RMBS

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2006 for Rambus Inc., a company engaged in the design, development, and licensing of chip interface technologies. The filing includes significant restatements of previously issued financial statements for periods ending June 30, 2005, and December 31, 2005, due to an Audit Committee investigation into historical stock option granting practices. The investigation revealed that actual grant dates for many options differed from stated dates, requiring the recognition of additional stock-based compensation expense.

Key Financial Metrics

Note: Operating losses were offset by significant tax benefits and interest income, resulting in net income.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 23.5% for the quarter and 21.6% for the six months compared to the same periods in 2005 (restated). Royalty revenues grew 20.5% (quarter) and 23.4% (six months), driven by new license agreements with AMD and Fujitsu.
• Expense Increases: Total costs and expenses rose significantly, exceeding revenues for the periods. Marketing, general, and administrative expenses increased 58.9% (quarter) and 35.0% (six months), primarily due to higher litigation expenses and increased stock-based compensation under SFAS 123(R).
• Restatement Impact: The filing records additional pre-tax, non-cash stock-based compensation expense of $1.7 million for the quarter and $4.3 million for the six months ended June 30, 2006, related to remeasured stock options. Cumulative adjustments since the IPO decreased previously reported cumulative net income by $102.4 million.
• Stock Repurchases: The company repurchased 0.7 million shares during the six-month period. The repurchase program was suspended in July 2006 pending the resolution of the stock option investigation.

Guidance, Outlook, Risks, and Contingencies

• Stock Option Investigation: The Audit Committee concluded that retroactive pricing of stock options was intentional in many instances. This has led to derivative lawsuits, class-action securities litigation, and regulatory inquiries by the SEC and IRS. The company has accrued $18.0 million for a potential class-action settlement (to be recorded in Q3 2006) and expects to continue incurring significant legal expenses.
• Convertible Notes Default: On August 17, 2006, the trustee for the company's $160 million convertible notes issued a notice of default due to the failure to file the June 30, 2006 Form 10-Q. By October 2006, an event of default was declared, and in July 2007, the notes were accelerated. The company believes it has adequate resources to pay the principal and accrued interest.
• Regulatory Actions: The Federal Trade Commission (FTC) issued a remedy order in February 2007 capping royalty rates for certain SDRAM products. The European Commission issued a Statement of Objections regarding competition law violations. These actions could limit the company's ability to enforce patents and collect royalties.
• Litigation: The company is involved in extensive patent litigation with major semiconductor manufacturers (Hynix, Micron, Samsung, Nanya). While a jury awarded Rambus $307 million in damages against Hynix in April 2006, the court reduced this to approximately $134 million in July 2006. Further trials regarding antitrust and conduct claims are scheduled.
• Nasdaq Compliance: The company failed to file several periodic reports on time and faced potential delisting. Nasdaq granted an extension until October 17, 2007, to become current on filings.

Investor Verification Checklist

• Restatement Accuracy: Verify the final impact of the stock option restatement on cumulative net income and the adequacy of the $169.4 million cumulative expense adjustment.
• Convertible Note Status: Confirm the company's ability to satisfy the accelerated $160 million debt obligation and any associated default interest.
• Litigation Outcomes: Monitor the resolution of the Hynix, Micron, and Samsung patent/antitrust trials and the finalization of the $18.0 million class-action settlement.
• Regulatory Royalty Caps: Assess the financial impact of the FTC's royalty rate caps on SDRAM products and the outcome of the European Commission proceedings.
• SEC Filing Compliance: Track the company's progress in filing delinquent 10-Q and 10-K reports to avoid Nasdaq delisting.