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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from · to ·

Commission File Number: 000-22339

RAMBUS INC.

(Exact name of registrant as specified in its charter)

4440 El Camino Real, Los Altos, CA 94022

(Address of principal executive offices) (zip code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

The number of shares outstanding of the registrant’s Common Stock, par value $.001 per share, was 102,275,108 as of April 16, 2004.

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RAMBUS INC.

FORM 10-Q

INDEX

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PART I — FINANCIAL INFORMATION

RAMBUS INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)

See Notes to Unaudited Consolidated Condensed Financial Statements.

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RAMBUS INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

See Notes to Unaudited Consolidated Condensed Financial Statements.

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RAMBUS INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

See Notes to Unaudited Consolidated Condensed Financial Statements.

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RAMBUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1.    Basis of Presentation

The accompanying consolidated condensed financial statements include the accounts of Rambus Inc. (“Rambus” or “the Company”) and its wholly-owned subsidiaries, Rambus K.K., located in Tokyo, Japan, and Rambus Deutschland GmbH, located in Hamburg, Germany. All intercompany accounts and transactions have been eliminated in the accompanying consolidated condensed financial statements.

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

The consolidated condensed financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (or SEC) applicable to interim financial information. Certain information and footnote disclosures included in financial statements prepared in accordance with generally accepted accounting principles have been omitted in these interim statements pursuant to such SEC rules and regulations. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto, for the twelve months ended December 31, 2003, included in Rambus’s 2003 Annual Report filed on Form 10-K with the SEC on February 13, 2004.

2.    Accounting Policies and Recent Accounting Pronouncements

Stock-Based Compensation

Rambus accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Stock options are generally granted with exercise prices equivalent to fair market value, and no compensation cost is recognized. When stock options are granted with exercise prices below fair market value, employee stock-related compensation expense is recognized accordingly. Rambus complies with the disclosure provisions as required under Statement of Financial Accounting Standards, or SFAS, No. 123 “Accounting for Stock-Based Compensation.”

In December 2002, the Financial Accounting Standards Board, or FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure,” an amendment of SFAS 123. If Rambus had recognized compensation expense based upon the fair value of stock option awards, including shares issued under the Rambus employee stock purchase plan (collectively called options), at the grant date consistent with the methodology prescribed under SFAS 123, Rambus’s net income (loss) and net income (loss) per share would have changed to the pro forma amounts indicated below (in thousands, except share data; unaudited):

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RAMBUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

2.    Accounting Policies and Recent Accounting Pronouncements (continued)

The effects of applying SFAS 123 on the pro forma disclosures for the first quarter of 2004 is not likely to be representative of the effects on pro forma disclosures in future periods.

Recent Accounting Pronouncements

In January 2003, FASB issued FASB Interpretation No. 46, or FIN 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, which addresses consolidation by business enterprises of variable interest entities, or VIEs, either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. In December 2003, FASB issued a revised Interpretation No. 46, which provides guidance on the identification of and reporting for VIEs. Interpretation No. 46 was effective for Rambus in the first quarter of 2004. The adoption of Interpretation No. 46 did not have a material effect on Rambus’s results of operations or financial position for the period reported.

In April 2004, the Emerging Issues Task Force issued Statement No. 03-06, or EITF 03-06, “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share”. EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after March 31, 2004. The adoption of EITF 03-06 is not expected to have a material effect on Rambus’s results of operations or financial position.

3.    Business Combinations

On December 24, 2003, Rambus completed the acquisition of certain high-speed signaling assets from Velio Communications Inc., or Velio, for $13 million in cash. As a result of this acquisition, Rambus recorded purchased intangible assets of $13.2 million, including transaction costs. The valuation and useful lives of the

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RAMBUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

3.    Business Combinations (continued)

acquired intangible assets were allocated based on estimates which considered a number of factors including valuations. These intangible assets are being amortized over their estimated useful lives of ten years. Amortization expense of purchased intangible assets was $330,281 for the first quarter of 2004.

4.    Revenue Recognition

Rambus’s 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 Rambus’s 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 Rambus’s patents and intellectual property in SDRAM and DDR memory chips and controllers which control such memory. Rambus does not recognize contract revenues in excess of cash received if collectibility is not probable. Rambus recognizes royalty revenues upon notification of sale by its licensees if collectibility is probable. The terms of the royalty agreements generally require licensees to give Rambus notification and to pay Rambus royalties within 60 days of the end of the quarter during which the sales occur.

RDRAM Licenses.    RDRAM licenses generally allow a semiconductor manufacturer to use Rambus’s RDRAM memory interface and to receive engineering implementation services and customer support. Rambus delivers 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 Rambus 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.

Rambus recognizes revenue on RDRAM licenses consistent with American Institute of Certified Public Accountants, or AICPA, Statement of Position, or SOP, No. 97-2, and SOP 98-9, “Software Revenue Recognition.” This SOP applies 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 are comprised of license fees, and engineering service fees. Contract fees are bundled together as the total price of the agreement does not vary as a result of inclusion or exclusion of services and vendor specific objective evidence, or VSOE, for the undelivered element has not been established. Accordingly, the revenues from such contracts 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. At the time Rambus begins 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 Rambus 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. Rambus reviews assumptions regarding the post-contract customer support periods on a regular basis. If Rambus determines that it is necessary to revise its estimates of the support periods, the total amount of revenue recognized over the life of the contract

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

4.    Revenue Recognition (continued)

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 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.

XDR and Redwood Licenses.    XDR and Redwood interface licenses currently provide for the payment of license fees and engineering fees, as well as royalties. Rambus currently recognizes revenue on XDR and Redwood licenses using the percentage-of-completion method of accounting. Rambus determines 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. Rambus reviews assumptions regarding the work necessary to complete projects on a quarterly basis. If Rambus determines that it is necessary to revise its 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 Rambus 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, Rambus entered into a cross-license agreement with Intel that grants Intel a license to Rambus’s patent portfolio. Rambus recognizes 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 Rambus’s 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 Rambus’s patents from the time Rambus notifies the licensee of potential infringement. Accordingly, these fees are classified as royalty revenues, which are recognized ratably over the five-year contract period. The current contracts will begin to expire in June 2005.

Allowance for Doubtful Accounts.    Rambus’s allowance for doubtful accounts is determined using a combination of factors to ensure that Rambus’s trade and financing receivables balances are not overstated due to uncollectibility. Rambus determines its allowance for doubtful accounts based on a variety of factors. For the first quarters of 2004 and 2003, Rambus reported a balance of $0 in its allowance for doubtful accounts.

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

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5.    Comprehensive Income

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, including foreign currency translation adjustments and unrealized gains and losses on marketable securities. Other comprehensive income is presented in the balance sheet under accumulated other comprehensive income in stockholders’ equity.

Comprehensive income is as follows (in thousands; unaudited):

6.    Employee Stock Option Plans

Stock Option Program Description

Rambus officers and employees are eligible to participate in the 1997 Stock Plan. Non-executive officer employees are also eligible to participate in the 1999 Stock Plan. The 1997 Stock Plan permits the Board of Directors of Rambus, or the Board, or the Compensation Committee of the Board, or the Compensation Committee, to grant stock options, stock purchase rights and Common Stock Equivalents to employees, including executive officers, on such terms as the Board or the Compensation Committee may determine. The 1999 Stock Plan permits the Board or the Compensation Committee to grant stock options to employees on such terms as the Board or the Compensation Committee may determine. The Board or the Compensation Committee has authority to grant and administer stock options to all Rambus employees.

In determining the size of a stock option grant to a new officer or other key employee, the Board or the Compensation Committee takes into account equity participation by comparable employees within Rambus, external competitive circumstances and other relevant factors. These options typically vest over 60 months and thus require the employee’s continuing services to Rambus. Additional options may be granted to current employees to reward exceptional performance or to provide additional unvested equity incentives for retention. The method of vesting of additional options granted to current employees has and will vary over time based on approval of the Board or the Compensation Committee.

In addition, under the 1997 Stock Plan, the Board has delegated to two executive officers the authority to grant new hire options to non-executive officer employees. Each option granted to a new employee under this authority is subject to the following terms:

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RAMBUS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

6.    Employee Stock Option Plans (continued)

Distribution and Dilutive Effect of Options

The following table illustrates the grant dilution and exercise dilution (in thousands, except percentages; unaudited):

Note 1: The percentage for grant dilution is computed based on options granted less options canceled as a percentage of total outstanding shares of common stock.

Note 2: The percentage for exercise dilution is computed based on options exercised as a percentage of total outstanding shares of common stock.

The following table summarizes the options granted to the named executive officers. The named executive officers are Rambus’s Chief Executive Officer and the four other most highly paid executive officers whose salary and bonus for the twelve months ended December 31, 2003 were in excess of $100,000.

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

6.    Employee Stock Option Plans (continued)

General Option Information

A summary of activity under all stock option plans is as follows:

The following table summarizes information about outstanding and exercisable options as of March 31, 2004:

As of March 31, 2004, a total of 32,200,551 shares of Common Stock (24,945,359 of which are outstanding and 7,255,192 of which are available for future grant) were reserved for issuance under all stock option plans. As of March 31, 2004 and December 31, 2003, options for the purchase of 10,104,373 and 11,866,481 shares, respectively, were exercisable without being subject to repurchase by Rambus.

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

6.    Employee Stock Option Plans (continued)

The following table presents the option exercises for the first quarter of 2004 and option values as of that date for the named executive officers:

7.    Stockholders’ Equity

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 to be issued to various RDRAM licensees. The warrants, which were issued at the time certain targets were met, have an exercise price of $2.50 per share and a life of five years from the date of issuance. 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 March 31, 2004, a total of 1,520,000 of these warrants had been issued and 1,400,000 remain outstanding. These warrants began to expire in February 2004 and will be fully expired in January 2006.

Contingent Common Stock Equivalents and Options

As of March 31, 2004, 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. These CSEs were granted to Rambus’s CEO and President in 1999 and the options were granted to employees in 1999 and 2001. The CSEs were granted with a term of 10 years and the options were granted with an exercise price of $2.50 and a term of 10 years. 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.

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. Since the beginning of the plan, the Board has authorized the purchase in open market transactions of up to ten million shares of outstanding Rambus Common Stock over an undefined period of time. As of March 31, 2004, Rambus has repurchased 6.2 million shares of Rambus Common Stock. No shares were repurchased in the first quarter of 2004. As of March 31, 2004, there remained an outstanding authorization to repurchase 3.8 million shares of outstanding Rambus Common Stock.

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

8.    Net Income Per Share

Net income per share is computed in accordance with SFAS No. 128, “Earnings Per Share,” which requires the presentation of basic and diluted net income per share. Basic net income per share is calculated using the weighted average number of common shares outstanding during the period. Diluted net income per share is calculated using the weighted average number of common shares and common stock equivalents, if dilutive, outstanding during the period. Net income per share is calculated as follows (in thousands, except per share data; unaudited):

For the first quarters of 2004 and 2003, there were approximately 2,902,720 and 11,297,868 anti-dilutive weighted shares, respectively, which were excluded from the calculation of diluted weighted average shares outstanding. These options’s exercise prices were greater than the average market price of the common shares for the period or the options were contingent upon the satisfaction of certain conditions, as described in Note 7 under “Contingent Common Stock Equivalents and Options”, that had not been met as of March 31, 2004 and 2003.

9.    Litigation and Asserted Claims

Infineon Litigation

On August 8, 2000, Rambus filed suit in the U.S. District Court for the Eastern District of Virginia, or the Virginia court, against Infineon Technologies AG, or Infineon, and its North American subsidiary for patent infringement of two U.S. patents (USDC Virginia Civil Action No.: 3:00CV524). On September 25, 2000, Infineon filed counterclaims against Rambus in the U.S. case seeking a declaratory judgment that the two asserted patents are invalid and not infringed and further claiming contributory infringement by Rambus of two Infineon U.S. patents. In addition, Infineon also asserted breach of contract, fraud, RICO, and monopolization claims in connection with Rambus’s participation in an industry standards-setting group known as JEDEC where Infineon has alleged that Rambus did not disclose certain of our then-pending patents and patent applications (“JEDEC related claims”). The Infineon counterclaims sought compensatory and punitive damages, attorneys’ fees, injunctions to halt future infringement of the Infineon patents, and an award of a royalty-free license to the Rambus patents. In October 2000, Rambus amended its complaint to assert infringement of two additional U.S. patents. In January 2001, Infineon amended its answer and counterclaims to include a request for a declaratory judgment that all four asserted Rambus patents are invalid and not infringed. In addition, Infineon withdrew all contributory patent infringement claims against Rambus relating to Infineon’s U.S. patents.

Trial began in the Virginia case on April 23, 2001. On May 4, 2001, the Virginia court granted Infineon’s motion to dismiss Rambus’s patent infringement case and granted Rambus’s motion to dismiss Infineon’s breach

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

9.    Litigation and Asserted Claims (continued)

of contract and monopolization claims. On May 9, 2001, the jury returned a verdict against Rambus on the fraud claims and for Rambus on the RICO claims. The jury awarded Infineon $3.5 million in punitive damages, which was reduced to $350,000 under Virginia law. On August 9, 2001, as a result of post-trial motions, the Virginia court set aside the constructive fraud verdict with respect to both SDRAM and DDR SDRAM standard setting. The actual fraud verdict with respect to DDR SDRAM standard setting was also set aside. Post-trial motions by Infineon resulted in the Virginia court awarding Infineon approximately $7.1 million in attorneys’ fees. In addition, on November 26, 2001, the Virginia court issued a permanent injunction prohibiting Rambus from filing additional patent infringement actions against Infineon in the U.S. under certain of Rambus’s U.S. patent claims with regard to JEDEC-compliant SDRAM and DDR SDRAM chips and (subject to certain conditions) successor JEDEC-compliant chips. Rambus appealed rulings by the Virginia court relating to infringement, including rulings on patent claim construction, which are known as “Markman rulings.” Rambus also appealed numerous liability rulings by the Virginia court with respect to the JEDEC related claims concerning SDRAM standard setting. Rambus also filed an appeal with respect to the permanent injunction ruling. Infineon appealed two rulings against it: that Rambus committed no fraud with respect to the JEDEC DDR SDRAM standard and that no injunction should reach patent enforcement actions in Europe. These appeals were consolidated by the U.S. Court of Appeals for the Federal Circuit (CAFC) (Appeal Nos. 01-1449, 01-1583, 01-1604, 01-1641, 02-1174 and 02-1192). Briefing on all of the issues appealed was completed on an expedited schedule, and oral arguments were heard by the CAFC on June 3, 2002.

On January 29, 2003, a three-judge panel of the CAFC issued its opinion in the Infineon appeal. On April 4, 2003, the panel denied a motion for rehearing and the entire CAFC denied rehearing en banc. In its opinion, the CAFC reversed the fraud judgment against Rambus. In so doing it stated, inter alia, that the JEDEC disclosure rules suffered from a “staggering lack of defining details” and could not support a finding of fraud and that, in any event, Rambus had not, through any omission, communicated any false statement because none of Rambus’s patent applications on file at the time we were a JEDEC member read on the JEDEC SDRAM standard then being considered. The panel concluded that Infineon had introduced no evidence of any actionable breach of duty by Rambus. The panel also vacated the Infineon district court’s judgment of non-infringement based on what it found to be the district court’s erroneous interpretations of Rambus’s patents, upholding, in substantial part, the broader interpretations that Rambus had urged. In addition, based on its holding, the panel determined that the injunction entered against Rambus was moot, affirmed the district court’s denial of Infineon’s request to extend that injunction to foreign suits against Infineon as well as the district court ruling that no DDR fraud had occurred, vacated the attorneys’ fees award against Rambus and remanded the case to the Virginia court for retrial of Rambus’s infringement claims against Infineon. In the new trial the CAFC further ruled that the Virginia court may consider sanctions against Rambus for litigation misconduct, but only if Infineon is found to be the prevailing party in such retrial. Retrial is to be based on the new patent claim constructions found by the CAFC.

On Infineon’s motion, the CAFC stayed issuance of its mandate on April 11, 2003. This stay prevented further proceedings in the Virginia court pending a ruling on Infineon’s petition for writ of certiorari to the U.S. Supreme Court. On April 17, 2003, the Virginia court released Rambus’s supersedes bond and letter of credit, which had been filed with that court on August 28, 2001 in order to satisfy judgment on the now vacated award of attorney’s fees.

On October 6, 2003, the Supreme Court denied Infineon’s petition for certiorari, without record of any dissent. Jurisdiction for the case has passed back to the trial court, which originally set the date for the trial to begin on June 10, 2004. On April 27, 2004, the trial date was postponed to a new date in the fall of 2004. The new date is expected to be set before the end of May 2004. The date change was at the initiative of the trial court judge, who among other things, cited the number of pretrial issues that remain to be resolved, and the possible

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9.    Litigation and Asserted Claims (continued)

need for time for Rambus to appeal certain of those rulings prior to trial. Infineon moved to stay the case pending resolution of the FTC process and raised further allegations of litigation misconduct, including allegations of document spoliation based on claims that Rambus’s 2000-2001 document production to Infineon was inadequate. Infineon contends that our 2000-2001 document production did not include certain later discovered documents that Rambus later produced to other parties, at least some of which would have been produced to Infineon had they been discovered earlier. Infineon had threatened to try to reopen its JEDEC-related claims based on this issue but has not yet done so. Rambus believes that the issues to be tried should be focused on the infringement and validity of the patents in suit and the remedies, including damages, to which Rambus is entitled. The Virginia court has denied Infineon’s request to stay the case. Among other pre-trial rulings, the court has confined the parties to the expert reports previously on file and new ones necessitated by the appellate decision or by new documents. The court has also limited Rambus’s infringement case to four patent claims in three of the four patents on which Rambus initially sued Infineon. The court has not yet ruled definitively as to what counterclaims or defenses of Infineon will survive to trial; but did permit Infineon to take discovery related to its litigation misconduct allegations, and did permit Infineon to amend its counter claims to add a new legal theory (under California Civil Code §17200) to pursue, among other things, Infineon’s allegations, against Rambus, of JEDEC misconduct, document spoliation and litigation misconduct. Rambus anticipates that it will further challenge such claims prior to trial and will continue to vigorously defend against them and to vigorously pursue its potential claims.

On August 7, 2000, Rambus filed suit in the District Court in Mannheim, Germany, or the Mannheim court, against Infineon for infringement of one of Rambus’s European patents, European Patent No. 0525068 (the “‘068 patent”), which deals with one Rambus technology involving use of an access time register in DRAM. On July 20, 2001, the Mannheim court issued an “order for evidence” requiring the appointment of an independent technical expert to evaluate certain technical aspects of our infringement claim. The Mannheim court subsequently appointed its independent technical expert, and, the expert delivered his report to the Mannheim court and the parties in early May 2002. After the completion of briefing by the parties in response to the Mannheim court’s expert report, the validity of the same Rambus European patent was confirmed by an opposition board of the European Patent Office, or EPO, in a hearing conducted on September 10 and 11, 2002. After reviewing extensive prior art asserted by Infineon and other Rambus litigation opponents, the EPO Opposition Board upheld the validity of Rambus’s patent but, applying a unique feature of European patent law, required Rambus to add additional language based on a conclusion that that language better reflected the scope of claims as originally filed by Rambus in Europe. Under European patent law, unlike U.S. patent law, patent claims cannot generally be amended to expand their scope beyond that of the claims as initially filed. Rambus appealed the EPO Opposition Boards inclusion of this additional language; three DRAM companies appealed the validity ruling. A hearing on these appeals took place between February 10-12, 2004. The Technical Appeals Board of the EPO issued an oral ruling on February 12, 2004 revoking the ’068 patent without explanation. A written opinion of the Technical Appeals Board’s findings could be issued at any time.

A hearing was held in March 2003 at the Utility Model Division of the German Patent Office regarding a Rambus utility model that is similar in scope to the European patent that had been at issue in the EPO. Based on the same reasoning of the EPO Opposition Board, the German Patent Office required Rambus to add additional language to its utility model claim in order to preserve the utility model. However, in the Utility Model case, Rambus rejected the particular additional language requested by the German patent office and the Utility Model was, for this reason and based on a prior art argument, revoked. Rambus has appealed the decision, but, as a practical matter, it has little or no bearing on Rambus’s future patent rights as the prior art at issue has limited scope and, in any event, German utility models have — compared to patents — very limited terms, which have already expired in Rambus’s case. This hearing is set for June 19, 2004 although Rambus believes it may be postponed.

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9.    Litigation and Asserted Claims (continued)

Micron Litigation

On August 28, 2000, Micron Technology, Inc., or Micron, filed suit against Rambus in the U.S. District Court in Delaware (USDC Delaware Civil Action No.: 00-792-RRM). The suit asserts violations of federal antitrust laws, deceptive trade practices, breach of contract, fraud and negligent misrepresentation in connection with Rambus’s participation in JEDEC. Micron’s suit seeks a declaration of monopolization by us, compensatory and punitive damages, attorneys’ fees, a declaratory judgment that eight Rambus patents are invalid and not infringed and the award to Micron of a royalty-free license to the Rambus patents. In February 2001, Rambus filed its answer and counterclaims, whereby Rambus disputed Micron’s claims and asserted infringement by Micron of the eight U.S. patents. Both sides filed a number of potentially dispositive motions for summary judgment. On February 27, 2002, the court ruled on some of these motions, denying Micron’s motion for summary judgment on its claims of fraud. The Delaware court also postponed trial on all of the issues in the Micron case until after the CAFC reviews the judgments of the Virginia court in the Infineon matter. Limited discovery is ongoing in the Delaware action. Due to the resignation of Judge Roderick R. McKelvie, this case was assigned to a Magistrate Judge for all pretrial proceedings, and has since been assigned to the Judge Kent A. Jordan who has filled the vacancy left by Judge McKelvie. A hearing with Judge Jordan was scheduled for the Delaware Micron case on July 7, 2003, but was taken off the calendar at the request of the parties. The parties are currently deciding whether or not to change the status of this case to inactive, although such a status, if adopted, could be changed back to active upon the request of either party.

In September 2000, Rambus filed suit against Micron in the Mannheim court, the Tribunal de Grande Instance de Paris in Paris, France, or the Paris court, the High Court of Justice, Chancery Division, Patents Court at the Royal Courts of Justice in London, Great Britain, or the London court, and the District Court in Monza, Italy, or the Monza court, for infringement of a European patent. Rambus’s German suit against Micron is, like Rambus’s German suit against Infineon, in the Mannheim court, which issued an “order for evidence” on December 7, 2001 requiring the appointment of an expert. The appointed expert is the same expert as was appointed in the Infineon and Hynix cases in Germany. The expert issued his report in late 2002, and, as in the Infineon case, a hearing is currently scheduled for June 2004, although Rambus believes that this hearing date may be postponed. The French suit and the British suit have been temporarily stayed pending the validity determination of the EPO. On May 2, 2001, the independent experts appointed by the Monza court issued a report that confirmed the validity of the Rambus patent in suit and determined that Micron’s SDRAM products infringe the Rambus patent. On May 25, 2001, the Monza court declined to grant Rambus a preliminary injunction due to its conclusion that the experts had not addressed one technical issue. Rambus appealed the Monza court’s ruling, and on July 18, 2001, the Appeals Court rejected the appeal on jurisdictional grounds. The infringement suit against Micron in Italy on the first European patent has been stayed, but if it resumes, it will resume in the District Court of Milan rather than in Monza.

In December 2000, Micron filed a declaratory judgment suit of non-infringement of a second European patent against Rambus in the District Court of Avezzano, Italy. In response, Rambus asserted infringement of the second European patent in Milan, Italy. The actions on the second European patent in Italy have also been stayed. Further, Rambus filed suit against Micron in Germany and Italy for infringement of a third European patent. Both of these additional suits have also been stayed.

Hynix Litigation

On August 29, 2000, Hyundai Electronics Industries Co., Ltd., or Hyundai, and various subsidiaries filed suit against Rambus in the U.S. District Court for the Northern District of California (USDC Northern District of California Case No.: 00-20905 RMW). Since filing suit, Hyundai has changed its name to “Hynix Semiconductor

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

9.    Litigation and Asserted Claims (continued)

Inc.”, or Hynix. The suit asserts breach of contract in connection with Rambus’s participation in JEDEC and seeks a declaratory judgment that eleven Rambus patents are invalid and not infringed by Hynix.

In October 2000, Hynix amended its complaint to further assert violations of federal antitrust laws, deceptive trade practices, breach of contract, fraud and negligent misrepresentation in connection with Rambus’s participation in JEDEC. Hynix seeks a declaration of monopolization by Rambus, compensatory and punitive damages, and attorneys’ fees. In February 2001, Rambus filed its answer and counterclaims, whereby Rambus disputes Hynix’s claims and assert infringement of eleven U.S. patents. On November 21, 2001, the California court ruled that the claim construction applied in the Virginia case against Infineon should be applied in the case with Hynix, and, as a result, dismissed most of Rambus’s claims of patent infringement against Hynix. In doing so, the California court relied on the principles of collateral estoppel and declined to decide whether, on the merits, the Virginia claim construction was correctly or incorrectly decided. The Virginia claim construction issue was one of the matters that will be reviewed as part of Rambus’s appeal in the Infineon case. On December 17, 2001, the California court stayed the Hynix case until the CAFC decides the Rambus v. Infineon appeal. On May 10, 2002, Hynix filed a motion to lift the stay. Hynix also moved to file a second amended reply to add new affirmative defenses of estoppel and waiver to Rambus’s counterclaims of infringement. Rambus opposed the motion to lift the stay, but did not oppose Hynix’s motion to file the second amended reply. Argument on this motion was heard on June 14, 2002. On June 18, 2002, the court denied Hynix’s motion to lift the stay, granted its motion for leave to file a second amended reply to counterclaims, and scheduled another case management conference for September 20, 2002. At that case management conference, Hynix renewed its motions to lift the stay, which were denied, except with respect to discovery that would not be affected by the CAFC decision in the Infineon case. At that same conference, the court permitted Rambus to move to amend its complaint to add new claims for patent infringement, and Rambus filed that motion on October 4, 2002. A further case management conference occurred on November 22, 2002 at which point the California court considered proposed trial schedules and fully lifted the stay. On March 14, 2003 the California court set the Hynix trial date for November 8, 2004. On April 2, 2003, the court set the pretrial schedule. Pursuant to that schedule, Rambus filed and won a motion to vacate a previous collateral estoppel summary judgment order in the Hynix case, accordingly Rambus’s patent infringement claims that were subject to that earlier ruling have been reinstated into the case. That same April 2, 2003 pre-trial schedule sets forth dates for summary judgment motions, and for a “Markman” claim construction hearing. On January 12, 2004, both of the parties filed summary judgment motions related to the patents in suit. Rambus filed for summary judgment of infringement on multiple claims in seven of the patents in suit. Hynix filed on a variety of issues relating to alleged invalidity and non-infringement on a subset of Rambus’ asserted claims. Hearings on the proposed claim constructions and on both sides’ motions for partial summary judgment were heard on March 23-24, 2004. An order from the court is expected at any time.

In September 2000, Rambus filed suit against Hynix in the Mannheim court, the Paris court and the London court for infringement of a European patent. The French suit included court-sanctioned seizure of documents and samples from a Hynix facility. On December 7, 2001, in the German suit, an “order for evidence” calling for the appointment of an independent expert was issued by the Mannheim court. The appointed expert has not yet completed his report in the Hynix case. The French suit and the British suit have been stayed.

Memory Purchasers Class Action

On April 3, 2002, Rambus was served with a complaint in an action entitled Holiday Matinee, Inc. v. Rambus Inc. No. CV 806325, filed in California Superior Court, Santa Clara County. The complaint in that case purports to be on behalf of an alleged class of “indirect purchasers” of memory from January 2000 to March 2002. Plaintiff alleges that those purchasers paid higher prices for various types of DRAM due to Rambus’s

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

9.    Litigation and Asserted Claims (continued)

alleged unlawful use of market power in the various DRAM markets to coerce vendors of equipment using that technology to enter into supposed agreements in restraint of trade. Plaintiffs base their claims on Rambus’s alleged anticompetitive actions in patenting and licensing various technologies relating to DRAM, which plaintiffs assert, occurred during Rambus’s involvement at JEDEC in 1992 through 1996, as well as during Rambus’s subsequent patent licensing and litigation efforts. The complaint alleges claims under (i) California Business & Professions Code § 16700 for allegedly having coerced “market participants” into entering supposedly unlawful licensing agreements in restraint of trade; (ii) California Business & Professions Code § 17200 for supposed “unfair business practices” that forced the public to pay “supra-competitive” prices for products incorporating DRAM technology; and (iii) a theory of unjust enrichment based on supposedly receiving “unearned royalties” from products that incorporated certain DRAM technology. Plaintiffs seek legal and equitable relief. Rambus demurred to this complaint in its entirety on June 24, 2002 and a hearing on this demurrer occurred on August 27, 2002, at which point the court granted Rambus’s demurrer, giving plaintiff leave to amend its complaint. Plaintiff filed an amended complaint on September 26, 2002. Rambus filed a demurrer to the amended complaint and a hearing was held on this demurrer on December 10, 2002. The court granted Rambus’s demurrer and again gave plaintiff leave to amend its complaint. After Plaintiff filed its second amended complaint, Rambus demurred successfully again and plaintiff moved to dismiss its complaint with prejudice, reserving however, their rights of appeal from the decisions against them. That motion was granted on April 17, 2003 when the complaint was dismissed with prejudice. Plaintiff filed a notice of appeal on June 20, 2003 and filed its initial appeal brief in early September 2003. Rambus filed its brief in opposition on October 16, 2003, and Holiday Matinee replied on November 7, 2003. Oral arguments are currently scheduled for May 11, 2004. Rambus intends to continue to vigorously defend itself in this action.

FTC Complaint and European Commission Competition Directorate-General Request for Information

On June 19, 2002, the Federal Trade Commission, or FTC, filed a complaint against Rambus. The FTC has alleged that through Rambus’s action and inaction at JEDEC, Rambus violated Section 5 of the FTC Act in a way that allowed Rambus to obtain monopoly power in—or that by acting with intent to monopolize it created a dangerous probability of monopolization in—synchronous DRAM technology markets. The FTC has also alleged that Rambus’s action and practices at JEDEC constituted unfair methods of competition in violation of Section 5 of the FTC Act. As a remedy, the FTC has sought to invalidate Rambus’s right to enforce patents with priority dates prior to June 1996 as against products made pursuant to certain existing and future JEDEC standards. On or about April 22, 2003, Rambus received courtesy copies of requests for information from the European Commission Competition Directorate-General indicating that it had received complaints from Infineon and Hynix apparently making similar allegations. Rambus answered those requests on June 16, 2003. Rambus obtained a copy of Infineon’s complaint to the EU in late July, and on October 8, 2003, at the request of the Directorate, filed its response. Rambus has heard nothing from the EU since that date.

On July 5, 2002, Rambus moved to stay the FTC action until the CAFC issued a ruling in the Rambus v. Infineon appeal; this motion was denied, and Rambus filed its answer to the complaint on July 29, 2002. There was substantial motion practice, including a motion filed by FTC complaint counsel seeking a default judgment based on alleged document destruction deriving from a 1998 Rambus document retention plan. The administrative law judge, or ALJ, denied complaint counsel’s motion, although he did enter certain rebuttable presumptions against Rambus as sanctions for what the ALJ called Rambus’s “gross negligence” in implementing Rambus’s document retention plan and failing to keep an inventory of documents not retained. Among other motions, the Department of Justice, or DOJ, successfully sought to intervene in the FTC action, and obtained a limit on certain deposition questioning by Rambus pending completion of the DOJ’s criminal investigation of DRAM manufacturers for price-fixing. Rambus was informed that Rambus is not a target of the

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

9.    Litigation and Asserted Claims (continued)

DOJ investigation. The ALJ denied Rambus’s motion for summary judgment and entered other rulings on pre-hearing motions in the action. The parties filed pre-hearing briefs on April 22, 2003. The administrative hearing began on April 30, 2003. It ended on August 1, 2003, with closing arguments on October 8, 2003. On February 17, 2004, the FTC ALJ issued his initial decision dismissing the FTC’s Complaint against Rambus on multiple independent grounds. Complaint counsel has filed their opening appellate brief on April 16, 2004. Briefing to the five FTC Commissioners on this appeal is expected to conclude July 16, 2004. No date for the oral argument has been set. Rambus intends to continue to vigorously defend itself in this matter.

Potential Future Litigation

In addition to the above, there is at least one additional area where Rambus foresees potential litigation activity, perhaps in this or next quarter. Rambus is now evaluating what antitrust or other remedies Rambus may pursue based on evidence, some of which has been endorsed in the fact findings that are part of the FTC ALJ’s February 17, 2004 initial decision, indicating that there were concerted efforts beginning in the 1990’s to deter innovation in the DRAM market and to deter market acceptance of Rambus’s RDRAM product. Rambus has not decided whether to pursue such litigation and there can be no assurance that such litigation, if brought, will be successful.

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

General

This Form 10-Q contains forward-looking statements. These forward-looking statements include, without limitation, our predictions regarding the following:

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.

Overview

Rambus 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 pending. These patents and patent applications cover important innovations in memory interfaces and, we believe, logic and serial interfaces. Our advanced chip-to-chip interface solutions increase the data transfer rate between semiconductor chips, improving performance and reducing systems costs.

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.

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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 of these invoices and the 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 78% and 87% of our revenue for the first quarters of 2004 and 2003, respectively. In addition, for the first quarter of 2004, revenues from Intel, Toshiba Corporation, or Toshiba, Elpida Memory Inc., or Elpida, and Samsung Electronics Co. LTD, or Samsung, each accounted for greater than 10% of our total revenues and for the first quarter of 2003, revenues from Intel, Toshiba and Samsung each accounted for greater than 10% of our total revenues. Our revenue from companies based outside of the United States accounted for 66% and 62% of our revenues for the first quarters of 2004 and 2003, 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.

Results of Operations

Results of Operations

The following table sets forth, for the periods indicated, the percentage of total revenues represented by certain items reflected in our consolidated condensed statements of operations and the percentage change of such items between periods (unaudited):

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Revenues were $32.5 million and $28.1 million in the first quarters of 2004 and 2003, respectively.

Contract revenues were $5.1 million and $3.3 million in the first quarters of 2004 and 2003, respectively. The change in contract revenue was due primarily to the increase of recognition of revenue associated with our XDR and Redwood interface technologies contracts. We 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. The increase in recognized revenue in the first quarter of 2004 was a result of an increase in the amount of work performed under these contracts over the same time period in 2003 and the addition of two new contracts that we began recognizing revenue on in the second and third quarters of 2003. We currently expect to recognize revenue on our existing XDR and Redwood interface technologies contracts through 2005.

Royalty revenues were $27.4 million and $24.8 million in the first quarters of 2004 and 2003, respectively. In the first quarter of 2004, our largest category of royalties related to the license of our patents for SDRAM and DDR-compatible products. Royalties increased for SDRAM and DDR-compatible products in the first quarter of 2004 as compared with the same time period in 2003 primarily due to increased royalties on increased shipments of SDRAM controllers and DDR memory devices. As of March 31, 2004, 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. During the first quarter of 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 second quarter of 2003.

The Intel cross-license agreement represented the second largest category of royalties in the first quarter of 2004. Royalties under this agreement were unchanged in first quarter of 2004 when compared to the same time period in 2003. We expect to continue recognizing revenue on this agreement through the second quarter of 2006.

Payments from licensees’ shipments of RDRAM memory chips and controllers that connect to RDRAM memory chips comprised the third largest category of our royalties in first quarter of 2004. RDRAM royalties decreased in the first quarter of 2004 when compared to the comparable period in 2003. This royalty drop was due to declines in unit shipments by licensees during the period. We believe that the unit decline was 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.

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Engineering costs, consisting of cost of contract revenues and research and development expenses, were $12.6 million and $10.5 million in the first quarters of 2004 and 2003, respectively. This increase in engineering costs was primarily a result of approximately 30 additional engineering personnel required to meet the milestones stated in the contracts for XDR and Redwood interfaces, the hiring of 14 engineering personnel as part of our acquisition of high speed signaling assets of Velio and increased payroll taxes due to exercises of employee stock options.

Cost of contract revenues were $5.2 million and $3.2 million in the first quarters of 2004 and 2003, respectively. This increase was primarily due to the hiring of approximately 30 additional engineering personnel 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. This increase was also due to the hiring of 14 engineering personnel as part of our acquisition of certain high-speed signaling assets of Velio. 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 $7.4 million and $7.3 million in the first quarters of 2004 and 2003, respectively. We believe that in the future, research and development will continue 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 $11.2 million and $13.1 million in the first quarters of 2004 and 2003, respectively. This decrease in marketing, general and administrative expenses primarily represented decreased litigation costs associated with the defense of our intellectual property. Litigation costs were $4.2 million and $7.1 million in the first quarters of 2004 and 2003, respectively. This decrease in litigation expenses was due to high spending in preparation for the FTC hearing in the first quarter of 2003. Litigation expenses are expected to vary from period to period, given the volatility of litigation activities. We expect litigation expenses will increase in the twelve months ending December 31, 2004 relative to the comparable period in 2003 as we continue to engage in simultaneous litigation in multiple jurisdictions.

In the first quarter of 2004, marketing, general and administrative costs excluding litigation expenses increased by $1.0 million when compared with the same time period in 2003 due to additional corporate governance and disclosure requirements, patent and licensing expenses and increased payroll taxes due to exercises of employee stock options. 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.

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Interest and other income, net consists primarily of gains on the sale of equity investments and interest income from our cash investments. Interest and other income were $4.1 and $3.0 million in the first quarters of 2004 and 2003, respectively. This increase is primarily due to a pre-tax gain of $3.2 million related to the sale of 85% of our investment in Tessera Technologies, or Tessera, in the first quarter of 2004. The remaining 15% of our investment in Tessera was sold in April 2004. In the same period of 2003, interest and other income included other income of $1.7 million, resulting from the divestiture of Rambus’s investment in NurLogic Design Inc., or NurLogic, which was acquired during the period by Artisan Components, Inc. The divestiture resulted in the receipt of cash, stock and an intellectual property license, all with a total of $5 million.

The provision for income taxes was $4.5 million and $2.4 million in the first quarters of 2004 and 2003, respectively. In the first quarter of 2004, our effective tax rate was 35% as compared with a rate of 32% in the first quarter of 2003.

At March 31, 2004, our balance sheet included net deferred tax assets of approximately $73.9 million, primarily relating to the difference between tax and book treatment of depreciation and amortization, employee stock-related compensation expenses and deferred revenue, net operating losses and research and development credit carryforwards. In the first quarter of 2004, our net deferred tax assets increased by $26.9 million. Tax benefits from the exercise of employee stock options resulted in $20.2 million of the total increase in our net deferred tax assets.

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. Since the beginning of the plan, the Board has authorized the purchase in open market transactions of up to ten million shares of outstanding Rambus Common Stock over an undefined period of time. As of March 31, 2004, Rambus has repurchased 6.2 million shares of Rambus Common Stock. No shares were repurchased in the first quarter of 2004. As of March 31, 2004, there remained an outstanding authorization to repurchase 3.8 million shares of outstanding Rambus Common Stock.

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 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:

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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 (or SOP) No. 97-2, and SOP 98-9, “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 contracts 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 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

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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 March 31, 2004, we are involved in certain legal proceedings, as discussed in Note 9 of our unaudited consolidated financial statements on page 12. 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 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.

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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.

At March 31, 2004, our balance sheet included net deferred tax assets of approximately $73.9 million, primarily relating to the difference between tax and book treatment of depreciation and amortization, employee stock-related compensation expenses and deferred revenue, net operating losses and research and development credit carryforwards. In the first quarter of 2004, we increased our net deferred tax assets by $26.9 million. Tax benefits form the exercise of employee stock options resulted in $20.2 million of the total increase in our net deferred tax assets.

To the extent we believe that recovery of a tax asset included on the balance sheet is not likely or is 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. 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 March 31, 2004, we have recorded a valuation allowance of $1.4 million due to uncertainties related to our ability to recover certain of 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.

Liquidity and Capital Resources

As of March 31, 2004, we had cash and cash equivalents and marketable securities of $239.4 million, including a long-term component of $128.8 million. As of March 31, 2004, we had total working capital of $92.7 million, including a short-term component of deferred revenue of $24.5 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 $18.6 million and $5.8 million for the first quarters of 2004 and 2003, respectively. Cash generated in the first quarter of 2004 was primarily the result of net income adjusted for depreciation, a decrease in accounts receivable of $9.5 million primarily related to payments for XDR and Redwood

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interface contracts and an increase of the tax benefit of stock options exercised of $20.2 million. This cash generated from operations was partially offset by an increase in prepaid, deferred taxes and other assets of $16.9 million and by a net decrease in deferred revenue of $1.6 million. The decrease in deferred revenue represents revenues recognized in excess of contract billings. In the first quarter of 2003, net cash generated by operating activities consisted primarily of net income adjusted for depreciation, an increase of the tax benefit of stock options exercised and an increase in accounts payable and other liabilities primarily due to unsettled stock repurchases and increased legal expenses. This was partially offset by an increase in accounts receivable primarily due to increased billings for XDR and Redwood interface contracts and decreases in prepaids, deferred taxes and other assets, primarily due to increased foreign withholding taxes paid on payments received from licensees.

Net cash used in investing activities was $25.8 million and $2.1 million in the first quarters of 2004 and 2003, respectively. Investing activities in both periods primarily consisted of purchases and maturities of marketable securities and proceeds from the sales of investments. Investing activities for the first quarter of 2004 also included $4.9 million in cash proceeds received on the sale of 85% of our investment in Tessera Technologies, Inc. or Tessera. The remaining 15% of our investment in Tessera was sold in April 2004. Investing activities for the same time period in 2003 included cash proceeds received on the sale of our investment in NurLogic Design Inc.

Net cash provided by financing activities was $28.3 million in the first quarter of 2004 compared to $10.9 million used in financing activities in the same time period in 2003. For the first quarter of 2004, we generated net proceeds of $28.3 million from the issuance of Common Stock associated with the exercises of employee stock options. For the first quarter of 2003, we generated $3.8 million from the issuance of Common Stock associated with the exercises of employee stock options and used cash of $14.7 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 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. On April 15, 2004, we received a settlement approved by the bankruptcy court of $1.9 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 a letter of credit restricting $600,000 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.

On December 24, 2003, we completed the acquisition of certain high-speed signaling assets from Velio. This purchase included subleasing from Velio an engineering facility in Chapel Hill, North Carolina. The Chapel Hill sublease originally ended in March 2004 and has been extended through June 2004. We have also signed a lease for a new facility in Chapel Hill, which is where we plan to relocate our current Chapel Hill office to in July 2004.

As of March 31, 2004, our material net contractual obligations are (in thousands):

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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 March 31, 2004, 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 or other resolution in litigation could result in our losing certain rights, beyond the rights at issue in a particular case, including, among other things, our being effectively barred from suing others for violating certain or all of our intellectual property rights, our 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 resolution by or with 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 there were an adverse determination by, or other resolution with, a government agency, 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. Although the initial decision in the FTC proceeding supported Rambus and dismissed the complaint, that initial decision has been appealed by the FTC staff and may be reversed by the FTC or subject to some future compromise. The European Commission has directed inquiries to us relating to similar topics. If preceedings by one of these agencies, or any other governmental agency, resulted in a resolution that could limit our ability to enforce or license our intellectual property, our revenues could decline substantially. In addition, on February 12, 2004, the Technical Appeals Board of the European Patent Office issued and 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.

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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: