Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2003

OR

For the transition period from                                  to                                 

Commission file number: 000-22339

RAMBUS INC.

(Exact name of registrant as specified in its charter)

4440 El Camino Real

Los Altos, CA 94022

(Address of principal executive offices) (Zip Code)

(650) 947-5000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 Par Value

Preferred Share Purchase Rights

(Title of Class)

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.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  x    No  ¨

Aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant as of June 30, 2003 was approximately $1.3 billion based upon the closing price reported for such date on the Nasdaq Stock Market. For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of Common Stock and shares held by officers and directors of the Registrant have been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of outstanding shares of the Registrant’s Common Stock, $.001 par value, was 100,490,304 as of January 31, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant’s next Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

Table of Contents

TABLE OF CONTENTS

i

Table of Contents

PART I

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

You can identify these and other forward-looking statements by the use of words such as “may,” “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 “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, RDRAM, XDR, RaSer, RaSerX and Redwood are trademarks or registered trademarks of Rambus Inc. Other trademarks that may be mentioned in this Form 10-K are intellectual property of their respective owners.

1

Table of Contents

Item 1. Business

Rambus Inc.^™ (“We” or “Rambus”) was founded in 1990. Our principal executive offices are located at 4440 El Camino Real, Los Altos, CA 94022. Our Internet address is www.rambus.com. You can obtain copies of our Form 10-K, 10-Q and 8-K reports, and all amendments to these reports, free of charge from on our web site as soon as reasonably practicable following our filing of any of these reports with the SEC. We create a broad range of chip-to-chip interface technologies that enhance the performance and cost-effectiveness of our customers’ semiconductor and system products. These solutions are used in a broad range of computing, consumer electronics and communications applications.

Our interface solutions can be grouped into two major categories:

These solutions, are covered currently by more than 300 U.S. and international patents, and we currently have over 300 patent applications currently pending.

We license our patented inventions to semiconductor and system companies who incorporate them into interfaces of their own design and pay us royalties. Also, we license our intellectual property to semiconductor and systems companies who incorporate our interface technologies into their semiconductors and systems, for which we receive royalty payments or other revenues. In addition, we offer engineering services to companies to help them successfully integrate our interface technologies into their chip and system products.

On April 10, 2003, the Board of Directors of Rambus voted to change the fiscal year end of Rambus from September 30 to December 31, effective January 1, 2003. As a result, financial statements included in this report show results of operations for the twelve months ended December 31, 2003 (audited) and 2002 (unaudited), the three months ended December 31, 2002 (audited) and 2001 (unaudited) and the twelve months ended September 30, 2002 (audited) and 2001 (audited). Except as specifically required under Regulation S-X or S-K, we have chosen to present the twelve months ended December 31 information since this is our new fiscal year end.

Background

The performance of computers, consumer electronics and other electronic systems is typically constrained by the speed of their slowest element. Over time, the chips within these systems have continued to increase in operating frequency, Ideally, the frequency of the data transfer between chips should be the same as the frequency of these on-chip transistors. Over the last decade, however, this has not been the case as on-chip frequencies continue to exceed chip-to-chip frequencies at an ever-increasing rate. For example, today’s fastest Pentium^® 4 processors operate on chip in excess of 3.0 GHz, but transfer data between chips using an 800MHz front-side bus. As a result of this widening performance gap, continuing advances in on-chip frequencies face potentially diminishing returns in increasing overall system performance. Also, Moore’s Law is increasing transistor counts of chips at a much faster rate than packaging technology is increasing the pin counts of chips, resulting in another widening gap that may impact the ability to increase overall system performance. Our chip-to-chip interface technologies help chip and system designers address these performance gaps.

Our Chip-to-Chip Interfaces

RDRAM^™ Interface

Our RDRAM memory interface has been integrated into DRAM memory chips and memory controllers by a number of chip manufacturers. Chips incorporating our RDRAM memory interface are shipping in volume, providing high performance for servers, video game consoles, projectors, printers, digital TVs, set-top boxes, routers and switches. Today’s RDRAM solutions offer data rates of over one gigabit per second and memory

2

Table of Contents

module bandwidth of over four gigabytes per second. Leading technology companies such as Cisco Systems Inc., or Cisco, Intel Corporation, or Intel, Matsushita Electric Industrial Co., Ltd., or Matsushita, Samsung Electronics Co. LTD, or Samsung, Sony Corporation, or Sony, Texas Instruments Inc., or Texas Instruments and Toshiba Corporation, or Toshiba, incorporate our RDRAM interface into their products.

XDR^™ DRAM Interface

Our XDR DRAM memory interface is designed for high performance, low cost memory applications. The 3.2GHz XDR signaling has been demonstrated on test chips and is available for integration into memory and controller chips for next-generation consumer electronics, computer graphics and networking applications. Leading technology companies such as Elpida Memory Inc., or Elpida, Sony, Samsung and Toshiba have licensed our XDR memory interface technology. Toshiba announced in December 2003 that samples are available for XDR DRAM that operate at 3.2 GHz data rates. XDR DRAM achieves this speed using many innovations, including transferring 8 bits of data per clock cycle using Octal Data Rate (ODR) technology, by using very low voltage differential bi-directional signaling (DRSL), and Rambus’s FlexPhase^™ technology. Our XDR memory interface technology includes a roadmap to 6.4GHz data rates and beyond, while enabling system memory bandwidth of up to 200GB/s.

RaSer^™ Interface

Our RaSer interface is a family of high speed and low power serial links for chip-to-chip communications between logic chips in a broad range of computing, consumer and communications applications. Our RaSer interfaces are compatible with a number of industry standards used in computers and network communications such as XAUI, Fibre Channel, PCI Express^®, and Infiniband^®, as well as even higher speed solutions that enable significant improvements in system bandwidth. Our RaSerX interface has been demonstrated to operate at up to 10 gigabits per second over network backplanes, enabling significant improvement in bandwidth and capacity of enterprise systems.

Redwood^™ Logic Interface

Our Redwood logic interface is a parallel bus for chip-to-chip communications between logic chips in a broad range of computing, consumer and communications applications. This technology has been demonstrated to operate at data rates up to 6.4 gigabits per second in test platforms. The Redwood interface technology has been licensed by Toshiba and Sony for use in future consumer broadband applications.

Target Markets, Applications and Customers

We partner with leading chip and system customers to solve their critical interface problems, working with them from chip design to system integration and through to volume production. Our interface technologies are incorporated into a broad range of high-volume applications in the computing, consumer electronics and communications markets. System level products that utilize our interfaces include servers, printers, video projectors, video game consoles, digital TVs, set-top boxes, routers and switches manufactured by such companies as Canon Inc., Cisco, Cray Computer Corporation, Hewlett-Packard Company, Juniper Networks, Inc., Matsushita, and Sony. We also license our intellectual property to a wide range of semiconductor companies including Elpida, Hitachi, Ltd., Intel, Matsushita, Mitsubishi Electric Corporation, NEC Corporation, Oki Electric Industry Co., Ltd., Renesas Technology Corporation, Samsung and Toshiba.

Our Strategy

Our key strategies are as follows:

Develop Core Technology: Develop our core technology to offer a broader range of customer benefits while providing Rambus with a fundamental competitive advantage in memory and logic interfaces.

3

Table of Contents

Partner With Leading Customers: Partner with leading chip and system customers to solve their critical interface design problems and incorporate our low risk, silicon-proven solutions into their high-growth products.

Develop Infrastructure and Market: Develop the infrastructure and market to ensure interoperability and availability of products that incorporate our solutions.

Implement Flexible Business Model: License customer-specific, standard solutions and core technologies in order to maximize long-term shareholder value, drive continued innovation and market leadership.

Design and Manufacturing

Our chip-to-chip interface technologies are developed with high-volume manufacturing processes in mind, such that they may be manufactured using familiar, industry-standard complementary metal-oxide semiconductor, or CMOS, processes, among others, including those available from leading semiconductor manufacturers. Typically, our technologies are delivered in one of three ways: implementation package, custom development or off-the-shelf design. We provide implementation packages to licensees who wish to port our interface designs to a manufacturing process being used to develop their semiconductor products. This package typically includes a specification, a generalized circuit layout database and test parameter software. We do custom development when licensees have contracted with us to produce a specific design implementation optimized for the licensee’s manufacturing process. In such cases, the licensee provides specific design rules and transistor models for the licensee’s process. We deliver off-the-shelf products when licensees purchase a previously developed interface design, which is typically the case with fabless semiconductor companies where the design rules and transistor models are provided by a third-party foundry manufacturer.

Research and Development

Our ability to compete in the future will be substantially dependent on our ability to advance our chip-to-chip interfaces in order to meet changing market needs. To this end, we have assembled a team of highly skilled engineers whose activities are focused on further development of our chip-to-chip interfaces as well as adaptation of current interfaces to specific customers’ processes. Our engineers are developing new interfaces and new versions of existing interfaces that we expect will allow chip-to-chip data transfer at higher speeds, as well as provide other improvements and benefits. Our design and development process is a multi-disciplinary effort requiring expertise in system architecture, digital and analog circuit design and layout, semiconductor process characteristics, packaging, printed circuit board routing, signal integrity and high-speed testing techniques.

As of December 31, 2003, we had 159 employees in our engineering departments, representing 72% of our total human resources. Approximately 57% of our engineering employees have advanced technical degrees and 18% have PhDs. In the twelve months ended December 31, 2003 and 2002, research and development expenses were approximately $30.4 million and $23.7 million, respectively. In the twelve months ended September 30, 2002 and 2001, research and development expenses were approximately $22.3 million and $18.2 million, respectively. We expect that we will continue to invest substantial funds in research and development activities. In addition, because our license and customer service agreements often call for us to provide engineering support, a portion of our total engineering costs have been allocated to the cost of contract revenues, even though these engineering efforts have direct applicability to our technology development.

Competition

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. In addition, most DRAM manufacturers, including our RDRAM and XDR licensees, produce versions of DRAM such as SDRAM, DDR, DDR2, GDDR, GDDR2 and GDDR3 which compete with RDRAM and XDR chips. These companies are larger and may have better access to financial, technical and other resources than we do.

4

Table of Contents

We believe that our principal competition for memory 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. Companies are also beginning to take a system approach similar to ours in solving the application needs of system companies. Most DRAM suppliers have been producing DDR chips, which use a technology that doubles the memory bandwidth without increasing the clock frequency.

JEDEC, a standards setting body including semiconductor and systems companies, has standardized what they call an extension of DDR, known as DDR2. JEDEC is also thought to be standardizing what they describe as an extension of DDR that they refer to as DDR3. Other efforts are underway to create other products including those sometimes referred to as GDDR2 and GDDR3. To the extent that these alternatives might provide comparable system performance at lower or similar cost than RDRAM and 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 the 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 result of which would be uncertain.

In addition, certain semiconductor companies are now marketing semiconductors which combine logic and DRAM on the same chip. Such technology, called “embedded DRAM,” eliminates the need for an external chip-to-chip interface to memory. The impact of embedded DRAM on our business is difficult to predict. If embedded DRAM were to gain widespread acceptance in the electronics industry, and if new royalty-generating licenses were not entered into between us and the manufacturers and/or users of the embedded DRAM products, embedded DRAM would have a negative impact on the royalties that we receive for the use of our patents. We do not currently receive royalties for embedded DRAM. There can be no assurance that competition from embedded DRAM will not increase in the future.

In the RaSer 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 interfaces, as well as from competitors, such as Artisan Components, who license similar serial link interface cells. At the 10 gigabit per second 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 RaSer interface business.

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

Employees

As of December 31, 2003, we had 221 full time employees. We believe that our relationship with our employees is excellent.

Patents and Intellectual Property Protection

We maintain and support an active program to protect our intellectual property, primarily through the filing of patent applications and the defense of issued patents against infringement. We currently have more than 300 patents on various aspects of our technology, with expiration dates ranging from 2010 to 2022, and have over 300 additional pending patent applications. In addition, we attempt to protect our trade secrets and other proprietary information through agreements with licensees and systems companies, proprietary information agreements with employees and consultants and other security measures. We also rely on trademarks and trade secret laws to protect our intellectual property.

5

Table of Contents

RISK FACTORS

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

We seek to diligently protect our intellectual property rights. In connection with the extension of our licensing program to SDRAM-compatible and DDR-compatible products in 2000-01, we became involved in litigation related to such efforts. As of December 31, 2003, we were in litigation with three such potential SDRAM-compatible and DDR-compatible licensees. In each of these cases, we have claimed infringement of our patents while the potential licensees have generally sought damages and a determination that our patents at suit are invalid and not infringed. These potential licensees have also relied or may rely upon defenses and counterclaims (some not yet formally asserted) based on various allegations including that we engaged in litigation misconduct and/or acted improperly during our 1991 - 96 participation in the JEDEC standard setting organization. For example, Infineon has indicated that it may, by pointing to documents not produced by us in time for the 2001 trial, try to set aside the 2003 Federal Circuit decision in our favor and reopen all of its now-dismissed JEDEC-related claims against us. Infineon has also complained about the alleged destruction of evidence through our document retention programs. And Infineon has recently amended its counterclaims with leave of court, thereby attempting to assert other legal theories related to what it calls unfair business practices and JEDEC misconduct. While we believe that these new legal theories are meritless, there is no assurance that Infineon and or others will not succeed in such efforts or that Infineon and or others will not in some other way establish broad defenses against our patents or otherwise avoid or delay paying what we believe to be appropriate royalties for the use of our patents or that the pending litigations and other circumstances will not reach a point where we elect to compromise for less than what we now believe to be fair consideration.

Any of these matters, whether or not determined in our favor or settled by us, is costly and diverts the efforts and attention of our management and technical personnel from normal business operations. Furthermore, any adverse determination 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 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. Any of these results from our litigation could cause a substantial decline in our revenues.

An adverse determination by a governmental agency, such as the FTC or the European Patent Office, could result in severe limitations on our ability to protect and license our intellectual property and which would cause our revenues to decline substantially.

If a government agency were to have an adverse determination against us, we may be limited in enforcing our intellectual property rights and obtaining licenses, which would cause our revenues to decline substantially. For example, in April 2003, the FTC filed a complaint against us alleging, among other things, that we had failed to disclose certain patents and patent applications, during our participation in the establishment of SDRAM standards with JEDEC and that we should be precluded from enforcing our intellectual property rights in patents with a priority date prior to May, 1996. The European Commission has directed inquiries to us relating to similar topics. If one of these agencies, or any other governmental agency, were to issue a determination adverse to us that could limit our ability to enforce or license our intellectual property our revenues would decline substantially. In addition, on February 12, 2004 the Technical Appeals Board of the European Patent Office issued an oral ruling revoking the European Patent No. 0525068 without explanation. If a sufficient number of our other patents are similarly impaired or revoked, that could also limit our ability to enforce or license our intellectual property our revenues would decline substantially.

6

Table of Contents

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:

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

Our inability to protect and own the intellectual property created by us 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 other, 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 continued growth of our business depends in large part on the applicability of our intellectual property to the products of third party manufacturers, and our ability to enforce intellectual property rights against them. 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.

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 revenues in any particular period, it is difficult for us to accurately forecast revenues and profitability. Factors that could cause our operating results to fluctuate include:

7

Table of Contents

Currently, royalties account for over 80% of our total revenues and we believe that royalties will continue to represent a majority of total revenues in the future. Royalties are 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 only recognized if collectibility is probable. Royalties are also dependent upon fluctuating sales volumes and prices of licensed chips that include our technology, all of which are beyond our ability to control or assess in advance. In addition, royalty revenues are affected by the seasonal shipment patterns of systems incorporating our interface products, or by a systems company change in its source of licensed chips, and the new source’s different royalty rates.

As a result of these uncertainties and effects being outside of our control, royalty revenues are challenging to predict and make accurate financial forecasts difficult to achieve, which could cause our stock price to become volatile and decline.

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

In the twelve months ended December 31, 2003 and 2002, revenues from our top five licensees accounted for approximately 75% and 81% of our revenues, respectively. In addition, for the twelve months ended December 31, 2003 and 2002, revenues from our top three licensees, Intel, Toshiba and Samsung each accounted for greater than 10% of our total revenues. We expect that we may continue to experience significant revenue concentration for the foreseeable future.

Substantially all of our licensees, including Intel, have the right to cancel their licenses, and the loss of any of our top five licensees would cause revenues to decline substantially. Because the revenues derived from various licensees vary from period to period depending on the addition of new 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, the particular licensees which account for revenue concentration have varied from period to period. 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.

Our financial results are materially dependent upon Intel and if we cannot maintain this relationship into the future our results of operations may decline significantly.

Intel is our largest customer and is an important catalyst for the development of new memory and logic interfaces in the semiconductor industry. We have a patent cross-license agreement with Intel for which we will receive quarterly royalty payments through the second quarter of 2006. The patent cross-license agreement expires in September 2006, at which time, Intel will have a paid-up license for the use of all of our patents claiming priority prior to September 2006. Intel has the right to cancel the agreement with us prior to the expiration of the contract. We have other licenses with Intel, in addition to the patent cross-license agreement, for the development of RaSer interfaces. If we cannot maintain our relationship with Intel into the future, our results of operations may decline significantly.

Our financial results are materially dependent upon the personal computer main memory market segment, which is volatile and could adversely affect our operations and cause our stock price to decline.

DRAMs for personal computers generate an important part of our revenue. The main memory market for personal computers is volatile and is impacted by the unit sales and prices of personal computers as well as the type and quantity of memory used in personal computers, which has resulted in volatility in the DRAM market overall. Personal computers use or have used three memory types for which we receive or have received royalties from at least some of the DRAM industry. The memory types include SDRAM and DDR, which are industry standards which we believe infringe our patents and RDRAM, which is a memory interface developed by us.

8

Table of Contents

Our licensing cycle is lengthy and costly which makes it difficult to predict future revenues, which may cause us to miss analysts’ estimates and result in our stock price declining.

Because our licensing cycle is a lengthy process, the accurate prediction of future revenues from new licenses is difficult. In addition, engineering services are dependent upon the varying level of assistance desired by licensees and, therefore, revenue from these services is also difficult to predict. We employ two methods of contract revenue accounting based upon the state of the technology licensed, the dollar magnitude of the program, and the ability to estimate work required over the contract period. We use ratable revenue recognition for mature technologies that require support after delivery of the technology. This method results in expenses associated with a particular contract to be recognized as incurred over the contract period, whereas contract fees associated with the contract are recognized ratably over the period during which the post-contract customer support is expected to be provided. We also use percentage-of-completion accounting for contracts that may require significant development and support over the contract term. There can be no assurance that we can accurately estimate the amount of resources required to complete projects, or that we will have, or be able to expend, sufficient resources required to complete a project. Furthermore, 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 that may result in us missing analysts’ estimates and causing our stock price to decline

Our financial results are materially dependent on the DRAM market, which may experience declines in price and unit volume per system, which could cause our revenue to decline.

For the twelve months ended December 31, 2003, a material portion of our royalties was derived from the sale of DRAM. As of December 31, 2003, except with respect to one licensee with whom we have a fixed royalty arrangement, royalties on DRAM are based on the volumes and prices of DRAM manufactured and sold by our licensees. For the twelve months ended December 31, 2003, the SDRAM and DDR-compatible royalties were recognized based on a percentage of the licensee’s revenue with the exception of the two contracts that had been previously amended to allow for fixed quarterly payments until there was a favorable resolution to the pending litigation. As a result of the legal outcomes in the Infineon patent litigation on January 29, 2003 at the Court of Appeals for the Federal Circuit, the smaller of the two licensees paying a fixed amount reverted back to variable royalties beginning with payment in the three months ended June 30, 2003. This change resulted in only one customer with a fixed royalty payment for the period from April 1, 2003 through December 31, 2003.

The royalties we receive, therefore, are, to a significant extent, influenced by many of the risks faced by the DRAM market in general, including constraints on the volumes shipped during periods of shortage and reduced average selling prices, or ASPs, during periods of surplus. The DRAM market is intensely competitive and generally is characterized by declining ASPs over the life of a generation of chips. Such price decreases, and the corresponding decreases in per unit royalties we receive, can be sudden and dramatic. Compounding the effect of price decreases is the fact that, under certain of our RDRAM license agreements, royalty rates decrease as a function of time or volume. The decreases in DRAM prices, shipment volumes or in our royalty rates could cause our revenue to decline.

Our revenue could decline if sales made by systems companies decline.

Although sales of semiconductors to system companies that have adopted our interfaces for their products are not made directly by us, such sales directly affect the amount of royalties we receive from semiconductors. Therefore, our success is partially dependent upon the adoption of our chip-to-chip interfaces by system companies, particularly those that develop and market high-volume business and consumer products such as PCs and video game consoles. We are subject to many risks beyond our control that influence the success or failure of a particular system company, including, among others:

9

Table of Contents

The process of persuading system companies to adopt our chip-to-chip interface can be lengthy and, even if adopted, there can be no assurance that our interfaces will be used in a product that is ultimately brought to market, achieves commercial acceptance or results in significant royalties to us. We must dedicate substantial resources to market to, and support, system companies, in addition to supporting the sales, marketing and technical efforts of our licensees in promoting our interfaces to system companies. Even if a systems company develops a product based on our interface, success in the market will depend in part on a supply of semiconductors from our licensees in sufficient quantities and at commercially attractive prices. Because we do not control the business practices of our licensees, we have no ability to establish the prices at which the chips containing our interfaces are made available to system companies or the degree to which our licensees promote our interfaces to system companies.

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. In addition, most DRAM manufacturers, including our RDRAM and XDR licensees, produce versions of DRAM such as SDRAM, DDR, DDR2, GDDR, GDDR2 and GDDR3 that compete with RDRAM and XDR chips. These companies are larger and may have better access to financial, certain technical and other resources than we do.

We believe that our principal competition for memory interfaces may come from our licensees and prospective licensees, some of whom are evaluating and developing products based on technologies that they contend or may contend will not require a license from us. Companies are also beginning to take a system approach similar to ours in solving the application needs of system companies. Most DRAM suppliers have been producing DDR chips, which use a technology that doubles the memory bandwidth without increasing the clock frequency.

JEDEC, a standards setting body including semiconductor and systems companies, has standardized what they call an extension of DDR, known as DDR2. JEDEC is also thought to be standardizing what they describe as an extension of DDR that they refer to as DDR3. Other efforts are underway to create other products including those sometimes referred to as GDDR2 and GDDR3. To the extent that these alternatives might provide comparable system performance at lower or similar cost than RDRAM and 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 the 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 result of which would be uncertain.

In addition, certain semiconductor companies are now marketing semiconductors that combine logic and DRAM on the same chip. Such technology, called “embedded DRAM,” eliminates the need for an external chip-to-chip interface to memory. The impact of embedded DRAM on our business is difficult to predict. If embedded DRAM were to gain widespread acceptance in the electronics industry, and if new royalty-generating licenses were not entered into between us and the manufacturers and/or users of the embedded DRAM products, embedded DRAM would have a negative impact on the royalties that we receive for the use of our patents. We do not currently receive royalties for embedded DRAM. There can be no assurance that competition from embedded DRAM will not increase in the future.

10

Table of Contents

In the RaSer 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 interfaces, as well as from competitors, such as Artisan Components, who license similar serial link interface cells. At the 10 gigabit per second 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 RaSer interface business.

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

If we cannot effectively compete in these primary market areas, our results of operations could suffer.

If market leaders do not successfully adopt our interface products our results of operation could decline.

An important part of our strategy for our interfaces is to penetrate markets by working with leaders in those markets. This strategy is designed to encourage other participants in those markets to follow such leaders in adopting our interfaces. If a high profile industry participant adopts our interfaces but fails to achieve success with its products or adopts and achieves success with a competing 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. If any of these events occur and market leaders do not successfully adopt our technologies, our results of operations could decline.

If we fail to gain and maintain acceptance of our technology in high-volume consumer products, our business results could suffer.

Our strategy includes the gaining of acceptance of our technology in high-volume consumer applications. These applications include video game consoles, such as the Sony PlayStation^®2, digital TVs and set-top boxes. 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 generating expected royalties.

Our XDR and Redwood interfaces and the manufacturing processes to incorporate them are new and complex, which may lead to technology and product development scheduling risks and there remains significant contract work to be completed, therefore percentage-of-completion accounting is used for these licenses. 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 result could suffer.

We might experience payment disputes for amounts owed to us under our licensing agreements, and this may harm our results of operations.

The standard terms 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 standard license terms give us the right to audit books and records of our licensees to verify this information, audits can be expensive, time consuming, and potentially detrimental to our ongoing business relationship with our licensees. We have implemented a royalty audit program, which consists of periodic royalty audits of our major licensees,

11

Table of Contents

using accounting firms that are independent of our external auditors, PricewaterhouseCoopers LLP. We have performed some audits but we primarily 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 us receiving more or less royalty revenues than we are entitled to under the terms of our license agreements. The result of such royalty audits could result in an increase, as a result of a licensee’s underpayment, or decrease, as a result of a licensee’s overpayment, to previously reported royalty revenues. Such adjustments are recorded in the period they are determined. Any adverse material adjustments resulting from royalty audits or dispute resolutions may result in us missing analyst estimates and causing our stock price to decline. The royalty audit may also 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.

Our inexperience in managing rapid growth or acquisitions could strain our resources and cause our financial results to decline.

We may not be equipped to successfully manage any future periods of rapid growth or expansion, which could be expected to place a significant strain on our limited managerial, financial, engineering and other resources. Such expansion could come from internal growth or acquisitions. Our licensees and system customers rely heavily on our technological expertise in designing, testing and manufacturing products incorporating our chip-to-chip interface technologies. In addition, relationships with new licensees or system companies generally require significant engineering support. As a result, any increases in adoption of our interfaces will increase the strain on our resources, particularly our engineers. Any delays or difficulties in our research and development process caused by these factors or others could make it difficult for us to develop future generations of our interface technologies and to remain competitive. In addition, the rapid rate of hiring or integrating new employees, or managing an acquisition, could be disruptive and could adversely affect the efficiency of our business. In addition, certain acquisitions may involve business models with which we are unfamiliar. The rate of our future expansion, if any, in combination with the complexity of the interfaces involved in our licensee-based business model, may demand an unusually high level of managerial effectiveness in anticipating, planning, coordinating and meeting our operational needs as well as the needs of the licensees and system companies. Additionally, we may be required to reorganize our managerial structure in order to more effectively respond to the needs of customers. Given the small pool of potential licensees and target systems companies, the adverse effect resulting from our lack of effective management in any of these areas will be magnified. Inability to manage the expansion of our business could cause our financial results to decline.

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 interfaces will be competitively priced or will sell in significant volumes. One important requirement for our memory interfaces is for any premium in the price of memory and controller chips over alternatives to be reasonable in comparison to the perceived benefits of the 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.

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-to-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 interfaces that render our chip-to-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

12

Table of Contents

chip-to-chip interfaces by us could cause licensees or system companies to delay or defer entering into arrangements for the use of our current interfaces, which could have a material adverse effect on our business, financial results and condition of operations. We are dependent on the industry to develop test solutions that are adequate to test our 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-to-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-to-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:

Finally, significant technological innovations generally require a substantial investment before their commercial viability can be determined.

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.

As a result of a dispute regarding our intellectual property, we may be required 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 and some require us to provide technical support and information to a licensee that is involved in litigation involving use of our technology. In addition, we are obligated to indemnify certain licensees under the terms of certain license agreements, and we may agree to indemnify others in the future. Our support and indemnification obligations could result in substantial expenses. In addition to the time and expense required for us to supply such support or indemnification 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.

We face risks associated with our international operations and licenses which could result in a material adverse effect on our business, financial condition and results of operations.

For the twelve months ended December 31, 2003 and 2002, international revenues constituted approximately 64% and 56% of our total revenues, respectively. We expect that revenues derived from international licensees will continue to represent a significant portion of our total revenues in the future.

To date, all of the revenues from international licensees have been denominated in United States dollars. However, to the extent that such licensees’ sales to systems companies are not denominated in United States 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 derivative instruments to hedge foreign exchange rate risk.

13

Table of Contents

Our international operations and demand for the products of our licensees are subject to a variety of risks, including:

Our licensees are subject to many of the risks described above with respect to systems 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 international licenses of our technology could not have a material adverse effect on our business, financial condition and results of operations.

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, motivate and retain qualified engineers who can enhance our existing technologies and introduce new technologies. Competition for qualified engineers, particularly those with significant industry experience, is intense. We are also dependent upon our senior management personnel, most of who have worked together for us for many years. The loss of the services of any of the senior management personnel or 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.

Our stock price is extremely volatile.

The trading price of our common stock has been subject to very wide fluctuations which may continue in the future in response to, among other things, the following:

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. These broad market fluctuations may adversely affect the market price of our common stock.

14

Table of Contents

Our operations are primarily located in California and, as a result, are subject to natural disasters, 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.

Future changes in financial accounting standards or practices or existing taxation rules or practices may cause adverse unexpected revenue fluctuations and affect our reported results of operations.

A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practice have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

For example, any changes requiring that we record compensation expense in the statement of operations for employee stock options using the fair value method or changes in existing taxation rules related to stock options could have a significant negative effect on our reported results. Several agencies and entities are considering, and the Financial Accounting Standards Board has announced, proposals to change generally accepted accounting principles in the United States that, if implemented, would require us to record charges to earnings for employee stock option grants. This pending requirement would negatively impact our earnings. For example, recording a charge for employee stock options under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” would have created an expense, net of tax of $28.0 million and $36.2 million for the twelve months ended December 31, 2003 and 2002, respectively. This would have resulted in a net loss of $4.8 million and $12.1 million for the twelve months ended December 31, 2003 and 2002, respectively.

Our restated certificate of incorporation and bylaws as well as 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 restated certificate of incorporation, our bylaws 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. These provisions include:

15

Table of Contents

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 voting stock, the person is an “interested stockholder” and may not engage in “business combinations” with us for a period of three years from the time the person acquired 15% or more of our voting stock.

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 the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ National Market 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 are committed to maintaining high standards of corporate governance and public disclosure. As a result, 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.

General economic conditions may further reduce our revenues and harm our business.

We are subject to risks arising from adverse changes in domestic and global economic conditions. Because of the economic slowdown in the United States and in other parts of the world, many industries are delaying or reducing technology purchases and investments. The impact of this slowdown on us is difficult to predict, but if businesses or consumers defer or cancel purchases of new products that incorporate our chip-to-chip interface technology, our royalty revenues could decline, which would have an adverse effect on our results of operations and could have an adverse effect on our financial condition.

Item 2. Properties

In January 2001, we moved all of our U.S. operations into a newly constructed building in Los Altos, California. Our lease for this 96,000 square foot building has an initial term of ten years, with options to extend the term for two periods of five years each. We also lease approximately 31,000 square feet in one building in Mountain View, California, which formerly housed our U.S. engineering, marketing and administrative operations. The principal lease for this property expires in 2005, with an option to extend the lease for an additional five years. With the move of our U.S. operations to Los Altos, we subsequently subleased the Mountain View facility through February 2005. We also lease space in Tokyo, Japan, and Taipei, Taiwan, for offices which provide sales and technical support to systems companies in Japan and Taiwan. On December 24, 2003, we completed the acquisition of certain assets from Velio Communications Inc., or Velio. This purchase included subleasing from Velio an engineering facility in Chapel Hill, North Carolina. The Chapel Hill sublease ends in March 2004. We expect to continue leasing a facility in North Carolina after the sublease ends. We believe that our current facilities are adequate to support our current growth expectations.

On January 26, 2004, we were notified that our subtenant for the Mountain View facility filed for bankruptcy protection. Although we have a letter of credit as collateral for the remaining payments, at this time there can be no assurance that we will recover the full amount due to us.

16

Table of Contents

Item 3. Legal Proceedings

For the information required by this item regarding legal proceeding we refer you to Note 13 titled “Litigation and Asserted Claims” of the Notes to Consolidated Financial Statements of this Form 10-K.

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

No matters were submitted to a vote of security holders during the three months ended December 31, 2003.

17

Table of Contents

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Our Common Stock is listed on the Nasdaq Stock Market under the symbol “RMBS.” The following table sets forth for the periods indicated the high and low sale price per share of our Common Stock as reported on the NASDAQ National Market.

Information regarding Rambus securities authorized for issuance under equity compensation plans is included in Item 12 (“Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”) on page 38 of this report on Form 10-K.

As of January 30, 2004, there were 1,014 holders of record of our Common Stock. Because many of the shares of our Common Stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. We have never paid or declared any cash dividends on our Common Stock or other securities and do not anticipate paying cash dividends in the foreseeable future.

Item 6. Selected Consolidated Financial Data

The following table sets forth our selected financial data for the twelve months ended December 31, 2003 and 2002, the three months ended December 31, 2002 and 2001 and the twelve months ended September 30, 2002, 2001, 2000, 1999 and 1998. On April 10, 2003, Rambus changed its fiscal year from September 30 to December 31, effective January 1, 2003. The selected financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Consolidated Financial Statements and notes thereto provided in Item 15. “Exhibits, Financial Statement Schedules, and Reports on Form 8-K” on page 39. For a discussion of factors that could cause the information set forth below to not be indicative of our future financial condition or results of operations, see “Risk Factors,” beginning on page 6.

18

Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains forward-looking statements, including, without limitation, our expectations regarding revenues, expenses and results of operations. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future actual results to differ materially from our recent results or those projected in the forward-looking statements include, but are not limited to, those discussed in the “Risk Factors” section, and below. We assume no obligation to update the forward-looking statements or such risk factors.

Overview

Rambus Inc. creates a broad range of chip-to-chip interface technologies that enhance the performance and cost-effectiveness of our customers’ semiconductor and system products. These solutions are used in a broad range of computing, consumer electronics and communications applications. Our interface solutions can be grouped into two major categories: memory interfaces and logic interfaces. Our memory interface solutions provide an interface between memory chips and logic chips. Our logic interface solutions provide an interface between two logic chips. These solutions are currently covered by more than 300 U.S. and international patents, and we currently have over 300 patent applications currently pending.

Our advanced chip-to-chip interface solutions increase the data transfer rate between semiconductor chips, improving performance and reducing systems costs. These solutions are used in a broad range of computing, consumer electronics and communications applications.

We license our patented inventions to semiconductor and system companies who incorporate them into interfaces of their own design and pay us royalties. Also, we license our intellectual property to semiconductor and system companies who incorporate our interface technologies into their semiconductors and systems, for which we receive royalty payments or other revenues. In addition, we offer engineering services to companies to help them successfully integrate our interface technologies into their chip and system products.

Royalties represent a substantial portion of our total revenue. The remaining part of our revenue is contract revenue which includes license fees and engineering services fees. Amounts invoiced to our customers in excess of recognized revenue are recorded as deferred revenues. The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can have a significant impact on deferred revenues in any given period.

We have a high degree of customer concentration, with our top five customers representing 75% and 81% of our revenue for the twelve months ended December 31, 2003 and 2002, respectively. Our top three customers were Intel, Samsung and Toshiba for both years, who each accounted for more than 10% of our revenues in each

19

Table of Contents

year. Our revenue from companies based outside of the United States accounted for 64% and 56% of our revenues for the twelve months ended December 31, 2003 and 2002, respectively. We expect to have significant revenues from companies based outside the United States for the foreseeable future.

For the last three years, 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 during this time and we anticipate future litigation expenses to 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.

Subsequent Event

On February 12, 2004, the Technical Appeals Board of the European Patent Office issued an oral ruling revoking our European patent No. 0525068 without explanation. A written opinion of the Appeals Board would typically issue in four to ten weeks from the date of the oral ruling. For more information regarding this subsequent event, see Note 13 under “Litigation and Asserted Claims” of the Notes to Consolidated Financial Statements on page 67.

Revenues

Our revenues consist of royalty revenues and contract revenues generated from the following five types of agreements with semiconductor and systems companies: (1) RDRAM licenses, which are licenses for chips fully compatible with the RDRAM memory interface, (2) XDR and Redwood licenses, which are licenses for chips fully compatible with the XDR and Redwood interfaces, (3) RaSer licenses, which are licenses for our RaSer interface that licensees integrate into their logic semiconductors, (4) a patent cross-license with Intel Corporation, or Intel, and (5) SDRAM- and DDR- compatible licenses, which are licenses that cover the use of our patents and other intellectual property in synchronous DRAM, or SDRAM, and double data-rate, or DDR, memory devices and controllers which control such memory. We do not recognize contract revenues in excess of cash received if collectibility is not probable. We recognize royalty revenues upon notification of sale by our licensees if collectibility is probable. The terms of the royalty agreements generally require licensees to give us notification and to pay us royalties within 60 days of the end of the quarter during which the sales take place.

As of December 31, 2003, our deferred revenue from RDRAM, XDR, RaSer, SDRAM- and DDR-compatible and Redwood licenses was $42.2 million, substantially all of which is scheduled to be recognized in varying amounts over the next six years.

Royalty Revenues

Royalty revenues represented approximately 87% of our total revenues in the twelve months ended December 31, 2003 and 94% in the twelve months ended December 31, 2002. Royalty revenues can be: (1) a fixed quarterly amount, (2) a percentage of the revenues received by licensees on their sales of licensed semiconductors or (3) a fixed amount per serial link in the case of our RaSer interface family. We recognize royalties from a licensee in the quarter in which we receive the report detailing shipments of the semiconductors containing our technology by such licensee in the prior quarter. We engage accounting firms independent of our external auditors to perform, on our behalf, periodic audits of some of our licensee’s reports of royalties to us and any adjustment resulting from such royalty audits is recorded in the period such adjustment is determined. For the twelve months ended December 31, 2003 and 2002, approximately half of our royalties were based on contracts that required fixed quarterly payments for various periods of time.

RDRAM, XDR, Redwood and RaSer. Royalties for RDRAM, XDR, Redwood and RaSer are normally payable quarterly by a licensee on its sales that occur during the life of the Rambus patents being licensed. In the case of RDRAM, XDR and Redwood licenses, the exact rate and structure of a royalty arrangement with a

20

Table of Contents

particular licensee depend on a number of factors, including past practices in the market segment, the amount of intellectual property used, license fee to be paid by the licensee and, in the case of certain licenses, the marketing and engineering commitment made by the licensee. In the case of RaSer interface licenses, the exact royalty rate and structure vary based on a number of factors, including volume and required customization.

SDRAM- and DDR- compatible. SDRAM-compatible and DDR-compatible licenses generally provide for the payment of fees, which include compensation for use of our patents from the time we notify the licensee of potential infringement. Accordingly, we classify these fees as royalty revenues, which are recognized ratably over the contract period. Our current contracts will begin to expire in June 2005. The excess of payments received over royalty revenue recognized is shown on our balance sheet as deferred revenue. Except with regard to one licensee with an amended agreement, royalties for SDRAM- and DDR- compatible licenses are calculated based on a percentage of the revenue generated by licensed products shipped by the licensee. The licensee with an amended agreement is currently paying a fixed amount per quarter until there is a favorable resolution to pending litigation.

Intel cross-license. In September 2001, we entered into a cross-license agreement with Intel that grants Intel a license to our patent portfolio. We recognize revenue from this arrangement on a quarterly basis as amounts become due and payable. The agreement terminates in September 2006 and after that date Intel will have a fully paid license to all of our patents claiming priority prior to September 2006.

Contract Revenues

Contract revenues are comprised of license fees and engineering services fees, which fees are derived from licenses for our RDRAM, XDR, Redwood and RaSer interfaces only, in addition to the royalty revenues each technology provides. Contract revenues represented approximately 13% of our total revenues in the twelve months ended December 31, 2003 and 6% in the twelve months ended December 31, 2002.

RDRAM Licenses. RDRAM licenses generally allow a semiconductor manufacturer to use our RDRAM memory interface and to receive engineering implementation services, and customer support. We deliver to a new RDRAM licensee an implementation package, which contains the information needed to develop a chip incorporating RDRAM memory interface in the licensee’s process. An implementation package includes a specification, generalized circuit layout database software for the particular version of the chip which the licensee intends to develop, test programs and, for memory chips, a core interface specification. Some licensees contract with us to provide specific engineering implementation services required to optimize the generalized circuit layout for their manufacturing processes. The RDRAM licenses also provide for the right to receive ongoing customer support, which includes technical advice on chip specifications, enhancements, debugging and testing. RDRAM licenses provide for the payment of license fees, engineering fees and royalties. Revenues from license fees and engineering fees are currently recognized ratably over the period during which the post-contract customer support is expected to be provided, independent of the payment schedules under the contract. The excess of contract fees billed over revenue recognized is shown on the balance sheet as deferred revenue.

XDR and Redwood Licenses. XDR and Redwood interface licenses currently provide for the payment of license fees and engineering fees, as well as royalties. We currently recognize revenue on XDR and Redwood licenses using the percentage-of-completion method of accounting. Since labor is the principal input into these arrangements, we determine progress-to-completion using input measures based on labor-hours incurred. Our contracts generally reflect fixed prices for specific deliverables. A provision for estimated losses on contracts is made, if necessary, in the period in which the loss becomes probable and can be reasonably estimated. We review assumptions regarding the work necessary to complete projects on a quarterly basis. If we determine that it is necessary to revise our estimates of the work 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 amount of work necessary to complete a project were less than the original assumptions, the contract fees would be recognized sooner than originally expected. Conversely, if the new estimated total amount

21

Table of Contents

of work necessary to complete a project was greater than the original assumptions, the contract fees would be recognized over a longer period.

Part of these contract fees may be due upon the achievement of certain milestones, such as provision of certain deliverables by us or production of chips by the licensee. The remaining fees are due on pre-determined dates and include significant up-front fees. The excess of contract fees billed over revenue recognized is shown on the balance sheet as deferred revenue.

RaSer licenses. RaSer interface licenses provide for the payment of license fees, engineering fees and royalties. Revenues from license fees and engineering fees are currently recognized ratably over the period during which the post-contract customer support is expected to be provided, independent of the payment schedules under the contract. The excess of contract fees billed over revenue recognized is shown on the balance sheet as deferred revenue.

Revenue Concentration

In the twelve months ended December 31, 2003 and 2002, revenues from our top five licensees accounted for approximately 75% and 81% of our revenues, respectively. In addition, for the twelve months ended December 31, 2003 and 2002, revenues from our top three licensees, Intel, Toshiba and Samsung, each accounted for greater than 10% of our total revenues. We expect that we may continue to experience significant revenue concentration for the foreseeable future.

Many of our licensees, including Intel, have the right to cancel their licenses, and the loss of any of our top five licensees would have a material adverse effect on our business. Because the revenues derived from various licensees vary from period to period depending on the addition of new 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, the particular licensees which account for revenue concentration have varied from period to period. 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.

The royalties we receive are partly a function of the adoption of our interfaces at the system company level. Many system companies purchase semiconductors containing our interfaces from our licensees and do not have a direct contractual relationship with us. Our licensees generally do not provide detail as to the identity or volume of licensed semiconductors purchased by particular system companies. As a result, we face difficulty in analyzing the extent to which our future revenues will be dependent upon particular system companies. System companies face intense competitive pressure in their markets, which are characterized by extreme volatility, frequent new product introductions and rapidly shifting consumer preferences, and there can be no assurance as to the unit volumes of licensed semiconductors that will be purchased by these companies in the future or as to the level of royalty-bearing revenues that our licensees will receive from sales to these companies. There can be no assurance that a significant number of other system companies will adopt our interfaces or that our dependence upon particular system companies will decrease in the future.

International Revenues

In the twelve months ended December 31, 2003 and 2002, international revenues constituted approximately 64% and 56% of our total revenues, respectively. We expect that revenues derived from international licensees will continue to represent a significant portion of our total revenues in the future.

To date, all of the revenues 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

22

Table of Contents

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 derivative instruments to hedge foreign exchange rate risk.

For additional information concerning international revenues, see Note 12 in the Notes to Consolidated Financial Statements on page 67.

Expenses

We intend to continue making significant expenditures associated with engineering, marketing, general and administration, and expect that these costs and expenses will continue to be a significant percentage of revenues in future periods. Whether such expenses increase or decrease as a percentage of revenues will be substantially dependent upon the rate at which our revenues change.

Engineering. Engineering costs are allocated between cost of contract revenues and research and development expenses. Cost of contract revenues is determined based on the portion of engineering costs which have been incurred during the period of the adaptation of our chip-to-chip interface interfaces for specific licensee processes. The balance of engineering costs, incurred for general development of our interfaces, is charged to research and development. In a given period, the allocation of engineering costs between these two components is a function of the timing of development and implementation cycles. As a generation of technology matures from the development stage through implementation, the majority of engineering costs shift from research and development expenses to cost of contract revenues. Engineering costs are recognized as incurred and do not correspond to the recognition of revenues under the related contracts.

Marketing, general and administrative. Marketing, general and administrative expenses include expenses and costs associated with trade shows, public relations, advertising, legal, finance, insurance and other marketing and administrative efforts. Litigation expenses are a very significant portion of our marketing, general and administrative expenses. Costs of technical support for systems companies, including applications engineering, are also charged to marketing, general and administrative expense. Consistent with our business model, sales and marketing activities are focused on developing relationships with potential licensees and on participating with existing licensees in marketing, sales and technical efforts directed to systems companies. In many cases, we must dedicate substantial resources to the marketing and support of systems companies. Due to the long business development cycles we face and the semi-fixed nature of administrative expenses, marketing, and general and administrative expenses in a given period generally are unrelated to the level of revenues in that period or in recent or future periods.

Taxes. We report certain items of income and expense for financial reporting purposes in different years than they are reported for tax purposes. Specifically, we report contract fees and royalties when received for tax purposes, as required by tax law. For financial reporting purposes, however, we recognize revenues from RDRAM, XDR, Redwood and RaSer contract fees either ratably over the period post-contract customer support is expected to be provided or by using the percentage-of-completion method of accounting. We recognize revenues from SDRAM-compatible and DDR-compatible license fees over the contract period and recognize royalty revenues upon notification from licensees. Thus, we recognize revenue earlier for tax than for financial reporting purposes. Accordingly, our net operating profit or loss for tax purposes may be more or less than the amount recorded for financial reporting purposes.

Results of Operations

On April 10, 2003, Rambus changed its fiscal year from September 30 to December 31, effective January 1, 2003. The following discussion of historical operating results compares the twelve months ended December 31, 2003 to the twelve months ended December 31, 2002. Additionally, the three months ended December 31, 2002 are compared to the three months ended December 31, 2001 and the twelve months ended September 30, 2002 are compared to the twelve months ended September 30, 2001.

23

Table of Contents

To enhance comparability, the following table sets forth audited Consolidated Statements of Operations for the twelve months ended December 31, 2003, the three months ended December 31, 2002 and the twelve months ended September 30, 2002 and 2001. The unaudited periods of the twelve months ended December 31, 2002 and three months ended December 31, 2001 have been derived from our financial statements for the twelve months ended September 30, 2002 and three months ended December 31, 2002

Twelve Months Ended December 31, 2003 and 2002

Revenues were $118.2 million and $97.4 million in the twelve months ended December 31, 2003 and 2002, respectively.

Contract revenues were $15.6 million and $5.9 million in the twelve months ended December 31, 2003 and 2002, respectively. The increase in contract revenue is due primarily to recognition of revenue associated with our XDR and Redwood interface technologies contracts. We commenced recognizing contract revenue for XDR interface technology in the quarter ended December 31, 2002 The first contract revenue for the Redwood interface technology was recognized in the three months ended March 31, 2003. We currently expect to recognize revenue on these contracts through 2005.

Royalty revenues were $102.6 million and $91.5 million in the twelve months ended December 31, 2003 and 2002, respectively. In the twelve months ended December 31, 2003, our largest category of royalties relates to the license of our patents for SDRAM and DDR-compatible products. Royalties increased for SDRAM and DDR-compatible products in the twelve months ended December 31, 2003, as compared with the same time period in 2002 primarily due to increased royalties on increased shipments of SDRAM controllers and DDR

24

Table of Contents

Memory and controllers, As of December 31, 2003, these royalties were recognized based on a percentage of the licensee’s revenue with the exception of one contract that had been previously amended to allow for fixed quarterly payments until there is a favorable resolution to the pending litigation, as described in Note 13 under “Litigation and Asserted Claims” of the Notes to Consolidated Financial Statements. For the period of April 1, 2002 through March 31, 2003 there was a second licensee that had been paying a fixed quarterly sum. As a result of the January 29, 2003 Court of Appeals decision, the second licensee, who was previously paying a fixed quarterly sum for SDRAM and DDR-compatible royalties, reverted back to paying variable royalties in the quarter ended June 30, 2003.

The Intel cross-license agreement represented the second largest category of royalties in the twelve months ended December 31, 2003. Royalties under this agreement were unchanged in the twelve months ended December 31, 2003 when compared to the twelve months ended December 31, 2002.

Payments from licensees’ shipments of RDRAM memory chips and controllers that connect to RDRAM memory chips comprised the smallest category of our royalties in the twelve months ended December 31, 2003. RDRAM royalties decreased in the twelve months ended December 31, 2003, when compared to the comparable period in 2002. This royalty drop was due to a combination of falling customers’ average selling prices, or ASPs and declines in unit shipments by licensees during the period. We believe that the unit decline is mostly driven by the decline in shipments of RDRAM memory chips for Intel’s 850E chipset.

Certain semiconductor companies are now marketing semiconductors which combine logic and DRAM on the same chip. Such technology, called “embedded DRAM,” eliminates the need for an external chip-to-chip interface to memory. The impact of embedded DRAM on our business is difficult to predict. If embedded DRAM were to gain widespread acceptance in the electronics industry, and if new royalty-generating licenses were not entered into between us and the manufacturers and/or users of the embedded DRAM products, embedded DRAM would have a negative impact on the royalties that we receive for the use of our patents. However, we believe embedded DRAM does not appear to be gaining significant acceptance in the industry. We do not currently receive royalties for embedded DRAM. There can be no assurance that competition from embedded DRAM will not increase in the future.

Engineering costs, consisting of cost of contract revenues and research and development expenses, were $46.3 million and $30.7 in the twelve months ended December 31, 2003 and 2002, respectively. This increase in engineering costs was primarily a result of additional engineering personnel required to meet the milestones stated in the contracts for XDR and Redwood interfaces.

Cost of contract revenues were $16.0 million and $7.0 million in the twelve months ended December 31, 2003 and 2002, respectively. This increase was primarily due to the additional engineering headcount necessary to fulfill XDR and Redwood interface contractual obligations. Our current expectation is that we will fulfill our XDR and Redwood contract obligations by the end of 2005. We believe the cost of contract revenues will continue to fluctuate over time both in absolute dollars and as a percentage of revenue based on our ongoing contractual requirements.

Research and development expenses were $30.3 million and $23.7 million in the twelve months ended December 31, 2003 and 2002, respectively. We believe that in the future, research and development will continue

25

Table of Contents

to vary in both absolute dollars and as a percentage of revenue from period to period based on the nature, timing, and the number of research and development projects underway. The change in engineering headcount in any given period will also cause research and development spending to vary both in absolute dollars and as a percentage of revenue.

Marketing, General and Administrative expenses were $44.6 million and $36.0 million in the twelve months ended December 31, 2003 and 2002, respectively. This increase in marketing, general and administrative expenses primarily represents increased litigation costs associated with the defense of our intellectual property. Litigation costs were $20.4 million and $11.2 million in the twelve months ended December 31, 2003 and 2002, respectively. This increase in litigation expenses was driven primarily by costs associated with the ongoing administrative hearing with the FTC, as described in Note 13 under “Litigation and Asserted Claims” of the Notes to Consolidated Financial Statements. Litigation expenses are expected to vary from period to period, given the volatility of litigation activities. We expect such costs will increase in the twelve months ending December 31, 2004 relative to the comparable period in 2003 as we continue to defend ourselves in the FTC action and engage in simultaneous private litigation in multiple jurisdictions.

Additional reasons for the rise in marketing, general and administrative costs in the twelve months ended December 31, 2003 included increased costs associated with additional corporate governance and disclosure requirements, patent and licensing expenses partially offset by individually insignificant decreases in several areas. In the future, marketing, general and administrative expenses will vary from period to period based on the trade shows, advertising, legal and other marketing and administrative activities undertaken and the change in sales, marketing and administrative headcount in any given period.

Interest and other income, net consists primarily of interest income from our cash investments. Interest and other income were $6.9 and $5.9 million in the twelve months ended December 31, 2003 and 2002, respectively. This increase is primarily due to the inclusion in Other Income of a pre-tax gain of $1.2 million, comprised of Other Income of $1.7 million less research and development expense of $0.5 million, resulting from the divestiture of Rambus’s investment in NurLogic Design, Inc. which was acquired by Artisan Components. The divestiture resulted in the receipt of cash, stock and an intellectual property license.

The provision for income taxes was $10.9 million and $12.6 million in the twelve months ended December 31, 2003 and 2002, respectively. In the twelve months ended December 31, 2003, our effective tax rate was 32% as compared with a rate of 34% for the comparable period in 2002. The effective tax rate decreased primarily due to state taxes and research and development tax credits. In 2004, we expect an effective tax rate of 35%, assuming the expiration of U.S. R&D tax credits available to corporations in June 2004.

At December 31, 2003, our balance sheet included gross deferred tax assets of approximately $57.6 million, primarily relating to the difference between tax and book treatment of depreciation and amortization, employee

26

Table of Contents

stock-related compensation expenses and deferred revenue, and research and development and foreign tax credit carryforwards. Our gross deferred tax assets of $57.6 million have been reduced by a valuation allowance of $2.0 million as of December 31, 2003, which relates primarily to the tax benefit of the employee stock related compensation expense. Our net deferred tax assets of $55.6 million represent management’s estimate of the amount of the tax assets which it believes will more likely than not be realized.

The deferred tax asset valuation allowance is subject to periodic adjustment as facts and circumstances warrant. The ability to realize the deferred tax asset is dependant on sufficient levels of future taxable income and other factors.

Three Months Ended December 31, 2002 and 2001

Revenues were $25.7 million and $24.9 million in the three months ended December 31, 2002 and 2001, respectively.

Contract revenues were $1.4 million and $3.1 million in the three months ended December 31, 2002 and 2001, respectively. The decrease in contract revenues was due largely to the expiration of revenue recognition periods for several contracts. This decrease was partially offset by increased contract revenues for RaSer interface technologies and the first revenues for XDR interface technologies.

Royalty revenues were $24.3 and $21.8 million in the three months ended December 31, 2002 and 2001, respectively. Our largest category of royalties was the Intel cross-license agreement. The royalties for this agreement were unchanged in the three months ended December 31, 2002 when compared to the three months ended December 31, 2001.

The next largest category of royalties is from licensees for the use of Rambus patents and intellectual property in SDRAM and DDR-compatible products. Royalties increased for SDRAM and DDR-compatible products primarily due to increased royalties on shipments of SDRAM controllers. As of December 31, 2002, the SDRAM and DDR-compatible royalties were based on variable royalties with the exception of two contracts that were amended to allow for fixed quarterly payments until there is a favorable resolution to the pending litigation. As of December 31, 2001, the SDRAM and DDR-compatible royalties were based on variable royalties with the exception of one contract that was amended to allow for fixed quarterly payments until there is a favorable resolution to the pending litigation.

The final category of royalties is from licensees’ shipments of RDRAM memory chips and controllers that connect to RDRAM memory chips. The increase in revenues in the three months ended December 31, 2002 when compared to the three months ended December 31, 2001 is caused by growth in unit volumes shipped. This volume growth was partially offset by declines in ASPs for RDRAM memory chips.

27

Table of Contents

Engineering costs, consisting of cost of contract revenues and research and development expenses, were $8.1 million and $7.3 million, in the three months ended December 31, 2002 and 2001, respectively. The increase in engineering costs in the three months ended December 31, 2002 was a result of increased compensation costs related to salary increases and the hiring of additional engineering personnel.

Cost of contract revenues were $1.6 million and $2.2 million in the three months ended December 31, 2002 and 2001, respectively. The decrease in the cost of contract revenues in the three months ended December 31, 2002, was primarily due to the fulfillment of contract commitments. This resulted in the reassignment of engineering resources to research and development activities.

Research and development expenses were $6.5 million and $5.1 million, in the three months ended December 31, 2002 and 2001, respectively. Research and development expenses increased 27.5% in three months ended December 31, 2002 as compared to three months ended December 31, 2001. Research and development expenses increased as investment increased in the RaSer, XDR and Redwood interfaces, including the reassignment of engineering resources to research and development activities as well as increased compensation costs related to salary increases and the hiring of additional engineering personnel.

Marketing, general and administrative expenses were $10.8 million and $10.0 million in the three months ended December 31, 2002 and 2001, respectively. The 8.0% increase in the three months ended December 31, 2002 in marketing, general and administrative expenses was primarily the result of increased compensation costs resulting from the hiring of additional personnel and an increase in Director and Officer liability insurance premiums. Litigation expenses in the three months ended December 31, 2002 were consistent with the three months ended December 31, 2001.

Interest and other income, net was $1.3 million and $1.9 million in the three months ended December 31, 2002 and 2001, respectively. The decrease in absolute dollars in the three months ended December 31, 2002 was due to lower interest rates and reduced rental income from the sublease of our former office facilities in Mountain View, California.

We recorded an income tax provision of $2.6 million and $3.3 million in the three months ended December 31, 2002 and 2001, respectively. In the three months ended December 31, 2002 and 2001, our effective tax rate was 32% and 35%, respectively. The decrease in the effective tax rate was primarily due to state taxes and research and development tax credits.

28

Table of Contents

Twelve Months Ended September 30, 2002 and 2001

Revenues were $96.6 million and $117.2 million in the twelve months ended September 30, 2002 and 2001, respectively.

Contract revenues decreased 65% to $7.6 million in the twelve months ended September 30, 2002. The decrease in contract revenues in the twelve months ended September 30, 2002 is due largely to the completion of contract commitments for several RDRAM contracts.

In the twelve months ended September 30, 2002, royalties decreased 6.7% to $89 million, including a decline in royalties for SDRAM and DDR-compatible products. The decline in royalties for SDRAM and DDR-compatible products was partially offset by increased licensees’ shipments of RDRAM memory chips and memory controllers that connect to RDRAM memory chips, primarily due to the success of the Sony PlayStation^® 2. In addition, royalties in the twelve months ended September 30, 2002 reflect the first full year of royalties received under the Intel cross-license agreement which was signed in September 2001. In the three months ended March 31, 2002, due to the adverse litigation results in 2001, we agreed to an amended fixed royalty agreement with a small licensee for SDRAM and DDR-compatible products. This was the second such agreement which called for fixed quarterly royalty payments for these products. The first agreement was with a large licensee in July 2001.

Engineering costs, consisting of cost of contract revenues and research and development expenses, were $29.9 million and $28.1 million in the twelve months ended September 30, 2002 and 2001, respectively. The increase in engineering costs in the twelve months ended September 30, 2002 was a result of increased compensation costs related to salary increases and the hiring of additional engineering personnel.

Cost of contract revenues were $7.6 million and $9.9 million in the twelve months ended September 30, 2002 and 2001, respectively. The decrease in the cost of contract revenues in the twelve months ended September 30, 2002 was primarily due to the successful launch and ramp of RDRAM semiconductors into the PC main memory market resulting in a reduction in engineering support efforts. This resulted in the reassignment of engineering resources to research and development activities.

Research and development expenses were $22.3 million and $18.2 million, in the twelve months ended September 30, 2002 and 2001, respectively. Research and development expenses increased 22.5% in the twelve months ended September 30, 2002 as compared to the same time period in 2001 due to increased investments in our XDR, Redwood and RaSer interface technologies, including the reassignment of engineering resources to research and development activities.

29

Table of Contents

Marketing, general and administrative expenses were $35.2 million and $48.4 million in the twelve months ended September 30, 2002 and 2001, respectively. The decrease in the twelve months ended September 30, 2002 in marketing, general and administrative expenses primarily represents decreased litigation costs associated with the defense of our intellectual property. Litigation costs were $11.3 million in the twelve months ended September 30, 2002 versus $27.1 million in the twelve months ended September 30, 2001. Trial delays in several of the pending cases as well as the number of simultaneous litigation activities contributed to the significant litigation expenses in the twelve months ended September 30, 2001. In addition, at the beginning of January 2001, we began to incur higher rent and other ongoing operating costs associated with relocating our corporate headquarters to a larger facility to accommodate anticipated long-term growth.

Interest and other income, net was $6.6 million and $8.9 million for the twelve months ended September 30, 2002 and 2001, respectively. The decrease in absolute dollars in fiscal 2002 was due to lower interest rates and reduced rental income from the sublease of our former office facilities in Mountain View, California. During the twelve months ended September 30, 2002, we sold one investment for a $2 million gain and wrote down investments by $2 million to more closely reflect our estimate of current market values of the remaining securities.

We recorded an income tax provision of $13.3 million in the twelve months ended September 30, 2002, as compared with an income tax provision of $18.4 million the twelve months ended September 30, 2001. The tax rate for the twelve months ended September 30, 2002 and 2001 was 35% and 37%, respectively.

Contingent Warrants, Common Stock Equivalents, and Options

Warrants

In October 1998, Rambus’s Board of Directors authorized an incentive program in the form of warrants for a total of up to 1,600,000 shares of Rambus Common Stock (the “DRAM incentive warrants”) to be issued to various RDRAM licensees, which vest upon the achievement of certain product qualification and volume production targets. The warrants, to be issued at the time the targets are met, have an exercise price of $2.50 per share and a life of five years. These warrants vest and become exercisable only upon the achievement of certain milestones by Intel relating to shipment volumes of RDRAM chipsets, which could result in a non-cash charge to the statement of operations based on the fair value of the warrants if and when the achievement of the Intel milestones becomes probable. Since Intel has announced the phase out of the 850E chipset, the likelihood that the unvested warrants will vest is considered remote. As of December 31, 2003, warrants exercisable for a total of 1,520,000 shares had been issued. These warrants will begin to expire in February 2004 and will have expired by January 2006.

30

Table of Contents

Contingent Common Stock Equivalents and Options

As of December 31, 2003, there were 1,000,000 contingent unvested Common Stock Equivalents, or CSEs, and 1,001,346 contingent unvested options, which vest upon the achievement of certain milestones by Intel relating to shipment volumes of RDRAM chipsets. If and when the achievement of the Intel milestones become probable, there would be an almost entirely non-cash charge to the statement of operations based on the fair value of the CSEs and options. Since Intel has announced the phase out of the 850E chipset, the likelihood that the unvested CSEs and options will vest is considered remote. These CSEs were granted to Rambus’s CEO and President in 1999 and the options were granted to Rambus’s employees in 1999 and 2001. These CSEs were granted with a term of 10 years and these options were granted with an exercise price of $2.50 and a term of 10 years.

The magnitude of these charges is a function of the then current price of our Common Stock at the time the charges are taken. For example, if these warrants, CSEs, and options were valued based upon a stock price of $30, the charge could be $55 million or more. The charge, when and if taken, will be non-cash except for payroll tax liabilities, which would likely be more than offset by cash received by Rambus upon exercise of the warrants and options.

Share Repurchase Program

In October 2001, Rambus’s Board of Directors approved a share repurchase program of Rambus Common Stock principally to reduce the dilutive effect of employee stock options. At that time, Rambus was authorized to purchase in open market transactions up to five million shares of outstanding Rambus Common Stock over an undefined period of time. As of December 31, 2001, Rambus had repurchased 0.4 million of the five million shares approved for repurchase. Rambus repurchased an additional 3.5 million shares at a cost of $20.5 million in the twelve months ended December 31, 2002. In October 2002, Rambus’s Board approved the purchase in open market transactions of up to an additional five million shares of outstanding Rambus Common Stock. Rambus repurchased 2.3 million shares at a cost of $29.8 million during the twelve months ended December 31, 2003. On December 31, 2003, there remained an outstanding authorization to repurchase another 3.8 million shares of outstanding Rambus Common Stock.

Liquidity and Capital Resources

As of December 31, 2003, we had cash and cash equivalents and marketable securities of $193.1 million, including restricted investments of $4.6 million and a long-term component of $121.8 million. As of December 31, 2003, we had total working capital of $60.6 million, including a short-term component of deferred revenue of $24.2 million. Deferred revenue represents the excess of billings to licensees over revenue recognized on license contracts, and the short-term component represents the amount of this deferred revenue expected to be recognized over the next twelve months.

Our operating activities provided net cash of $23.4 million and $45.3 million in the twelve months ended December 31, 2003 and 2002, respectively. Cash generated in the twelve months ended December 31, 2003 was primarily the result of net income adjusted for depreciation and the tax benefit resulting from stock options exercised. This was partially offset by an increase in accounts receivable primarily due to increased billings for the XDR and Redwood interface contracts and increases in prepaids, deferred taxes and other assets, primarily due to increased foreign withholding taxes paid on payments received from international licensees and the renewal of software maintenance contracts. In the comparable period of 2002, net cash provided by operating activities consisted primarily of net income adjusted for depreciation, an increase in the valuation allowance related to investments, a net increase to deferred revenue (which represents contract billings in excess of revenues recognized) and a decrease in prepaids, deferred taxes and other assets.

Net cash used in investing activities was $6.3 million and $28.8 million in the twelve months ended December 31, 2003 and 2002, respectively. Investing activities in the twelve months ended December 31, 2003

31

Table of Contents

consisted primarily cash paid for the acquisition and related acquisition costs of certain signaling assets of Velio totaling $13.2 million and for purchases of property and equipment (including a new high-speed semiconductor tester), which were offset by a decrease in restricted investments based on a favorable litigation ruling. On April 16, 2003, the United States District Court for the Eastern District of Virginia removed restrictions on $7.7 million in investments. Accordingly, this amount has been reflected as a decrease in restricted investments and an increase in cash. Investing activities also included cash proceeds received on the sale of our investment in NurLogic. In the comparable period of 2002, investing activities primarily consisted of net purchases of maturities of marketable securities, purchases of property and equipment and proceeds from the sale of an investment.

Net cash used in financing activities was $3.9 million and $17.3 million in the twelve months ended December 31, 2003 and 2002, respectively. Financing activities have consisted primarily of proceeds from the sale of Common Stock under our employee stock purchase and option plans and the repurchase of shares of our outstanding Common Stock. In the twelve months ended December 31, 2003, we generated net proceeds of $25.9 million from the issuance of Common Stock and used cash of $29.8 million to repurchase Common Stock. In the comparable period of 2002, we generated net proceeds of $3.2 million from the issuance of Common Stock and used cash of $20.5 million to repurchase Common Stock.

We currently anticipate that existing cash balances will be adequate to meet our cash needs for at least the next 12 months.

Contractual Obligations

We relocated our headquarters at the beginning of calendar year 2001, and entered into an agreement to sublease our previous Mountain View facilities through the end of the existing lease term in February 2005. On January 26, 2004, we were notified that our subtenant filed for bankruptcy protection. We have a letter of credit as collateral for the remaining payments of approximately $2.4 million, which has been included as a reduction to the operating leases in the table below.

We lease our present office facilities in Los Altos, California, under an operating lease agreement. As part of this lease transaction, we provided the lessor with a letter of credit restricting $2.5 million of our cash as collateral for certain of our obligations under the lease. The cash is restricted as to withdrawal and is managed by a third party subject to certain limitations under our investment policy. The letter of credit was reduced to $1.2 million on the first anniversary of rent commencement and was further reduced to $600,000 on the second anniversary of rent commencement.

On December 24, 2003, we completed the acquisition of certain Velio high speed signaling assets. This purchase included subleasing from Velio an engineering facility in Chapel Hill, North Carolina. The Chapel Hill sublease ends in March 2004. We expect to continue leasing a facility in North Carolina after the sublease ends.

As of December 31, 2003, our contractual obligations are (in thousands):

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our 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

32

Table of Contents

judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to 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.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

Our revenues consist of royalty revenues and contract revenues generated from the following five types of agreements with semiconductor and systems companies: (1) RDRAM licenses, which are licenses for chips fully compatible with the RDRAM memory interface, (2) XDR and Redwood licenses, which are licenses for chips fully compatible with the XDR and Redwood interfaces, (3) RaSer licenses, which are licenses for our RaSer interface that licensees integrate into their logic semiconductors, (4) a patent cross-license with Intel and (5) SDRAM- and DDR- compatible licenses, which are licenses that cover the use of our patents and other intellectual property in SDRAM and DDR memory devices and controllers which control such memory. We do not recognize contract revenues in excess of cash received if collectibility is not probable. We recognize royalty revenues upon notification of sale by our licensees if collectibility is probable. The terms of the royalty agreements generally require licensees to give us notification and to pay us royalties within 60 days of the end of the quarter during which the sales take place. We engage accounting firms independent of our external auditors to perform, on our behalf, periodic audits of some of our licensee’s reports of royalties to us and any adjustment resulting from such royalty audits is recorded in the period such adjustment is determined.

RDRAM Licenses. RDRAM licenses generally allow a semiconductor manufacturer to use our RDRAM memory interface and to receive engineering implementation services and customer support. We deliver to a new RDRAM licensee an implementation package, which contains the information needed to develop a chip incorporating RDRAM memory interface in the licensee’s process. An implementation package includes a specification, generalized circuit layout database software for the particular version of the chip which the licensee intends to develop, test parameter software and, for memory chips, a core interface specification. Test parameters are the programs that test the RDRAM interface embedded in the customer’s product. Some licensees have contracted to have us provide the specific engineering implementation services required to optimize the generalized circuit layout for the licensee’s manufacturing process. The RDRAM licenses also provide for the right to receive ongoing customer support, which includes technical advice on chip specifications, enhancements, debugging and testing.

We recognize revenue on RDRAM licenses consistent with American Institute of Certified Public Accountants, or AICPA, Statement of Position No. 98-9, or SOP 98-9, and SOP 97-2, “Software Revenue Recognition.” 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 services provided under these agreements include license fees, engineering service fees and post contract customer support. Contract fees are bundled together as the total price of the agreement does not vary as a result of inclusion or exclusion of such services and ongoing customer support. We have not established vendor specific objective evidence, or VSOE, for such contract elements including post contract customer support. Accordingly, the revenues from such contract fees are recognized ratably over the period during which the post-contract customer support is expected to be provided independent of the payment schedules under the contract, including milestones. We review assumptions regarding the post-contract customer support periods on a regular basis. If we determine that it is necessary to revise our estimates of the support periods, 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 post-contract customer support periods were less than the original assumptions, the contract fees would be recognized ratably over an

33

Table of Contents

accelerated period. Conversely, if the new estimated periods were longer than the original assumptions, the contract fees would be recognized ratably over a longer period.

At the time we begin to recognize revenue under RDRAM licenses, the remaining obligations are no longer significant. These remaining obligations are primarily to keep the product updated and include activities such as responding to inquiries and periodic customer meetings. Part of these contract fees may be due upon the achievement of certain milestones, such as provision of certain deliverables by us or production of chips by the licensee. The remaining fees are due on pre-determined dates and include significant up-front fees. The excess of contract fees billed over revenue recognized is shown on the balance sheet as deferred revenue.

XDR and Redwood Licenses. XDR and Redwood interface licenses currently provide for the payment of license fees and engineering fees, as well as royalties. We currently recognize revenue on XDR and Redwood licenses using the percentage-of-completion method of accounting. We determine progress-to-completion using input measures based on labor-hours incurred. 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. We review assumptions regarding the work necessary to complete projects on a quarterly basis. If we determine that it is necessary to revise our estimates of the work 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 amount of work necessary to complete a project were less than the original assumptions, the contract fees would be recognized sooner than originally expected. Conversely, if the new estimated total amount of work necessary to complete a project was longer than the original assumptions, the contract fees would be recognized over a longer period.

Part of these contract fees may be due upon the achievement of certain milestones, such as provision of certain deliverables by us or production of chips by the licensee. The remaining fees are due on pre-determined dates and include significant up-front fees. The excess of contract fees billed over revenue recognized is shown on the balance sheet as deferred revenue.

RaSer licenses. RaSer interface licenses provide for the payment of license fees, engineering fees and royalties. Revenues from license fees and engineering fees are currently recognized ratably over the period during which the post-contract customer support is expected to be provided, independent of the payment schedules under the contract. The excess of contract fees billed over revenue recognized is shown on the balance sheet as deferred revenue.

Intel cross-license. In September 2001, we entered into a cross-license agreement with Intel that grants Intel a license to our patent portfolio. We recognize revenue from this arrangement on a quarterly basis as amounts become due and payable. The agreement terminates in September 2006 and after that date Intel will have a fully paid license to all of our patents claiming priority prior to September 2006.

SDRAM-compatible and DDR-compatible licenses. SDRAM-compatible and DDR-compatible licenses generally provide for the payment of fees, which include compensation for use of our patents from the time we notify the licensee of potential infringement. Accordingly, we classify these fees as royalty revenues, which are recognized ratably over the five-year contract period. The current contracts will begin to expire in June 2005.

Litigation

As of December 31, 2003, we are involved in certain legal proceedings, as discussed in Note 13 of our consolidated financial statements on page 67. Based upon consultation with the outside counsel handling our defense in these matters and an analysis of potential results, we have not accrued any amounts for potential losses related to these proceedings. Because of uncertainties related to both the amount and range of loss on the pending litigation, management is unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. As additional information becomes available, we will assess the potential liability related

34

Table of Contents

to our pending litigation. We will record accruals for losses if and when we determine the negative outcome of such matters to be probable and reasonably estimable. Our estimates regarding such losses could differ from actual results. Revisions in our estimates of the potential liability could materially impact our results of operations and financial position.

Marketable Securities

We classify all of our marketable securities as available-for-sale. We carry these investments at fair value, based on quoted market prices, and unrealized gains and losses are included in accumulated other comprehensive income, net of taxes, which is reflected as a separate component of stockholders’ equity. Realized gains and losses are recorded in our consolidated statement of operations. If we believe that an other-than-temporary decline exists, it is our policy to record a valuation allowance to reduce aggregate investments to fair value and record the related charge as a reduction of interest income.

Income Taxes

As part of preparing our consolidated financial statements, we are required to calculate the income tax expense or benefit which relates to the pretax income or loss for the period. In addition, we are required to assess the realization of the tax asset or liability to be included on the consolidated balance sheet as of the reporting dates.

This process requires us to calculate various items including permanent and temporary differences between the financial accounting and tax treatment of certain income and expense items, differences between federal and state tax treatment of these items, the amount of taxable income reported to various states, foreign taxes and tax credits. The differing treatment of certain items for tax and accounting purposes results in deferred tax assets and liabilities, which are included on our consolidated balance sheet.

We assess the likelihood that our deferred tax assets will be recovered in the future through reductions of taxes that would otherwise be payable. This assessment is based in part on estimates of future taxable income and tax credits. The actual taxable income realized in the future and the other factors that determine how much benefit we ultimately realize from the deferred tax assets could vary materially from our estimates.

To the extent we believe that recovery of a tax asset included on the balance sheet is not likely or uncertain, we must establish a valuation allowance. When we establish a valuation allowance or increase this allowance, we include an expense within the tax provision in the statement of operations. The valuation allowance as of December 31, 2003 of $2.0 million represents a decrease of $4.0 million over the prior period. The valuation allowance for these periods relates primarily to the tax benefit of the employee stock related compensation expense. For all other periods presented in these financial statements, the valuation allowance was unchanged. When this deferred tax asset related to the stock compensation was first recorded on the balance sheet, the price of our stock was significantly higher than it was on December 31, 2003. We believe that the tax benefit that we ultimately realize when the options to which this asset relates are exercised will be less than the amount of the asset. Therefore, the valuation allowance was recorded. Certain tax credit carryforwards reported on the income tax returns we file are not recorded as assets on the consolidated balance sheet until management believes they will reduce future income tax.

Significant judgment is required to determine our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our deferred tax assets. As of December 31, 2003, we have recorded a valuation allowance of $2.0 million due to uncertainties related to our ability to recover our deferred tax assets. In the event that actual results differ from the estimates or we adjust in future periods the estimates upon which the valuation allowance has been determined, we may need to record additional valuation allowance, which could materially impact our financial position and results of operations.

As of December 31, 2003, we had net deferred tax assets of $55.6 million.

35

Table of Contents

Recent Accounting Pronouncements

See Note 2 under “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements on page 48 for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of operations and financial condition.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We have no investments denominated in foreign country currencies and therefore are not subject to foreign exchange risk. We mitigate default risk by investing in high credit quality securities and by positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity.

The table below presents the carrying value and related weighted average interest rates for our investment portfolio. The carrying value approximates fair value at December 31, 2003.

Item 8. Financial Statements and Supplementary Data

See Item 15 of this Form 10-K for required financial statements and supplementary data.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Limitations on the Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures

36

Table of Contents

may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Scope of the Controls Evaluation

The CEO/CFO evaluation of our disclosure controls and procedures and our internal controls over financial reporting included a review of the controls’ objectives and design, the controls’ implementation by Rambus and the effect of the controls on the information generated for use in this Annual Report. In the course of the controls evaluation, we sought to identify data errors, controls problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. This type of evaluation will be done on a quarterly basis so that the conclusions concerning controls effectiveness can be reported in our Quarterly Reports on Form 10-Q and Annual Report on Form 10-K. Our internal controls over financial reporting have been evaluated and will continue to be evaluated on a quarterly basis by our internal audit consultants. In addition, consistent with our past practices, our internal controls over financial reporting are evaluated by personnel in our finance organization. The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures and our internal controls over financial reporting and to make modifications as necessary; our intent in this regard is that the disclosure controls and procedures and the internal controls over financial reporting will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant.

Among other matters, we sought in our evaluation to determine whether (i) there were any “significant deficiencies” or “material weaknesses” in the company’s internal controls over financial reporting, (ii) the company had identified any acts of fraud involving personnel who have a significant role in the company’s internal controls over financial reporting or (iii) whether there has been any change in our internal controls over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. This information was important both for the controls evaluation generally and because the Section 302 Certifications of the CEO and CFO require that the CEO and CFO disclose certain information to our Board’s Audit Committee and to our independent accountants and to report on related matters in this section of the Annual Report.

Our review of our internal controls over financial reporting was made within the context of the relevant professional auditing standards defining “internal controls over financial reporting,” “significant deficiencies,” and “material weaknesses.” As part of our evaluation of internal controls over financial reporting, we also address other, less significant control matters that we or our auditors identify, and we determine what revision or improvement to make, if any, in accordance with our on-going procedures.

Conclusions Regarding Disclosure Controls and Procedures

Based upon the evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report, our CEO and CFO have concluded that, subject to the limitations noted above, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Conclusions Regarding Internal Controls Over Financial Reporting

There was no change in our internal controls over financial reporting that occurred during the period covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

37

Table of Contents

PART III

Certain information required by Part III is omitted from this Report on Form 10-K since we intend to file our definitive Proxy Statement for our next Annual Meeting of Stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the “Proxy Statement”), no later than April 29, 2004, and certain information to be included in the Proxy Statement is incorporated herein by reference.

Item 10. Directors and Executive Officers of the Registrant

The information required by this item concerning our directors is incorporated by reference to the information set forth in the section titled “Election of Directors” in our Proxy Statement. Information required by this item concerning our executive officers is incorporated by reference to the information set forth in the section entitled “Executive Officers of the Company” in our Proxy Statement. Information regarding Section 16 reporting compliance is incorporated by reference to the information set forth in the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement.

Our Board of Directors adopted a Code of Business Conduct and Ethics for all of our directors, officers and employees on January 14, 2004. Stockholders may request a free copy of our Code of Business Conduct and Ethics from:

Rambus Inc.

Attention: Investor Relations

4440 El Camino Real

Los Altos, CA 94022

650-947-5050

To date, there have been no waivers under our Code of Business Conduct and Ethics. We will post any waivers, if and when granted, of our Code of Business Conduct and Ethics on our website at http://www.rambus.com/inv/.

Item 11. Executive Compensation

The information required by this item regarding executive compensation is incorporated by reference to the information set forth in the sections titled “Executive Compensation” in our Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters

The information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference to the information set forth in the section titled “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plans” in our Proxy Statement.

Item 13. Certain Relationships and Related Transactions

The information required by this item regarding certain relationships and related transactions is incorporated by reference to the information set forth in the section titled “Certain Relationships and Related Transactions” in our Proxy Statement.

Item 14. Principal Accountant Fees and Services

The information required by this item regarding principal auditor fees and services is incorporated by reference to the information set forth in the section titled “Principal Auditor Fees and Services” in our Proxy Statement.

38

Table of Contents

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)(1) Financial Statements

The following consolidated financial statements of the Registrant and Report of PricewaterhouseCoopers LLP, Independent Auditors, are included herewith:

(a)(2) Financial Statement Schedules

Financial statement schedules have been omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information is included in the consolidated financial statements or notes thereto.

39

Table of Contents

(a)(3) Exhibits

INDEX TO EXHIBITS

40

Table of Contents