change in
(Dollars in millions)	2008		2007		Percentage			2008		2007		Percentage
Engineering costs
Cost of contract revenue	$	3.3	$	4.5		(26.0	)%	$	13.8	$	14.8		(6.8	)%
Stock-based compensation		1.3		1.3		(0.9	)%		4.6		4.1		13.2	%

Total cost of contract revenue		4.6		5.8		(20.3	)%		18.4		18.9		(2.5	)%

Research and development		14.2		15.1		(6.2	)%		48.0		50.5		(4.9	)%
Stock-based compensation		3.3		3.2		4.3	%		11.0		9.8		12.0	%

Total research and development		17.5		18.3		(4.4	)%		59.0		60.3		(2.1	)%

Total engineering costs	$	22.1	$	24.1		(8.2	)%	$	77.4	$	79.2		(2.2	)%

Total engineering costs decreased 8.2% for the three months ended September 30, 2008 as compared to the same period in 2007 primarily due to utilization or reversal of previously recognized loss contract provisions and decreases in salaries and related support costs in connection with the restructuring. Bonus expense in the third quarter of 2008 was also lower due to performance metrics which were not achieved. In addition, amortization of intangible assets in the third quarter of 2008 was lower due to the completion of amortization of certain intangibles in the second quarter of 2008.

Total engineering costs decreased 2.2% for the nine months ended September 30, 2008 as compared to the same period in 2007 due to the one-time tax reimbursement expenses of approximately $4.1 million recorded in the first quarter of 2007 which was partially offset by increases in 2008 in stock-based compensation expense, salary expenses and patent expenses. The tax reimbursement expenses were associated with our decision to reimburse current and former non-executive employees for Internal Revenue Code Section 409A penalty taxes imposed on them in connection with their exercise of repriced options in 2006. In addition, the bonus expense for the nine months ended September 30, 2008 was lower than the comparable 2007 period due to performance metrics which were not achieved.

In certain periods, the estimated cost of contract revenue may exceed contract revenue that did not factor in the expected stream of future royalty payments. This can be further impacted by timing of expensing of pre-contract costs as research and development expenses and the cost to complete contracts where the realizability of an asset is uncertain. As of September 30, 2008, the Company had accrued a liability of approximately $0.8 million related to estimated loss revenue contracts. Loss revenue contract costs are recognized in cost of contract revenue when such loss is determined.

In the near term, we expect engineering costs will decline as a result of our cost reduction initiative undertaken in the third quarter of 2008.

Marketing, general and administrative costs:


	Three Months Ended							Nine Months Ended
	September 30,				Change in			September 30,				Change in
(Dollars in millions)	2008		2007		Percentage			2008		2007		Percentage
Marketing, general and administrative costs
Marketing, general and administrative costs	$	11.2	$	14.1		(20.5	)%	$	37.5	$	41.9		(10.3	)%
Litigation expense		15.7		11.7		34.3	%		38.0		23.3		62.8	%
Stock-based compensation		4.4		4.1		5.6	%		12.9		14.5		(11.1	)%

Total marketing, general and administrative costs	$	31.3	$	29.9		4.6	%	$	88.4	$	79.7		11.0	%

Total marketing, general and administrative costs increased 4.6% and 11.0% for the three and nine months ended September 30, 2008, respectively, as compared to the comparable periods in 2007.

The increase for the three month period ended September 30, 2008 from the comparable period in 2007 was due primarily to increased litigation expenses related to certain cases that went to trial during the third quarter of 2008 as well as preparation for upcoming trials. This increase was partially offset by lower bonus expense due to performance metrics which were not achieved, and lower general legal, marketing and advertising, and professional fees.

The increase for the nine month period ended September 30, 2008 was due primarily to increased litigation expenses of $14.7 million, of which a majority of the expenses were related to major cases that went to trial during 2008 as well as preparation for upcoming trials. The decrease in stock-based compensation expense for the nine month period ended September 30, 2008 from the comparable period in 2007 was due primarily to the one-time equity award modification charges related to extensions of expiring options recorded in 2007. Non-litigation related marketing, general and administrative expenses also decreased in the nine month period ended September 30, 2008 from the comparable period in 2007 primarily due the one-time tax reimbursement expenses of approximately $2.5 million recorded in the first quarter of 2007. The tax reimbursement expenses were associated with our decision in 2007 to reimburse current and former non-executive employees for the Internal Revenue Code Section 409A penalty taxes imposed on them in connection with their exercise of repriced options in 2006. In addition, bonus expense during the nine month period ended September 30, 2008 was lower than in the comparable period in 2007 due to performance metrics which were not achieved, and overall marketing and advertising expenses were decreasing in 2008.

In the future, marketing, general and administrative costs will vary from period to period based on the advertising, legal, and other marketing and administrative activities undertaken, and the change in sales, marketing and administrative headcount in any given period. Litigation expenses are expected to vary from period to period due to the variability of litigation activities, but are expected to remain at levels higher than 2007 for the foreseeable future. In the near term, we expect marketing, general and administrative costs will decline as a result of our cost reduction initiative undertaken in the third quarter of 2008.

Restructuring costs:

Three Months Ended

Nine Months Ended

September 30,

Change in

September 30,

Change in

(Dollars in millions)

2008

2007

Percentage

2008

2007

Percentage

Restructuring costs

4.0

—

4.0

—

During the third quarter of 2008, we initiated a workforce reduction in certain areas of excess capacity. The cash severance, including continuance of certain employee benefits, totaled approximately $3.5 million and non-cash employee severance of approximately $0.5 million of stock-based compensation expense. The total restructuring charge for the three month period ended September 30, 2008 was approximately $4.0 million. We paid approximately $1.6 million of severance and benefits during the quarter. The remaining $1.9 million of severance will be paid during the fourth quarter of 2008. We expect cash savings of approximately $17.0 million annually as a result of our restructuring measures. We expect to complete our restructuring activities during the fourth quarter of 2008. We plan to fund the remaining cash restructuring costs with cash flows generated from operating activities.

Impairment of Intangible asset:

Three Months Ended

Nine Months Ended

September 30,

Change in

September 30,

Change in

(Dollars in millions)

2008

2007

Percentage

2008

2007

Percentage

Impairment of intangible asset

2.2

—

2.2

—

During the three months ended September 30, 2008, we determined that approximately $2.2 million of our intangible assets had no alternative future use and was impaired as a result of a customer’s change in technology requirements. The intangible asset relates to a contractual relationship acquired in the Velio acquisition during December 2003.

Costs of restatement and related legal activities:


	Three Months Ended							Nine Months Ended
	September 30,				Change in			September 30,				Change in
(Dollars in millions)	2008		2007		Percentage			2008		2007		Percentage
Cost of restatement and related legal activities	$	0.4	$	4.2		(90.6	)%	$	3.6	$	18.6		(80.9	)%

Costs of restatement and related legal activities consist primarily of investigation, audit, legal and other professional fees related to the 2006-2007 stock option investigation and the filing of the restated financial statements and related litigation.

Costs of restatement and related legal activities were $0.4 million and $3.6 million for the three and nine months ended September 30, 2008, respectively, due primarily to litigation expenses associated with the derivative lawsuit related to this stock option investigation. Costs in the third quarter and first nine months of 2008 were significantly lower than in the third quarter and first nine months of 2007 because the majority of the investigation was completed during 2007. Until all the litigation and related issues are resolved, we anticipate that there could be additional amounts relating to these matters in the future.

Interest and other income, net:


	Three Months Ended							Nine Months Ended
	September 30,				Change in			September 30,				Change in
(Dollars in millions)	2008		2007		Percentage			2008		2007		Percentage
Interest and other income, net	$	2.7	$	5.6		(52.1	)%	$	10.2	$	16.5		(38.1	)%

Interest and other income, net consists primarily of interest income generated from investments in high quality fixed income securities as well as changes in exchange rates. The decrease in interest and other income, net for the three and nine months ended September 30, 2008 as compared to the same period in 2007 was primarily due to lower average investment balances and lower yields on invested balances during the periods ended September 30, 2008.

In the future, we expect that interest and other income, net, will vary from period to period based on the amount of cash and marketable securities, interest rates and foreign currency exchange rates.

Provision for (benefit from) income taxes:


	Three Months Ended							Nine Months Ended
	September 30,						Change in	September 30,						Change in
(Dollars in millions)	2008			2007			Percentage	2008			2007			Percentage
Provision for (benefit from) income taxes	$	0.1		$	(4.3	)	NM	$	124.7		$	(8.5	)	NM

Effective tax rate		(0.3	)%		40.0	%			(206.2	)%		39.3	%


*		NM — percentage is not meaningful as the change is too large.

Our effective tax rate for the three and nine months ended September 30, 2008 is lower and higher than the U.S. statutory tax rate applied to our net losses, respectively, primarily due the establishment of a full valuation allowance on our U.S. net deferred tax assets.

Our effective tax rate for the three and nine months ended September 30, 2007 was higher than the U.S. statutory tax rate primarily due to research and development tax credits, non-deductible stock-based compensation expense related to our executives and other employees, state income taxes and foreign income taxes.

For the quarter ended June 30, 2008, we recorded a non-cash income tax provision of $130.5 million to establish a valuation allowance. Management periodically evaluates the realizability of our net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is solely dependent on the Company’s ability to generate sufficient future taxable income during periods prior to the expiration of tax statutes to fully utilize these assets. As previously disclosed in the Form 10-K for the year ended December 31, 2007, our forecasted future operating results are highly influenced by, among other factors, assumptions regarding (1) our ability to achieve our forecasted revenue, (2) our ability to effectively manage our expenses in line with our forecasted revenue and (3) general trends in the semiconductor industry.

We weighed both positive and negative evidence and determined that there is a need for the valuation allowance during the quarter ended June 30, 2008 due to the existence of three years of historical cumulative losses and a revised forecast that projected future losses from operations in the U.S., which we considered significant verifiable negative evidence. Though considered positive evidence, projected income from favorable patent and related settlement litigation were not included in the determination for the valuation allowance due to our inability to reliably estimate the timing and amounts of such settlements. We intend to maintain the valuation allowance until sufficient positive evidence exists to support reversal of the valuation allowance.

Liquidity and Capital Resources


	As of
	September 30,		December 31,
	2008		2007
	(In millions)
Cash and cash equivalents	$	106.8	$	119.4
Marketable securities		272.2		321.5

Total cash, cash equivalents, and marketable securities	$	379.0	$	440.9


	Nine Months Ended
	September 30,
	2008			2007
	(In millions)
Net cash provided by (used in) operating activities	$	(34.1	)	$	19.0
Net cash provided by investing activities	$	40.3		$	181.1
Net cash used in financing activities	$	(18.9	)	$	(4.3	)

Liquidity

Although we used cash for operating activities in the first three quarters of 2008, we continue to believe that total cash, cash equivalents and marketable securities will continue at adequate levels to finance our operations, projected capital expenditures and commitments for the next twelve months. Cash needs for the first three quarters of 2008 were funded primarily from investing activities, as investments in marketable securities matured and were not reinvested.

Operating Activities

Cash used in operating activities of $34.1 million for the nine months ended September 30, 2008 was primarily attributable to the net loss for the period adjusted for non-cash items, including the tax provision related to the deferred tax asset valuation allowance, stock-based compensation expense, depreciation and amortization expense, and impairment of an asset. The increased working capital for the nine months ended September 30, 2008 was primarily due to of a decrease in accrued litigation expenses due to payments related to the class action lawsuit settlement.

Cash provided by operating activities of $19.0 million for the nine months ended September 30, 2007 was primarily attributable to the net loss for the period adjusted for non-cash items including stock-based compensation expense, and depreciation and amortization expense. Changes in non-cash working capital for the nine months ended September 30, 2007 included increases in prepaid and other assets due primarily to prepaid software maintenance agreements and deferred tax assets resulting from our operating loss offset by a net increase in accounts payable primarily due to restatement and related legal expenses and capitalized software license maintenance agreements.

We plan to fund the remaining cash restructuring costs with cash flows generated from operating activities.

Investing Activities

Cash provided by investing activities of approximately $40.3 million for the nine months ended September 30, 2008 primarily consisted of proceeds from the maturities of available-for-sale marketable securities of $352.3 million, of which only $304.6 million was reinvested in available-for-sale marketable securities. We also paid $8.2 million related to acquired property and equipment, primarily computer software licenses.

Cash provided by investing activities for the nine months ended September 30, 2007 primarily consisted of proceeds from the maturities of available-for-sale investments of $616.1 million, offset by purchases of available-for-sale investments of $428.2 million.

Financing Activities

Cash used in financing activities was $18.9 million for the nine months ended September 30, 2008. During the nine months ended September 30, 2008, proceeds from issuance of stock from employee stock plans totaled approximately $17.3 million. In addition, we repurchased stock with an aggregate value of $34.9 million under our share repurchase program — refer to “Share Repurchase Program” below. The Company also made installment payments in regards to an acquire software license.

We did not engage in any stock-related financing activities for the nine months ended September 30, 2007 primarily due to the stock option investigation and restatement, during which time we suspended our common stock repurchase program and suspended employee stock option exercises and purchases under our employee stock purchase plan. We used approximately $4.3 million to make payments under installment payment arrangements during that period.

We currently anticipate that existing cash and cash equivalent balances and cash flows from operations will be adequate to meet our cash needs for at least the next 12 months as well as satisfy our cash requirement to redeem our convertible notes due in 2010. We do not anticipate any liquidity constraints as a result of either the current credit environment or investment fair value fluctuations. Additionally, we have the intent and ability to hold our debt investments that have unrealized losses in accumulated other comprehensive income for a sufficient period of time to allow for recovery of the principal amounts invested. We continually monitor the credit risk in our portfolio and mitigate our credit risk exposures in accordance with our policies. We may also incur additional expenditures related to future potential restructuring activities. As described elsewhere in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and this Quarterly Report on Form 10-Q, we are involved in ongoing litigation related to the protection of our intellectual property and our past stock option investigation. Any adverse settlements or judgments in any of this litigation could have a material adverse impact on our results of operations, cash balances and cash flows in the period in which such events occur.

Contractual Obligations

On February 1, 2005, we issued $300.0 million aggregate principal amount of zero coupon convertible senior notes (the “convertible notes”) due February 1, 2010 to Credit Suisse First Boston LLC and Deutsche Bank Securities as initial purchasers who then sold the convertible notes to institutional investors. We elected to pay the principal amount of the convertible notes in cash when they are due. Subsequently, we repurchased a total of $140.0 million face value of the outstanding convertible notes in 2005. As of September 30, 2008, there were $160.0 million of convertible notes outstanding which were classified as a non-current liability in the accompanying condensed consolidated balance sheets.

As of September 30, 2008, our material contractual obligations were:


	Payments Due by Year
			Remainder
	Total		of 2008		2009		2010		2011		2012		Thereafter
	(In thousands)
Contractual obligations(1)
Operating leases	$	17,404	$	2,624	$	7,381	$	6,277	$	645	$	477	$	—
Convertible notes		160,000		—		—		160,000		—		—		—
Purchased software license agreements(2)		1,014		507		507		—		—		—		—

Total	$	178,418	$	3,131	$	7,888	$	166,277	$	645	$	477	$	—


(1)		The above table does not reflect possible payments in connection with uncertain tax benefits associated with FIN 48 of approximately $14.1 million, including $11.1 million recorded as a reduction of long-term deferred tax assets and $3.0 million in long-term income taxes payable, as of September 30, 2008. Although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, we cannot reasonably estimate the outcome at this time.

(2)		We have commitments with various software vendors for non-cancellable license agreements that generally have terms greater than one year. The above table summarizes those contractual obligations as of September 30, 2008, which are also included on our condensed consolidated balance sheets under current and other long-term liabilities.

Share Repurchase Program

In October 2001, the Board approved a share repurchase program of our Common Stock, principally to reduce the dilutive effect of employee stock options. To date, the Board has approved the authorization to repurchase up to 19.0 million shares of our outstanding Common Stock over an undefined period of time. For the three months ended September 30, 2008, 0.6 million shares were repurchased with an aggregate value of $10.0 million. During the nine months ended September 30, 2008, we repurchased approximately 2.0 million shares with an aggregate value of $34.9 million. As of September 30, 2008, we had repurchased a cumulative total of approximately 15.2 million shares of our Common Stock with an aggregate value of approximately $219.5 million since the commencement of this program. As of September 30, 2008, there remained an outstanding authorization to repurchase approximately 3.8 million shares of our outstanding Common Stock.

We record stock repurchases as a reduction to stockholders’ equity. As prescribed by APB Opinion No. 6, “Status of Accounting Research Bulletins,” we record a portion of the purchase price of the repurchased shares as an increase to accumulated deficit when the cost of the shares repurchased exceeds the average original proceeds per share received from the issuance of Common Stock. During the nine months ended September 30, 2008, the cumulative price of the shares repurchased exceeded the proceeds received from the issuance of the same number of shares. The excess of $32.2 million was recorded as an increase to accumulated deficit for the nine months ended September 30, 2008. During the nine months ended September 30, 2007, we did not repurchase any Common Stock.

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 estimates and judgments that affect the reported amounts of assets,

liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, investments, income taxes, litigation and other contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting estimates include those regarding (1) revenue recognition, (2) litigation, (3) income taxes and (4) stock-based compensation. For a discussion of our critical accounting estimates, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2007.

Recent Accounting Pronouncements

See Note 2 “Recent Accounting Pronouncements” of Notes to Unaudited Condensed Consolidated Financial Statements for discussion of recent accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to financial market risks, primarily arising from the effect of interest rate fluctuations on our investment portfolio. Interest rate fluctuation may arise from changes in the market’s view of the quality of the security issuer, the overall economic outlook, and the time to maturity of our portfolio. We mitigate this risk by investing only in high quality, highly liquid instruments. Securities with original maturities of one year or less must be rated by two of the three industry standard rating agencies as follows: A1 by Standard & Poor’s, P1 by Moody’s and/or F-1 by Fitch. Securities with original maturities of greater than one year must be rated by two of the following industry standard rating agencies as follows: AA- by Standard & Poor’s, Aa3 by Moody’s and/or AA- by Fitch. By corporate policy, we limit the amount of our credit exposure to $10.0 million for any one commercial issuer. Our policy requires that at least 10% of the portfolio be in securities with a maturity of 90 days or less. In addition, we may make investments in securities with maturities up to 36 months. However, the bias of our investment policy is toward shorter maturities.

We invest our cash equivalents and short-term marketable securities in a variety of U.S. dollar financial instruments such asTreasuries, Government Agencies, Repurchase Agreements, Commercial Paper and Corporate Notes.Our policy specifically prohibits trading securities for the sole purposes of realizing trading profits. However, we may liquidate a portion of our portfolio if we experience unforeseen liquidity requirements. In such a case if the environment has been one of rising interest rates we may experience a realized loss, similarly, if the environment has been one of declining interest rates we may experience a realized gain. As of September 30, 2008, we had an investment portfolio of fixed income marketable securities of $375.9 million including cash equivalents. If market interest rates were to increase immediately and uniformly by 10% from the levels as of September 30, 2008, the fair value of the portfolio would decline by approximately $0.6 million. Actual results may differ materially from this sensitivity analysis.

We bill our customers in U.S. dollars. Although the fluctuation of currency exchange rates may impact our customers, and thus indirectly impact us, we do not attempt to hedge this indirect and speculative risk. Our overseas operations consist primarily of small business development offices in any one country and one design center in India. We monitor our foreign currency exposure; however, as of September 30, 2008, we believe our foreign currency exposure is not material enough to warrant foreign currency hedging.

The table below summarizes the fair value, book value, unrealized gain (loss), net and related weighted rate of return for our marketable securities portfolio as of September 30, 2008 and December 31, 2007.


	September 30, 2008
								Weighted
					Unrealized			Rate of
Available-for-sale securities (dollars in thousands)	Fair Value		Book Value		Gain (Loss), net			Return
Money Market Funds	$	84,819	$	84,819	$	—			1.74	%
Municipal Bonds and Notes		1,004		1,000		4			3.85	%
U.S. Government Bonds and Notes		191,604		192,015		(411	)		3.04	%
Corporate Notes, Bonds, and Commercial Paper		98,519		99,390		(871	)		3.01	%

Total cash equivalents and marketable securities		375,946		377,224		(1,278	)
Cash		3,026		3,026		—

Total cash, cash equivalents and marketable securities	$	378,972	$	380,250	$	(1,278	)


	December 31, 2007
							Weighted
					Unrealized		Rate of
Available-for-sale securities (dollars in thousands)	Fair Value		Book Value		Gain, net		Return
Money Market Funds	$	104,836	$	104,836	$	—		4.82	%
Municipal Bonds and Notes		3,008		3,000		8		4.81	%
U.S. Government Bonds and Notes		108,660		108,568		92		4.39	%
Corporate Notes, Bonds, and Commercial Paper		219,734		219,668		66		4.90	%

Total cash equivalents and marketable securities		436,238		436,072		166
Cash		4,644		4,644		—

Total cash, cash equivalents and marketable securities	$	440,882	$	440,716	$	166

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such terms are defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2008, the end of the period covered by this Quarterly Report on Form 10-Q. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to management, including our CEO and CFO. To the extent that components of our internal control over financial reporting are included within our disclosure controls and procedures, they are included in the scope of management’s annual assessment of our internal control over financial reporting.

Based on this evaluation, our management, including our CEO and CFO, has concluded that the Company has made substantial progress in remediating the material weakness described below. We will continue to monitor remediation throughout the year and final assessment will be determined as part of year end testing of internal control over financial reporting.

Previously, we did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of generally accepted accounting principles commensurate with our financial reporting requirements. Specifically, this deficiency resulted in audit adjustments that corrected an understatement of revenue and audit adjustments to deferred revenue, deferred rent, property and equipment, depreciation, consulting expenses and certain accrual accounts and disclosures in the consolidated financial statements for the year ended December 31, 2006 and in an audit adjustment that corrected an understatement of operating expenses and related legal accrual accounts and disclosures in the consolidated financial statements for the year ended December 31, 2007, primarily arising from an insufficient review by us of relevant information obtained through communications with third parties. Additionally, this deficiency could result in misstatements of the aforementioned accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management previously determined this control deficiency constituted a material weakness.

We have undertaken the remedial actions described below and in connection with the preparation of this Quarterly Report, our management performed additional analyses, reconciliations and other post-closing procedures and has concluded that the Company’s consolidated financial statements for the periods covered by and included in this Quarterly Report are fairly stated in all material respects in accordance with generally accepted accounting principles in the U.S. for each of the periods presented herein.

Implemented or Planned Remedial Actions of the Material Weakness

In response to the identification of the material weakness described above, management initiated the following corrective actions:

	•		During the quarter ended December 31, 2007, we hired a new VP of Finance, with experience in public accounting as well as in senior accounting roles in a public company, who oversees all of our accounting functions.

	•		During the quarter ended December 31, 2007, and prior to filing the financial statements, we hired two Assistant Corporate Controllers; one to oversee revenue recognition and financial systems and the other to oversee external reporting. We have also hired a General Ledger and Consolidations Manager.

	•		During the quarter ended December 31, 2007, we required all of our finance, accounting and stock administration staff to attend training in various areas of U.S. generally accepted accounting principles. In this regard, members of our finance, accounting and operations departments have attended revenue recognition, SEC reporting and stock administration training in the fourth quarter of 2007.

	•		We have on-going efforts to improve communications between finance personnel responsible for completing reviews of our accrual accounts and operations personnel responsible for the execution of the work on those transactions and have instituted quarterly close meetings involving finance and operations personnel; and

•

We are continuing our efforts to review our internal control over financial reporting with the intent to automate previously manual processes specifically in the areas of legal billing administration.

Additionally, management is investing in on-going efforts to continuously improve the control environment and has committed considerable resources to the continuous improvement of the design, implementation, documentation, testing and monitoring of our internal controls.

Management believes the Company has made substantial progress in remediating the material weakness based on the measure addressed above. We will continue to monitor remediation throughout the year and final assessment will be determined as part of year end testing of internal control over financial reporting.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting except as described above in the section, “Implemented or Planned Remedial Actions of the Material Weakness.”

Limitation on Effectiveness of Controls

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on its financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

The information required by this item regarding legal proceedings is incorporated by reference to the information set forth in Note 13 “Litigation and Asserted Claims” of the Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.

Item 1A. Risk Factors

Because of the following factors, as well as other variables affecting our operating results, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods. See also “Forward-looking Statements” elsewhere in this report.

Risks Associated With Our Business, Industry and Market Conditions

If market leaders do not adopt our chip interface products, our results of operations could decline.

An important part of our strategy is to penetrate market segments for chip interfaces by working with leaders in those market segments. This strategy is designed to encourage other participants in those segments to follow such leaders in adopting our chip interfaces. If a high profile industry participant adopts our chip interfaces but fails to achieve success with its products or adopts and achieves success with a competing chip interface, our reputation and sales could be adversely affected. In addition, some industry participants have adopted, and others may in the future adopt, a strategy of disparaging our memory solutions adopted by their competitors or a strategy of otherwise undermining the market adoption of our solutions.

We target system companies to adopt our chip interface technologies, particularly those that develop and market high volume business and consumer products, which have traditionally been focused on PCs, including PC graphics processors, and video game consoles, but also are expanding to include HDTVs, cellular and digital phones, PDAs, digital cameras and other consumer electronics that incorporate all varieties of memory and chip interfaces. In particular, our strategy includes gaining acceptance of our technology in high volume consumer applications, including video game consoles, such as the Sony PlayStation ® 2 and Sony PLAYSTATION ® 3, HDTVs and set top boxes. We are subject to many risks beyond our control that influence whether or not a particular system company will adopt our chip interfaces, including, among others:

	•		competition faced by a system company in its particular industry;

	•		the timely introduction and market acceptance of a system company’s products;

	•		the engineering, sales and marketing and management capabilities of a system company;

	•		technical challenges unrelated to our chip interfaces faced by a system company in developing its products;

	•		the financial and other resources of the system company;

	•		the supply of semiconductors from our licensees in sufficient quantities and at commercially attractive prices;

	•		the ability to establish the prices at which the chips containing our chip interfaces are made available to system companies; and

	•		the degree to which our licensees promote our chip interfaces to a system company.

There can be no assurance that consumer products that currently use our technology will continue to do so, nor can there be any assurance that the consumer products that incorporate our technology will be successful in their segments thereby generating expected royalties, nor can there be any assurance that any of our technologies selected for licensing will be implemented in a commercially developed or distributed product.

If any of these events occur and market leaders do not successfully adopt our technologies, our strategy may not be successful and, as a result, our results of operations could decline.

To continue to grow, we may have to invest more resources in research and development than anticipated, which could increase our operating expenses and negatively impact our operating results.

If new competitors, technological advances by existing competitors, our entry into new markets, or other competitive factors require us to invest significantly greater resources than anticipated in our research and development efforts, our operating expenses would increase. For the three and nine months ended September 30, 2008, research and development expenses were $17.5 million and $59.0 million, respectively, including stock-compensation of approximately $3.3 million and $11.0 million, respectively. If we are required to invest significantly greater resources than anticipated in research and development efforts without an increase in revenue, our operating results could decline. Research and development expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments in research and development and these investments may be independent of our level of revenue. In order to grow, which may include entering new markets, we anticipate that we will continue to devote substantial resources to research and development, and we expect these expenses to increase in absolute dollars in the foreseeable future due to the increased complexity and the greater number of products under development as well as hiring additional employees.

Our revenue is concentrated in a few customers, and if we lose any of these customers, our revenue may decrease substantially.

of our total revenue. For the nine months ended September 30, 2008, revenue from Fujitsu, Elpida, Sony, AMD, Matsushita and NEC each accounted for 10% or more of our total revenue. For the three months ended September 30, 2007, revenue from Qimonda, Fujitsu, Elpida and Toshiba each accounted for 10% or more of our total revenue. For the nine months ended September 30, 2007, revenue from Fujitsu, Qimonda and Elpida each accounted for 10% or more of our total revenue. We may continue to experience significant revenue concentration for the foreseeable future.

Substantially all of our licensees have the right to cancel their licenses. Failure to renew licenses and/or the loss of any of our top five licensees would cause revenue to decline substantially. Intel has been one of our largest customers and is an important catalyst for the development of new memory and logic chip interfaces in the semiconductor industry. We have a patent cross-license agreement with Intel that expired in September 2006. Intel now has a paid up license for the use of all of our patents which claimed priority prior to September 2006. We have other licenses with Intel, in addition to the patent cross-license agreement, for the development of serial link chip interfaces. If we do not continue to replace the revenue we previously received under the Intel contract, our results of operations may decline significantly.

In addition, some of our commercial agreements require us to provide certain customers with the lowest royalty rate that we provide to other customers for similar technologies, volumes and schedules. These clauses may limit our ability to effectively price differently among our customers, to respond quickly to market forces, or otherwise to compete on the basis of price. The particular licensees which account for revenue concentration have varied from period to period as a result of the addition of new contracts, expiration of existing contracts, industry consolidation, the expiration of deferred revenue schedules under existing contracts, and the volumes and prices at which the licensees have recently sold licensed semiconductors to system companies. These variations are expected to continue in the foreseeable future, although we anticipate that revenue will continue to be concentrated in a limited number of licensees.

We are in negotiations with licensees and prospective licensees to reach SDR and DDR patent license agreements. We expect SDR and DDR patent license royalties will continue to vary from period to period based on our success in renewing existing license agreements and adding new licensees, as well as the level of variation in our licensees’ reported shipment volumes, sales price and mix, offset in part by the proportion of licensee payments that are fixed. If we are unsuccessful in renewing any of our SDR and DDR-compatible contracts, our results of operations may decline significantly.

Our business and operating results may be harmed if we are unable to manage growth in our business or if we undertake any restructuring activities.

Our business historically has experienced periods of rapid growth that have placed, and may continue to place, significant demands on our managerial, operational and financial resources. In managing this growth, we must continue to improve and expand our management, operational and financial systems and controls. We also need to continue to expand, train and manage our employee base. We cannot assure you that we will be able to timely and effectively meet demand and maintain the quality standards required by our existing and potential customers and licensees. If we ineffectively manage our growth or we are unsuccessful in recruiting and retaining personnel, our business and operating results will be harmed.

From time to time, we may undertake to restructure our business, such as the reduction in our workforce that we announced in August 2008. There are several factors that could cause a restructuring to have an adverse effect on our business, financial condition and results of operations. These include potential disruption of our operations, the development of our technology, the deliveries to our customers and other aspects of our business. Employee morale and productivity could also suffer and we may lose employees whom we want to keep. Loss of sales, service and engineering talent, in particular, could damage our business. Any restructuring would require substantial management time and attention and may divert management from other important work. Employee reductions or other restructuring activities also cause us to incur restructuring and related expenses such as severance expenses. Moreover, we could encounter delays in executing any restructuring plans, which could cause further disruption and additional unanticipated expense.

Unanticipated changes in our tax rates or in the tax laws and regulations could expose us to additional income tax liabilities which could affect our operating results and financial condition.

We are subject to income taxes in both the United States and various foreign jurisdictions. Significant judgment is required in determining our worldwide provision (benefit) for income taxes and, in the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. Our effective tax rate could be adversely affected by changes in the

mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and regulations as well as other factors. For example, the state of California has enacted regulations which limit the use of net operating losses and certain tax credits, including research and development credits, in 2008 and 2009 which could lead to an increase in our effective tax rate. Our tax determinations are regularly subject to audit by tax authorities and developments in those audits could adversely affect our income tax provision. Although we believe that our tax estimates are reasonable, the final determination of tax audits or tax disputes may be different from what is reflected in our historical income tax provisions which could affect our operating results.

If we cannot respond to rapid technological change in the semiconductor industry by developing new innovations in a timely and cost effective manner, our operating results will suffer.

The semiconductor industry is characterized by rapid technological change, with new generations of semiconductors being introduced periodically and with ongoing improvements. We derive most of our revenue from our chip interface technologies that we have patented. We expect that this dependence on our fundamental technology will continue for the foreseeable future. The introduction or market acceptance of competing chip interfaces that render our chip interfaces less desirable or obsolete would have a rapid and material adverse effect on our business, results of operations and financial condition. The announcement of new chip interfaces by us could cause licensees or system companies to delay or defer entering into arrangements for the use of our current chip interfaces, which could have a material adverse effect on our business, financial condition and results of operations. We are dependent on the semiconductor industry to develop test solutions that are adequate to test our chip interfaces and to supply such test solutions to our customers and us.

Our continued success depends on our ability to introduce and patent enhancements and new generations of our chip interface technologies that keep pace with other changes in the semiconductor industry and which achieve rapid market acceptance. We must continually devote significant engineering resources to addressing the ever increasing need for higher speed chip interfaces associated with increases in the speed of microprocessors and other controllers. The technical innovations that are required for us to be successful are inherently complex and require long development cycles, and there can be no assurance that our development efforts will ultimately be successful. In addition, these innovations must be:

	•		completed before changes in the semiconductor industry render them obsolete;

	•		available when system companies require these innovations; and

	•		sufficiently compelling to cause semiconductor manufacturers to enter into licensing arrangements with us for these new technologies.

Finally, significant technological innovations generally require a substantial investment before their commercial viability can be determined. There can be no assurance that we have accurately estimated the amount of resources required to complete the projects, or that we will have, or be able to expend, sufficient resources required for these types of projects. In addition, there is market risk associated with these products, and there can be no assurance that unit volumes, and their associated royalties, will occur. If our technology fails to capture or maintain a portion of the high volume consumer market, our business results could suffer.

If we cannot successfully respond to rapid technological changes in the semiconductor industry by developing new products in a timely and cost effective manner our operating results will suffer.

We face intense competition that may cause our results of operations to suffer.

The semiconductor industry is intensely competitive and has been impacted by price erosion, rapid technological change, short product life cycles, cyclical market patterns and increasing foreign and domestic competition. Some semiconductor companies have developed and support competing logic chip interfaces including their own serial link chip interfaces and parallel bus chip interfaces. We also face competition from semiconductor and intellectual property companies who provide their own DDR memory chip interface technology and solutions. In addition, most DRAM manufacturers, including our XDR licensees, produce versions of DRAM such as SDR, DDRx and GDDRx SDRAM which compete with XDR chips. We believe that our principal competition for memory chip interfaces may come from our licensees and prospective licensees, some of which are evaluating and developing products based on technologies that they contend or may contend will not require a license from us. In addition, our competitors are also taking a

system approach similar to ours in seeking to solve the application needs of system companies. Many of these companies are larger and may have better access to financial, technical and other resources than we possess. Wider applications of other developing memory technologies, including FLASH memory, may also pose competition to our licensed memory solutions.

As the semiconductor industry is highly cyclical, significant economic downturns characterized by diminished demand, erosion of average selling prices, production overcapacity and production capacity constraints could affect the semiconductor industry. We believe we currently are experiencing such a period of economic downturn. As a result, we may face a reduced number of licensing wins, tightening of customers’ operating budgets, extensions of the approval process for new licenses and consolidation among our customers, all of which may adversely affect the demand for our technology and may cause us to experience substantial period-to-period fluctuations in our operating results.

JEDEC has standardized what it calls extensions of DDR, known as DDR2 and DDR3. Other efforts are underway to create other products including those sometimes referred to as GDDR4 and GDDR5, as well as new ways to integrate products such as system-in-package DRAM. To the extent that these alternatives might provide comparable system performance at lower or similar cost than XDR memory chips, or are perceived to require the payment of no or lower royalties, or to the extent other factors influence the industry, our licensees and prospective licensees may adopt and promote alternative technologies. Even to the extent we determine that such alternative technologies infringe our patents, there can be no assurance that we would be able to negotiate agreements that would result in royalties being paid to us without litigation, which could be costly and the results of which would be uncertain. In the industry standard and leadership serial link chip interface business, we face additional competition from semiconductor companies that sell discrete transceiver chips for use in various types of systems, from semiconductor companies that develop their own serial link chip interfaces, as well as from competitors, such as ARM and Synopsys, who license similar serial link chip interface products and digital controllers. At the 10 Gb/s speed, competition will also come from optical technology sold by system and semiconductor companies. There are standardization efforts under way or completed for serial links from standard bodies such as PCI-SIG and OIF. We may face increased competition from these types of consortia in the future that could negatively impact our serial link chip interface business.

In the FlexIO processor bus chip interface market segment, we face additional competition from semiconductor companies who develop their own parallel bus chip interfaces, as well as competitors who license similar parallel bus chip interface products. We may also see competition from industry consortia or standard setting bodies that could negatively impact our FlexIO processor bus chip interface business.

As with our memory chip interface products, to the extent that competitive alternatives to our serial or parallel logic chip interface products might provide comparable system performance at lower or similar cost, or are perceived to require the payment of no or lower royalties, or to the extent other factors influence the industry, our licensees and prospective licensees may adopt and promote alternative technologies, which could negatively impact our memory and logic chip interface business.

If for any of these reasons we cannot effectively compete in these primary market segments, our results of operations could suffer.

Some of our revenue is subject to the pricing policies of our licensees over whom we have no control.

We have no control over our licensees’ pricing of their products and there can be no assurance that licensee products using or containing our chip interfaces will be competitively priced or will sell in significant volumes. One important requirement for our memory chip interfaces is for any premium charged by our licensees in the price of memory and controller chips over alternatives to be reasonable in comparison to the perceived benefits of the chip interfaces. If the benefits of our technology do not match the price premium charged by our licensees, the resulting decline in sales of products incorporating our technology could harm our operating results.

Our licensing cycle is lengthy and costly and our marketing and sales efforts may be unsuccessful.

The process of persuading customers to adopt and license our chip interface technologies can be lengthy and, even if successful, there can be no assurance that our chip interfaces will be used in a product that is ultimately brought to market, achieves commercial acceptance, or results in significant royalties to us. We generally incur significant marketing and sales expenses prior to entering into our license agreements, generating a license fee and establishing a royalty stream from each licensee. The length of time it takes to establish a new licensing relationship can take many months. In addition, our ongoing intellectual property litigation and regulatory

actions have and will likely continue to have an impact on our ability to enter into new licenses and renewals of licenses. As such, we may incur costs in any particular period before any associated revenue stream begins. If our marketing and sales efforts are very lengthy or unsuccessful, then we may face a material adverse effect on our business and results of operations as a result of delay or failure to obtain royalties.

Future revenue is difficult to predict for several reasons, and our failure to predict revenue accurately may cause us to miss analysts’ estimates and result in our stock price declining.

Our lengthy and costly license negotiation cycle makes our future revenue difficult to predict in the event that we are not successful entering into licenses with our customers on our estimated timelines. In addition, a portion of our revenue comes from development and support services provided to our licensees. Depending upon the nature of the services, a portion of the related revenue may be recognized ratably over the support period, or may be recognized according to contract accounting. Contract revenue accounting may result in deferral of the service fees to the completion of the contract, or may be recognized over the period in which services are performed on a percentage-of-completion basis. There can be no assurance that the product development schedule for these projects will not be changed or delayed. All of these factors make it difficult to predict future licensing revenue and may result in our missing previously announced earnings guidance or analysts’ estimates which would likely cause our stock price to decline.

Our quarterly and annual operating results are unpredictable and fluctuate, which may cause our stock price to be volatile and decline.

Since many of our revenue components fluctuate and are difficult to predict, and our expenses are largely independent of revenue in any particular period, it is difficult for us to accurately forecast revenue and profitability. Factors other than those set forth above, which are beyond our ability to control or assess in advance, that could cause our operating results to fluctuate include:

	•		semiconductor and system companies’ acceptance of our chip interface products;

	•		the success of high volume consumer applications, such as the Sony PLAYSTATION^® 3;

	•		the dependence of our royalties upon fluctuating sales volumes and prices of licensed chips that include our technology;

	•		the seasonal shipment patterns of systems incorporating our chip interface products;

	•		the loss of any strategic relationships with system companies or licensees;

	•		semiconductor or system companies discontinuing major products incorporating our chip interfaces;

	•		the unpredictability of the timing and amount of any litigation expenses;

	•		changes in our chip and system company customers’ development schedules and levels of expenditure on research and development;

	•		our licensees terminating or failing to make payments under their current contracts or seeking to modify such contracts;

	•		changes in our strategies, including changes in our licensing focus and/or possible acquisitions of companies with business models different from our own; and

	•		changes in the economy and credit market and their effects upon demand for our technology and the products of our licensees.

For the three and nine months ended September 30, 2008, royalties accounted for 87.7% and 86.9%, respectively, and for the three and nine months ended September 30, 2007, royalties accounted for 84.7% and 84.8%, respectively, of our total revenue, and we believe that royalties will continue to represent a majority of total revenue for the foreseeable future. Royalties are generally recognized in the quarter in which we receive a report from a licensee regarding the sale of licensed chips in the prior quarter; however, royalties are recognized only if collectibility is assured. As a result of these uncertainties and effects being outside of our control, royalty revenue are difficult to predict and make accurate financial forecasts difficult to achieve, which could cause our stock price to become volatile and decline.

Current economic conditions may adversely affect our industry, business and results of operations.

The U.S. and world economies are undergoing a period of slowdown or recession, and the future economic environment may continue to be less favorable than that of recent years. This slowdown has and could further lead to reduced consumer and business spending in the foreseeable future, including amongst our licensees and the purchasers of their products. If such spending continues to slow down or decrease, our industry, business and results of operations may be adversely impacted

A substantial portion of our revenue is derived from sources outside of the United States and these revenue and our business generally are subject to risks related to international operations that are often beyond our control.

For the three and nine months ended September 30, 2008, revenue from our sales to international customers constituted approximately 80% and 82% of our total revenue, respectively, and for the three and nine months ended September 30, 2007, revenue from our sales to international customers constituted approximately 84% and 85% of our total revenue, respectively. We currently have international operations in India (design), Japan (business development), Taiwan (business development), Germany (business development) and Korea (business development). As a result of our continued focus on international markets, we expect that future revenue derived from international sources will continue to represent a significant portion of our total revenue.

To date, all of the revenue from international licensees have been denominated in U.S. dollars. However, to the extent that such licensees’ sales to systems companies are not denominated in U.S. dollars, any royalties which are based as a percentage of the customer’s sales that we receive as a result of such sales could be subject to fluctuations in currency exchange rates. In addition, if the effective price of licensed semiconductors sold by our foreign licensees were to increase as a result of fluctuations in the exchange rate of the relevant currencies, demand for licensed semiconductors could fall, which in turn would reduce our royalties. We do not use financial instruments to hedge foreign exchange rate risk.

Our international operations and revenue are subject to a variety of risks which are beyond our control, including:

	•		export controls, tariffs, import and licensing restrictions and other trade barriers;

	•		profits, if any, earned abroad being subject to local tax laws and not being repatriated to the United States or, if repatriation is possible, limited in amount;

	•		changes to tax codes and treatment of revenue from international sources, including being subject to foreign tax laws and potentially being liable for paying taxes in that foreign jurisdiction;

	•		foreign government regulations and changes in these regulations;

	•		social, political and economic instability;

	•		lack of protection of our intellectual property and other contract rights by jurisdictions in which we may do business to the same extent as the laws of the United States;

	•		changes in diplomatic and trade relationships;

	•		cultural differences in the conduct of business both with licensees and in conducting business in our international facilities and international sales offices;

	•		operating centers outside the United States;

	•		hiring, maintaining and managing a workforce remotely and under various legal systems; and

	•		geo-political issues.

We and our licensees are subject to many of the risks described above with respect to companies which are located in different countries, particularly home video game console and PC manufacturers located in Asia and elsewhere. There can be no assurance that one or more of the risks associated with our international operations could not result in a material adverse effect on our business, financial condition or results of operations.

Our results of operations could vary as a result of the methods, estimates, and judgments we use in applying our accounting policies.

The methods, estimates, and judgments we use in applying our accounting policies have a significant impact on our results of operations, as described elsewhere in this report. Such methods, estimates, and judgments are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise over time that lead us to change our methods, estimates, and judgments. Changes in those methods, estimates, and judgments could significantly affect our results of operations. In particular, the calculation of share-based compensation expense under Statement of Financial Accounting Standards No. 123(R) (“SFAS No. 123(R)”) requires us to use valuation methodologies which were not developed for use in valuing employee stock options and a number of assumptions, estimates, and conclusions regarding matters such as expected forfeitures, expected volatility of our share price, and the exercise behavior of our employees. Furthermore, there are no means, under applicable accounting principles, to compare and adjust our expense if and when we learn about additional information that may affect the estimates that we previously made, with the exception of changes in expected forfeitures of share-based awards. Factors may arise that lead us to change our estimates and assumptions with respect to future share-based compensation arrangements, resulting in variability in our share-based compensation expense over time. Changes in forecasted stock-based compensation expense could impact our cost of contract revenue, research and development expenses, marketing, general and administrative expenses and our effective tax rate, which could have an adverse impact on our results of operations.

We may make future acquisitions or enter into mergers, strategic transactions or other arrangements that could cause our business to suffer.

We may continue to make investments in companies, products or technologies or enter into mergers, strategic transactions or other arrangements. If we buy a company or a division of a company, we may experience difficulty integrating that company’s or division’s personnel and operations, which could negatively affect our operating results. In addition:

	•		the key personnel of the acquired company may decide not to work for us;

	•		we may experience additional financial and accounting challenges and complexities in areas such as tax planning, cash management and financial reporting;

	•		our ongoing business may be disrupted or receive insufficient management attention;

	•		we may not be able to recognize the cost savings or other financial benefits we anticipated; and

	•		our increasing international presence resulting from acquisitions may increase our exposure to international currency, tax and political risks.

In connection with future acquisitions or mergers, strategic transactions or other arrangements, we may incur substantial expenses regardless of whether the transaction occurs. In addition, we may be required to assume the liabilities of the companies we acquire. By assuming the liabilities, we may incur liabilities such as those related to intellectual property infringement or indemnification of customers of acquired businesses for similar claims, which could materially and adversely affect our business. We may have to incur debt or issue equity securities to pay for any future acquisition, the issuance of which could involve restrictive covenants or be dilutive to our existing stockholders.

If we are unable to attract and retain qualified personnel, our business and operations could suffer.

Our success is dependent upon our ability to identify, attract, compensate, motivate and retain qualified personnel, especially engineers, who can enhance our existing technologies and introduce new technologies. Competition for qualified personnel, particularly those with significant industry experience, is intense, in particular in the San Francisco Bay Area where we are

headquartered and in the area of Bangalore, India where we have a design center. We are also dependent upon our senior management personnel. The loss of the services of any of our senior management personnel, or key sales personnel in critical markets, or critical members of staff, or of a significant number of our engineers could be disruptive to our development efforts or business relationships and could cause our business and operations to suffer.

Decreased effectiveness of equity-based compensation could adversely affect our ability to attract and retain employees.

We have historically used stock options and other forms of stock-based compensation as key components of our employee compensation program in order to align employees’ interests with the interests of our stockholders, encourage employee retention and provide competitive compensation and benefit packages. As a result of changes in accounting principles, we have incurred increased compensation costs associated with our stock-based compensation programs. As a result and as part of our overall compensation philosophy, we have worked to reduce the issuance of equity as a percentage of overall compensation and the number of equity awards issued annually as a percentage of our total outstanding shares. In addition, if we face any difficulty relating to obtaining stockholder approval of our equity compensation plans, it could make it harder or more expensive for us to grant stock-based payments to employees in the future. As a result of these factors leading to lower equity compensation of our employees, we may find it difficult to attract, retain and motivate employees, and any such difficulty could materially adversely affect our business.

Our operations are subject to risks of natural disasters, acts of war, terrorism or widespread illness at our domestic and international locations, any one of which could result in a business stoppage and negatively affect our operating results.

Our business operations depend on our ability to maintain and protect our facility, computer systems and personnel, which are primarily located in the San Francisco Bay Area. The San Francisco Bay Area is in close proximity to known earthquake fault zones. Our facility and transportation for our employees are susceptible to damage from earthquakes and other natural disasters such as fires, floods and similar events. Should an earthquake or other catastrophes, such as fires, floods, power loss, communication failure or similar events disable our facilities, we do not have readily available alternative facilities from which we could conduct our business, which stoppage could have a negative effect on our operating results. Acts of terrorism, widespread illness and war could also have a negative effect at our international and domestic facilities.

Risks Related to Corporate Governance and Capitalization Matters

The price of our Common Stock may fluctuate significantly, which may make it difficult for holders to resell their shares when desired or at attractive prices.

Our Common Stock is listed on The Nasdaq Global Select Market under the symbol “RMBS.” The trading price of our Common Stock has been subject to wide fluctuations which may continue in the future in response to, among other things, the following:

	•		any progress, or lack of progress, in the development of products that incorporate our chip interfaces;

	•		our signing or not signing new licensees;

	•		new litigation or developments in current litigation as discussed above;

	•		announcements of our technological innovations or new products by us, our licensees or our competitors;

	•		positive or negative reports by securities analysts as to our expected financial results;

	•		developments with respect to patents or proprietary rights and other events or factors;

	•		any delisting of our Common Stock from The Nasdaq Global Select Market; and

	•		changes in general market sentiment due to macroeconomic and geopolitical factors.

In addition, the equity markets have experienced volatility that has particularly affected the market prices of equity securities of many high technology companies and that often has been unrelated or disproportionate to the operating performance of such companies.

If we fail to remediate any material weaknesses in our internal control over financial reporting, we may be unable to accurately report our financial results or reasonably prevent fraud which could result in a loss of investor confidence in our financial reports and have an adverse effect on our business and operating results and our stock price.

Effective internal control over financial reporting is essential for us to produce reliable financial reports and prevent fraud. If we cannot provide reliable financial information or prevent fraud, our business and operating results, as well as our stock price, could be harmed. During the year ended December 31, 2007, we discovered, and may in the future discover, material weaknesses in our internal control over financial reporting. A failure to implement and maintain effective internal control over financial reporting, could harm our operating results, result in a material misstatement of our financial statements, cause us to fail to meet our financial reporting obligations or prevent us from providing reliable and accurate financial reports or avoiding or detecting fraud. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including new SEC regulations and Nasdaq rules, are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed.

The matters relating to the independent investigation of our historical stock option granting practices and the restatement of our previous financial statements could adversely affect our business, financial condition, results of operations and cash flows.

During 2006 and 2007, our Audit Committee conducted an internal investigation of the timing of stock option grant practices and related accounting issues, and, as a result of the findings, we restated various previously filed financial statements. The costs of the investigation and restatement and any settlements, payment of claims, fines, taxes and other costs led to substantial expenses that materially affected our cash balance and cash flows from operations, and significant expenditures may continue to be incurred in the future. In addition, the recent restatement of our financial results and any negative outcome that may occur from these investigations could impact our reputation, including our relationships with our investors and our licensees, our ability to hire and retain qualified personnel, our ability to acquire new licensees and other business partners and, ultimately, our ability to generate revenue.

Future government actions may result from the completion of the investigation of stock option grants. We are also under examination by the Internal Revenue Service (“IRS”) on the various tax reporting implications resulting from the investigation. There is no assurance that other regulatory inquiries will not be commenced by other U.S. federal, state or foreign regulatory agencies, including the IRS and other tax authorities. The unfavorable resolution of any potential tax or other regulatory proceeding or action could require us to make significant payments in overdue taxes, penalties and fines or otherwise record charges (or reduce tax assets) that may adversely affect our results of operations and financial condition.

In addition, our bylaws and certain indemnification agreements require us to indemnify our current and former directors, officers, employees and agents against most actions of a civil, criminal, administrative or investigative nature unless such person acted criminally, in a manner opposed to our best interests or did not act in good faith. Generally, we are required to advance indemnification expenses prior to any final adjudication of an individual’s culpability. Therefore, the expense of indemnifying our current and former directors, officers and employees and agents in their defense or related expenses as a result of the derivative, class action and any regulatory actions related to the investigation and financial restatement may be significant. Therefore, our indemnification obligations could result in the diversion of our financial resources that adversely affects our business, financial condition and results of operations.

We have been named as a party to several lawsuits arising from matters relating to our stock option investigation which may result in unfavorable outcomes and significant judgments, settlements and legal expenses which could cause our business, financial condition and results of operations to suffer.

Several shareholder derivative actions were filed in state and federal courts against certain of our current and former officers and directors, as well as our current auditors, related to the stock option investigation. The actions were brought by persons identifying themselves as shareholders and purporting to act on our behalf. We are named solely as a nominal defendant against whom the plaintiffs seek no recovery. The complaints allege that certain of these defendants violated securities laws and/or breached their fiduciary duties to us and obtained unjust enrichment in connection with grants of stock options to certain of our officers that were allegedly improperly dated. The complaints seek unspecified monetary damages and disgorgement from the defendants, as well as unspecified equitable relief.

Additionally, several securities fraud class actions and individual lawsuits were filed in federal court against us and certain of our current and former officers and directors. The complaints generally allege that the defendants violated the federal securities laws by filing documents with the SEC containing false statements regarding our accounting treatment of the stock option granting actions under investigation. The individual lawsuits allege not only federal and state securities law violations, but also state law claims for fraud and breach of fiduciary duty. The class actions were consolidated into a single proceeding and have settled. The settlement provides for a payment of $18.3 million, which we paid into a settlement fund in March 2008, for a dismissal with prejudice of all claims against all defendants. Some potential class members requested exclusion from the settlement. On May 8, 2008, the court entered an order granting final approval of the settlement agreement and entered judgment dismissing with prejudice all claims against all defendants in the consolidated class action litigation. For more information about the litigation described above, see Note 13 “Litigation and Asserted Claims” of Notes to Unaudited Condensed Consolidated Financial Statements.

The amount of time to resolve these current and any future lawsuits is uncertain, and these matters could require significant management and financial resources which could otherwise be devoted to the operation of our business. Although we have expensed or accrued for certain liabilities that we believe will result from certain of these actions, the actual costs and expenses to defend and satisfy all of these lawsuits and any potential future litigation will exceed our current estimated accruals, possibly significantly. Unfavorable outcomes and significant judgments, settlements and legal expenses in the litigation related to our past stock option granting practices could have material adverse impacts on our business, financial condition, results of operations, cash flows and the trading price of our Common Stock.

We are leveraged financially, which could adversely affect our ability to adjust our business to respond to competitive pressures and to obtain sufficient funds to satisfy our future research and development needs, and to defend our intellectual property.

We have indebtedness. On February 1, 2005, we issued $300.0 million aggregate principal amount of zero coupon convertible senior notes (“convertible notes”) due February 1, 2010, of which $160.0 million remains outstanding as of the date of this report.

The degree to which we are leveraged could have important consequences, including, but not limited to, the following:

	•		our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes may be limited;

	•		a substantial portion of our cash flows from operations will be dedicated to the payment of the principal of our indebtedness as we are required to pay the principal amount of the convertible notes in cash when due;

	•		if we elect to pay any premium on the convertible notes with shares of our Common Stock or we are required to pay a “make-whole” premium with our shares of Common Stock, our existing stockholders’ interest in us would be diluted; and

	•		we may be more vulnerable to economic downturns, less able to withstand competitive pressures and less flexible in responding to changing business and economic conditions.

A failure to comply with the covenants and other provisions of our debt instruments could result in events of default under such instruments, which could permit acceleration of the convertible notes under such instruments and in some cases acceleration of any future debt under instruments that may contain cross-default or cross-acceleration provisions. Any required repayment of the convertible notes as a result of an acceleration would lower our current cash on hand such that we would not have those funds available for the use in our business.

If we are at any time unable to generate sufficient cash flow from operations to service our indebtedness when payment is due, we may be required to attempt to renegotiate the terms of the instruments relating to the indebtedness, seek to refinance all or a portion of the indebtedness or obtain additional financing. There can be no assurance that we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us.

Our certificate of incorporation and bylaws, our stockholder rights plan, and Delaware law contain provisions that could discourage transactions resulting in a change in control, which may negatively affect the market price of our Common Stock.

Our certificate of incorporation, our bylaws, our stockholder rights plan and Delaware law contain provisions that might enable our management to discourage, delay or prevent change in control. In addition, these provisions could limit the price that investors would be willing to pay in the future for shares of our Common Stock. Among these provisions are:

	•		our board of directors is authorized, without prior stockholder approval, to create and issue preferred stock, commonly referred to as “blank check” preferred stock, with rights senior to those of Common Stock;

	•		our board of directors is staggered into two classes, only one of which is elected at each annual meeting;

	•		stockholder action by written consent is prohibited;

	•		nominations for election to our board of directors and the submission of matters to be acted upon by stockholders at a meeting are subject to advance notice requirements;

	•		certain provisions in our bylaws and certificate of incorporation such as notice to stockholders, the ability to call a stockholder meeting, advanced notice requirements and the stockholders acting by written consent may only be amended with the approval of stockholders holding 66 2 / 3 % of our outstanding voting stock;

	•		the ability of our stockholders to call special meetings of stockholders is prohibited; and

	•		our board of directors is expressly authorized to make, alter or repeal our bylaws.

In addition, the provisions in our stockholder rights plan could make it more difficult for a potential acquirer to consummate an acquisition of our company. We are also subject to Section 203 of the Delaware General Corporation Law, which provides, subject to enumerated exceptions, that if a person acquires 15% or more of our outstanding voting stock, the person is an “interested stockholder” and may not engage in any “business combination” with us for a period of three years from the time the person acquired 15% or more of our outstanding voting stock.

Litigation, Regulation and Business Risks Related to our Intellectual Property

We face current and potential adverse determinations in litigation stemming from our efforts to protect and enforce our patents and intellectual property, which could broadly impact our intellectual property rights, distract our management and cause a substantial decline in our revenue and stock price.

We seek to diligently protect our intellectual property rights. In connection with the extension of our licensing program to SDR SDRAM-compatible and DDR SDRAM-compatible products, we became involved in litigation related to such efforts against different parties in multiple jurisdictions, including our recently filed lawsuit against NVIDIA for patent infringement. In each of these cases, we have claimed infringement of certain of our patents, while the manufacturers of such products have generally sought damages and a determination that the patents in suit are invalid, unenforceable, and not infringed. Among other things, the opposing parties have alleged that certain of our patents are unenforceable because we engaged in document spoliation, litigation misconduct and/or acted improperly during our 1991 to 1995 participation in the JEDEC standard setting organization (including allegations of antitrust violations and unfair competition). See Note 13 “Litigation and Asserted Claims” of Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding certain cases that are active as of the date of this report.

There can be no assurance that any or all of the opposing parties will not succeed, either at the trial or appellate level, with such claims or counterclaims against us or that they will not in some other way establish broad defenses against our patents, achieve conflicting results, or otherwise avoid or delay paying royalties for the use of our patented technology. Moreover, there is a risk that if one party prevails against us, other parties could use the adverse result to defeat or limit our claims against them; conversely, there can be no assurance that if we prevail against one party, we will succeed against other parties on similar claims, defenses, or counterclaims. In addition, there is the risk that the pending litigations and other circumstances may cause us to accept less than what we now believe to be fair consideration in settlement. Among other things, there can be no assurance that we will succeed in negotiating future settlements or licenses on terms better than those extended in our Infineon settlement. There can be no assurances that the circumstances under which we negotiated our Infineon settlement will turn out to be significantly different from the circumstances of future cases and future settlements, although we currently believe that significant differences do exist.

Any of these matters, whether or not determined in our favor or settled by us, is costly, may cause delays (including delays in negotiating licenses with other actual or potential licensees), will tend to discourage future design partners, will tend to impair adoption of our existing technologies and divert the efforts and attention of our management and technical personnel from other business operations. In addition, we may be unsuccessful in our litigation if we have difficulty obtaining the cooperation of former employees and agents who were involved in our business during the relevant periods related to our litigation and are now needed to assist in cases or testify on our behalf. Furthermore, any adverse determination or other resolution in litigation could result in our losing certain rights beyond the rights at issue in a particular case, including, among other things: our being effectively barred from suing others for violating certain or all of our intellectual property rights; our patents being held invalid or unenforceable or not infringed; our being subjected to significant liabilities; our being required to seek licenses from third parties; our being prevented from licensing our patented technology; or our being required to renegotiate with current licensees on a temporary or permanent basis. Delay of any or all of these adverse results could cause a substantial decline in our revenue and stock price.

An adverse resolution by or with a governmental agency, such as the Federal Trade Commission or the European Commission, could result in severe limitations on our ability to protect and license our intellectual property, and would cause our revenue to decline substantially .

In addition to private litigations, we are involved in proceedings brought against us by one or more government agencies and we may become involved in future proceedings by other government agencies. The FTC brought an administrative action against us alleging, among other things, that we had failed to disclose certain patents and patent applications during our membership in JEDEC while it established SDRAM standards and that we, therefore, should be precluded from enforcing certain of our intellectual property rights in patents with a priority date prior to June 1996. See Note 13 “Litigation and Asserted Claims” of Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of the FTC action. At the conclusion of this proceeding, the FTC found that our conduct at JEDEC was improper and issued an order on February 2, 2007, that, among other things, limited the royalty rates we may charge to license certain patents that cover certain JEDEC-compliant SDR and DDR SDRAM memory and controller products sold after April 12, 2007. On April 22, 2008, the U.S. Court of Appeals for the D.C. Circuit overturned the FTC decisions regarding Rambus, and vacated the FTC’s orders. The FTC has not decided whether to file a petition for certiorari with the U.S. Supreme Court. Additionally, the European Commission has instituted similar proceedings against us but has not yet issued a decision. These proceedings, or one by any other governmental agency, may result in adverse determination against us or in other outcomes that could limit our ability to enforce or license our intellectual property, and could cause our revenue to decline substantially. The pendency of these two cases has impaired our ability to enforce or license our patents or collect royalties from existing or potential licensees, as such existing or potential licensees may await the final outcome of these cases before agreeing to new licenses or pay royalties.

In addition, third parties have and may attempt to use adverse findings by a government agency to limit our ability to enforce our patents in private litigations and to assert claims for monetary damages against us. Although we have successfully defeated certain attempts to do so, there can be no assurance that other third parties will not be successful in the future or that additional claims or actions arising out of adverse findings by a government agency will not be asserted against us.

Further, third parties have sought and may seek review and reconsideration of the patentability of inventions claimed in certain of our patents by the United States Patent & Trademark Office (the “PTO”) and/or the European Patent Office (the “EPO”). An adverse decision by the PTO or EPO could invalidate some or all of these patent claims and could also result in additional adverse consequences affecting other related U.S. or European patents. If a sufficient number of such patents are impaired, our ability to enforce or license our intellectual property would be significantly weakened and this could cause our revenue to decline substantially.

Litigation or other third-party claims of intellectual property infringement could require us to expend substantial resources and could prevent us from developing or licensing our technology on a cost-effective basis.

Our research and development programs are in highly competitive fields in which numerous third parties have issued patents and patent applications with claims closely related to the subject matter of our research and development programs. We have also been named in the past, and may in the future be named, as a defendant in lawsuits claiming that our technology infringes upon the intellectual property rights of third parties. In the event of a third-party claim or a successful infringement action against us, we may be required to pay substantial damages, to stop developing and licensing our infringing technology, to develop non-infringing technology, and to obtain licenses, which could result in our paying substantial royalties or our granting of cross licenses to our technologies. Threatened or ongoing third-party claims or infringement actions may prevent us from pursuing additional development and licensing arrangements for some period. For example, we may discontinue negotiations with certain customers for additional licensing of our patents due to the uncertainty caused by our ongoing litigation on the terms of such licenses or of the terms of such licenses on our litigation. We may not be able to obtain licenses from other parties at a reasonable cost, or at all, which could cause us to expend substantial resources, or result in delays in, or the cancellation of, new product.

If we are unable to successfully protect our inventions through the issuance and enforcement of patents, our operating results could be adversely affected.

We have an active program to protect our proprietary inventions through the filing of patents. There can be no assurance, however, that:

	•		any current or future U.S. or foreign patent applications will be approved and not be challenged by third parties;

	•		our issued patents will protect our intellectual property and not be challenged by third parties;

	•		the validity of our patents will be upheld;

	•		our patents will not be declared unenforceable;

	•		the patents of others will not have an adverse effect on our ability to do business;

	•		Congress or the U.S. courts or foreign countries will not change the nature or scope of rights afforded patents or patent owners or alter in an adverse way the process for seeking patents;

	•		changes in law will not be implemented that will affect our ability to protect and enforce our patents and other intellectual property;

	•		new legal theories and strategies utilized by our competitors will not be successful; or

	•		others will not independently develop similar or competing chip interfaces or design around any patents that may be issued to us.

If any of the above were to occur, our operating results could be adversely affected.

Our inability to protect and own the intellectual property we create would cause our business to suffer.

We rely primarily on a combination of license, development and nondisclosure agreements, trademark, trade secret and copyright law, and contractual provisions to protect our non-patentable intellectual property rights. If we fail to protect these intellectual property rights, our licensees and others may seek to use our technology without the payment of license fees and royalties, which could weaken our competitive position, reduce our operating results and increase the likelihood of costly litigation. The growth of our business depends in large part on the use of our intellectual property in the products of third party manufacturers, and our ability to

enforce intellectual property rights against them to obtain appropriate compensation. In addition, effective trade secret protection may be unavailable or limited in certain foreign countries. Although we intend to protect our rights vigorously, if we fail to do so, our business will suffer.

We rely upon the accuracy on our licensees recordkeeping, and any inaccuracies or payment disputes for amounts owed to us under our licensing agreements may harm our results of operations.

Many of our license agreements require our licensees to document the manufacture and sale of products that incorporate our technology and report this data to us on a quarterly basis. While licenses with such terms give us the right to audit books and records of our licensees to verify this information, audits rarely are undertaken because they can be expensive, time consuming, and potentially detrimental to our ongoing business relationship with our licensees. Therefore, we rely on the accuracy of the reports from licensees without independently verifying the information in them. Our failure to audit our licensees’ books and records may result in our receiving more or less royalty revenue than we are entitled to under the terms of our license agreements. If we conducted royalty audits in the future, such audits may trigger disagreements over contract terms with our licensees and such disagreements could hamper customer relations, divert the efforts and attention of our management from normal operations and impact our business operations and financial condition.

We may not be able to satisfy the requirements under the Qimonda settlement and license agreement that would require Qimonda to pay us up to an additional $100.0 million in royalty payments.

On March 21, 2005, we entered into a settlement and license agreement with Infineon (and its former parent Siemens), which was assigned to Qimonda (formerly Infineon’s DRAM operations) in October 2006 in connection with Infineon’s spin-off of Qimonda. The settlement and license agreement, among other things, requires Qimonda to pay to us an aggregate payment of $50.0 million in quarterly installments of approximately $5.85 million, which started on November 15, 2005. The settlement and license agreement further provides that if we enter into licenses with certain other DRAM manufacturers, Qimonda will be required to make additional payments to us that may aggregate up to $100.0 million. As we have not yet succeeded in entering into these additional license agreements necessary to trigger Qimonda’s obligations, Qimonda’s quarterly payment decreased to $3.2 million in the fourth quarter of 2007, and has ceased as of the first quarter of 2008. The quarterly payments with Qimonda will not recommence until we enter into additional license agreements with certain other DRAM manufacturers. We may not succeed in entering into these additional license agreements necessary to trigger Qimonda’s obligations under the settlement and license agreement to pay to us additional amounts, thereby reducing the value of the settlement and license agreement to us.

An acquisition by Qimonda of a third party DRAM manufacturer could make it more difficult for us to obtain royalty rates we believe are appropriate and could reduce the number of companies in our antitrust litigation.

The Company recently amended its patent license agreement with Qimonda. The amended license grants a supplemental term license of approximately the same scope as the original term license originally provided for in the agreement, but specifies that in the event Infineon ceases to control or otherwise own a majority of Qimonda shares, certain competitors would not accede to this license upon such competitor’s acquisition of control of Qimonda. Furthermore, such acquiring competitor would not receive the benefit of a release from Rambus for past damages, including past infringement of Rambus’ patent portfolio. To the extent that Qimonda acquires another company, including such certain competitors, the acquired company would accede to the license and would be eligible to receive the benefit of the release from Rambus for past damages. Following such an acquisition by Qimonda, the combined entity would be required to pay a stepped up payment calculated in accordance with the percentage increase in the DRAM volume brought about by the acquisition. Such an increase in the payments could make it more difficult for us to obtain the royalties we believe are appropriate from the market as a whole. Such an acquisition by Qimonda of any of the certain competitors would in addition reduce the number of companies from which we may seek compensation for the antitrust injury alleged by us in our pending price-fixing action in San Francisco. Except in the case of the certain competitors, the extension of any such benefits to a third party entity, whether acquiring control or otherwise a majority of shares of Qimonda or being acquired by Qimonda, could, in addition, result in the release of claims to such third party entity, thus reducing the number of companies from which we may seek compensation for patent damages.

Any dispute regarding our intellectual property may require us to indemnify certain licensees, the cost of which could severely hamper our business operations and financial condition.

In any potential dispute involving our patents or other intellectual property, our licensees could also become the target of litigation. While we generally do not indemnify our licensees, some of our license agreements provide limited indemnities, some require us to provide technical support and information to a licensee that is involved in litigation involving use of our technology, and we may agree to indemnify others in the future. Our indemnification and support obligations could result in substantial expenses. In addition to the time and expense required for us to indemnify or supply such support to our licensees, a licensee’s development, marketing and sales of licensed semiconductors could be severely disrupted or shut down as a result of litigation, which in turn could severely hamper our business operations and financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable

Item 3. Defaults Upon Senior Securities

Not Applicable

Item 4. Submission of Matters to a Vote of Security Holders

Not Applicable

Item 5. Other Information

Not Applicable

Item 6. Exhibits

Please refer to the Exhibit Index of this quarterly report on Form 10-Q.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	RAMBUS INC.
Date: October 30, 2008	By:	/s/ Satish Rishi
		Satish Rishi
		Senior Vice President, Finance and Chief Financial Officer

INDEX TO EXHIBITS


Exhibit
Number		Description of Document
3.1(1)		Amended and Restated Certificate of Incorporation of Registrant filed May 29, 1997.

3.2(2)		Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant filed September 14, 2000.

3.3(3)		Amended and Restated Bylaws of Registrant dated November 13, 2007.

10.1(4)		Amendment No. 1 to Settlement and License Agreement, dated as of July 8, 2008, by and between Registrant and Qimonda AG.

31.1		Certification of Principal Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


(1)		Incorporated by reference to the Form 10-K filed on December 15, 1997.

(2)		Incorporated by reference to the Form 10-Q filed on May 4, 2001.

(3)		Incorporated by reference to the Form 10-Q filed on August 4, 2008.

(4)		Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

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Rambus (RMBS) 10-Q2008 Q3 Quarterly report

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