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Rambus Inc. (NASDAQ:RMBS)

Q3 2007 Earnings Call

October 31, 2007 5:00 pm ET

Executives

Harold Hughes - President & CEO

Satish Rishi - SVP & CFO

Tom Lavelle - SVP & General Counsel

Sharon Holt - SVP

Analysts

Jeff Schreiner - American Tech Research

Mike Crawford - Riley Investment Management

Michael Cohen - Pacific American Securities

Hamed Khorsand - BWS Financial

Operator

Good day, everyone, and welcome to this Rambus QuarterlyConference Call. Today's call is being recorded. At this time, I would like toturn the call over to Mr. Satish Rishi. Please go ahead, sir.

Satish Rishi

Thank you, Operator. And welcome to the Rambus’ thirdquarter 2007 conference call. I'm Satish Rishi, CFO, and with me today areHarold Hughes, our President and CEO, and Tom Lavelle, Senior VP and GeneralCounsel. We also have with us Sharon Holt, Senior VP of Sales, Licensing andMarketing, for the Q&A.

The press release for the results that will be discussedhere today has been filed with the SEC on Form 8-K. If you want a copy of therelease, please visit our website at www.rambus.com on the Investor Relationspage under Financial Releases. A replay of this conference call will beavailable for the next week at 888-203-1112. You can hear the replay by dialingthe toll-free number and then entering ID number 47896665 when you hear theprompt. In addition, we are simultaneously webcasting this call, and a replaycan be accessed on our website beginning today at 5:00 p.m. Pacific DaylightTime.

Before I begin, I need to advise you that the discussiontoday will contain forward-looking statements regarding our financialprospects, pending litigation and demand for our products, among other things.These statements are subject to risks and uncertainties, which are more fullydescribed in the documents that we file with the SEC, including our 8-Ks, 10-Qsand 10-Ks. These forward-looking statements may differ materially from ouractual results.

Now, I'll to turn the call over to Harold. Harold?

Harold Hughes

Thanks, Satish. And good afternoon, everyone, I would liketo start by talking about the just completed financial restatement. It wastruly a tremendous effort by Satish and the finance team. They had to workthrough an analysis and audit process that spanned hundreds of thousands ofdocuments. The long process entailed many thousands of man hours of efforts tocomplete the restatement of our historical financials.

I sincerely thank our stockholders, for their patience andperseverance during the many months it took to work through all of theseissues. You can rest assured that we are absolutely committed to operating withhighest standards of corporate governance and providing the market with timelyand transparent reports of our financial performance.

Now, regarding our third quarter results, we achievedrevenues of $41.7 million; this was on the low end of our guidance, it was downfrom the prior quarter. While we are still making progress on our strategy,providing critical memory architecture technology to leading systems and semiconductorcompanies. Our short-term results were nonetheless impacted both directly andindirectly by the limited order issued by the FTC.

As we talked about in an earlier call, we expected to see asignificant slow down in licensing momentum, while we implemented the actionsrequired to comply with the FTC's order.

It takes some time for all parties to digest the complexnature of the order, there was a slow down in momentum, more than anythingelse, that led to the results at the low end of our revenue guidance.

The actual payment held in banks in accordance with theFTC's orders were only about a $1million dollars, so far. In any case, we haverestarted a number of licensing negotiations that had been stalled followingthe FTC's action, and are again moving forward on that front.

Meanwhile, we got a number of exciting developments on theproducts side of our business discussed, whether in computing, consumerelectronics or mobile devices, the need for greater bandwidth is a common theme,as electronics deliver more rich media, more 3D graphics and more video.

Rambus' leadership memory architectures are on the forefrontin meeting this need. And earlier this month Elpida announced the availabilityof 4.8Ghz XDR DRAM device. Elpida is a trailblazer in bringing the world'sfastest memory to market. And we are very pleased to be their partner.

Also last quarter, Toshiba unveiled the new Spurs engine, ahigh performance stream processor derived from the Cell Broadband Engine.According to Toshiba, the Spurs engine is designed to take video processing indigital consumer products, to new levels of realism and image quality.

Spurs engine integrates four of the Cell BE’s highperformance risk cause, the hardware dedicated to decoding and encoding MPEG2and H.264 video. Toshiba showcased its Spurs engine at CEATEC in Tokyo, earlier this month.It uses XDR memory to achieve the high data transfer rates for amazing richmedia performance. We originally announced the XDR technology license we signedwith Toshiba for this program a year ago. We are happy to be able to discussanother exciting application that delivers breakthrough performance, thanks tothe XDR memory architecture.

Two weeks ago we held our Annual Developer Forum in Taiwan, wherewe hosted over 200 engineers -- a record number. We came to learn aboutdesigning with our leadership and industry standard memory architectures.

One of the highlights from the event in Taiwan was a presentation by LeonKerkhof, a Senior Systems Architect for Philips Consumer Electronics. Leondiscussed how HDTVs require high levels of memory bandwidth to deliverfeatures, like advanced motion compensation and image enhancement, 12-bit colorand the ability to handle multiple streams with HD content.

In fact, the next generation of HDTVs requires as muchmemory bandwidth as that of many PCs. At the same time, HD designers need amemory architecture to deliver this performance with the fewest possibledevices to keep cost low, both in terms of the direct bill of materials as wellas overall system complexity.

As Leo pointed out in his presentation, the high bandwidthper device performance of XDR makes it the ideal choice for HDTVs. We are verygrateful for this endorsement, from a leading manufacturer of HDTVs, andexcited with the prospect of enabling a new generation of consumer electronicproducts with the XDR memory architecture.

Also in Taiwan,we announced our new controller interface product for DDR3 memory. Thissolution provides a physical interface between the digital controller logic andDDR2 or DDR3 DRAM devices for data rates of up to 1600 MHz or 1.6 GHz. Itleverages both our signal integrity expertise and utilizes key Rambusinnovation, such as FlexPhase to enable robust DDR3 implementation at agigahertz and above.

And speaking of innovations, our engineers and scientistscontinue to invent and develop technology for advanced memory architectures,high-speed logic interfaces and low power interface solution.

When measured, the pace of innovation at Rambus is ourgrowing portfolio of patents, which at the end of Q3 stood at 667 issued patents,with another 519 patent applications pending. It's through this continuedcommitment to innovation that we deliver extraordinary value to our customersand enable breakthrough products that enrich the lives of consumers.

And with that, I will turn it over to Tom to provide anupdate on the legal front where all is not quite.

Tom Lavelle

Thanks Harold, and good afternoon, everybody. I would liketo provide some contacts around some of the events that have taken place overthe course of the last few months. Back in August, we received from theEuropean Commission a Statement of Objections alleging violations of EuropeanUnion competition law.

The Statement of Objections follows complaints by certainDRAM manufacturers originating from our '92 through '95 participation in JEDEC.We filed a response to that Statement of Objections today in Brussels. We believe the EC's allegations aremisplaced, and we intend to demonstrate to the commission just that and we areworking with them to get at that point.

Moving to the FTC action here in the U.S., on September 21, we filed our appeal ofthe FTC decision with the Court of Appeal for the District of Columbia Circuitin Washington.We expect the briefing will be completed shortly after the beginning of the newyear. No oral argument has been set at this point, but we do expect to see adecision some time in 2008 on that case.

There have also been developments from some of our privatelitigations. In August, a hearing was held in front of a three-judge panel atthe Court of Appeals for the Federal Circuit to argue the Samsung matterarising from the case in the District Court for the Eastern District ofVirginia. We're hoping this decision will finally put this case behind us.

The first phase of the Micron trial in Bloomington,Delaware, addressing alleged spoliation andlitigation misconduct by Rambus, is currently scheduled to begin November 8thof this year in Bloomington.

Moving on the price fixing case in the superior court ofSan-Francisco, the US Supreme Court denied Hynix’s petition to review JudgeCramer’s decision denying arbitration, in favor of a jury trial on Rambus’sallegation of price fixing and unfair practices by the three DRAM manufacturedefendants. Discovery on that case has been proceeding, and the next hearing iscurrently scheduled for December 20th of this year. We expect the trial datewill be set forth sometime in mid 2008.

In the Hynix patent case, the third phase is currentlyscheduled to begin near the end of January of 2008. You’ll recall that we wonPhase I and Phase II, including a judgment of approximately $133 million plusinterest. The Phase III trials will address Hynix’s allegation that we engagedin misconduct. This trial is currently scheduled to be a coordinated trial withMicron, Samsung and Nanya, because of the large overlap of issues and claimsamong those parties and Rambus.

There is clearly a lot going on with regards to ourlitigations, and our litigation expenses as disclosed in the press releasereflect that increase activity. It’s been our strategy to move the privatelitigation matters forward to a resolution as quickly as possible. Our leveland nature of the activity I just described reflects that we’re making progresson that strategy.

Now I'll turn the call over to Satish to review thefinancials. Satish?

Satish Rishi

Thank you Tom, as Harold mentioned earlier in the call we’requite pleased to have completed our filings to be current with the financialreport. It has been a long and grueling process, but one that we have to gothrough to ensure accuracy and completeness in our filings.

After our final outstanding 10-Q, we received notificationfrom NASDAQ, that we regain compliance with the rules for continued listings,and that the matter is now being closed.

Again, we thank our shareholders for their patience, as wewent through process of becoming current and are happy to be back to a normalreporting process.

Our revenues for the third quarter were $41.7 million, whichis down 12% from the previous quarter and 9% from the year ago. Revenuedecreased primarily as Harold explained, due to direct and indirect impact ofthe FTC's orders, and a scheduled decrease in payment, all the payments.

Operating expenses for the third quarter were $58.2 million,up 1% from the previous quarter and down 19% from the third quarter of lastyear.

Excluding the restatement related expenses and stock basedcompensation, operating expenses in this quarter at $45.3 million were up 14%from the previous quarter and 21% from the quarter a year ago.

The primary drivers for this were an increase in the generallitigation expenses as well as incremental expenses related to audits accountingand related consulting.

Cost of general litigation, which excludes cost related toour restatement, was $11.7 million, up 75% as compared to the second quarter of2007, and up 34% from the third quarter of last year.

The increase in litigation expenses that are [flag expenses]associated with the preparations for the responses to the appeal commission,the appeal of the FTC decision, Phase 1 of the Micron trial, the price fixingcase in San Franciscoand Phase 3 of Hynix patent case all of which Tom described in some detail.

Even though general litigation expenses increasedquarter-over-quarter, our year-to-date general litigation expenses are slightlydown as compared to the same period a year ago.

Within SG&A, incremental expenses related to audit,accounting and consulting were up $1.4 million as compared to the previousquarter. Other SG&A expenses were generally in line with spending in theprevious quarter and the third quarter of last year.

Our operating loss of $16.5 million was up $6.3 million or62% from the previous quarter and down 36% from the third quarter of 2006. Theincreased loss from the previous quarter was primarily associated with lowerrevenue of $5.8 million, increased non-restatement related legal expenses of $5million, and the decrease in restatement related expenses of $3.3 million,while the decrease from the third quarter of 2006 was primarily associated withlower cost of restatement.

Bottom line net loss for the third quarter was $6.5 millioncompared to a loss of $2.7 million in the second quarter and a loss of $22.6million in the third quarter of last year.

Overall, cash defined as cash, cash equivalents, andmarketable securities excluding restricted cash, was $445 million, an increaseof approximately $3 million from the second quarter of 2007 and up $24 millionfrom a year ago.

This year-over-year increase in cash was not withstandingthe fact that we had no cash generated from stock option exercises and that wepaid out approximately $30 million in cash for restatement related expenses inthe last 12 months.

During the quarter we also received notice from a trustee,who, on behalf of majority of our note holders, informed us that the holders ofthe $160 million of pending notes were extending the acceleration of the noteand were waiving all existing Events of Default. The notes mature in 2010 andwe have reclassified the notes back to long term as of end of this quarter.

Now that we are current with the filings, we should be ableto restock our share repurchase program soon.

Now let me give you some thoughts regarding the fourthquarter. This guidance reflects our reasonable estimate and our actual resultscould differ materially from what I would like to review. We expect fourthquarter revenue to be between $45 million and $50 million and operatingexpenses excluding stock-based compensation, any additional restatement relatedexpenses and one-time severance payment should be between $47 million and $55million.

Litigation expenses are difficult to predict, because we donot control timelines and request from the courts, nor do we control theactions that adversaries may take which may cause us to incur additionalexpenses, in any particular quarter.

Including the range of operating expenses I just gave you,our general litigation expenses of $10 million to $16 million, a very widerange given the level of activity that we are expecting in Q4 of 2007.

Also, we would like to remind you that as we outlined in our10-Q, we plan to hold our Annual Shareholders Meeting on December 19 at theWestin Hotel in Palo Alto and we look forward to see many of you over there.

That concludes our prepared remarks. Operator, would youplease open the call for questions.

Question-and-AnswerSession

Operator

Thank you. (Operator Instructions). We’ll take our firstquestion from Jeff Schreiner with American Tech Research.

Jeff Schreiner -American Tech Research

Good afternoon gentlemen. Thank you for taking my question.

Harold Hughes

Hello Jeff.

Jeff Schreiner -American Tech Research

Wanted to dig a little bit in to the agreement previouslywith Infineon and Qimonda and the potential triggers that may relate to theextension of payments. Have those triggers been met, and will we additionalrevenues in future quarters from the Infineon group?

Sharon Holt

Hi Jeff, this is Sharon.With respect to the agreement which by the way is now with Qimonda, theagreement was transferred shortly after Qimonda was spun out of Infineon.Certainly if we had met any of the triggers you would have heard from us aboutthat by now, because I think you’re well aware of what’s the triggers areroughly. That are part of that agreement. And we haven’t made any announcementsabout that.

We certainly continue to work towards positive outcomes inthe litigation with the other players in the DRAM industry. And we certainlyhope to trigger the follow-on payments from Qimonda, but we’ve made noannouncements to that effect yet.

Jeff Schreiner - AmericanTech Research

Okay and , I was wondering Satish if you could talk a littlebit about the commentary that was in the most recent Q, in relation to fixroyalties actually not being affected by the SEC decision. Should we assumegoing forward that only agreements with variable portions are going to beincluded or encompassed by the remedy?

Satish Rishi

Jeff the SEC order is fairly complex and I am not sure wecan do it justice in one or two sentences. But the application definitely istowards the variable royalty payment and for the fix royalty payers, each andevery customers is treated differently. So you have to go and talk to theindividual customers and see if any of their revenue that they believe, that issubject to the SEC orders above mark or not above mark. So I wouldn’t blanketit to say just that its related only to the fixed payers. But by and large at ahigher level, I think , it should be right to say that the variable rateroyalty payers have a bigger impact than the fixed payers.

Jeff Schreiner -American Tech Research

Okay. And then Harold recently there was a press release andI appreciate taking the time, in which you reported and saying that, there isgoing to be a breakout year in calendar year ’08. And I am not sure if you havemisquoted or is that’s what you want to say, but could you reaffirm thatstatement today in kind of go over some of the drivers that you see, in termsof driving a breakout year for Rambus in calendar year ’08?

Harold Hughes

I don’t recall having used exactly those words and oftentimes translations produce results maybe slightly different then what I hadintended. But to add some inputs to that general concept, this is the yearwhere many of the legal cases that we have worked very, very hard to bring totrial are coming to trial.

We remain optimistic that our position is the stronger oneand the expense notwithstanding and sufficient time took you over, the enormousexpense incurred in these trials. We look forward to getting in to court andwinning, and as a result of which increasing significantly our chance of comingup with settlements, that we find acceptable.

Secondly, many of the markets, frankly all of the consumermarkets, the PC markets are moving in directions of very, very high bandwidth.

And secondly, the explosion in handheld devices has added tothe bandwidth requirement a very, very low power requirement. It's in thoseareas that we have excellent technology, have announced certain products andlong as the marketing people next to me don't hit me. We intend to announceproducts some time during 2008 with regard to low power.

So, the combination of finally getting the court on some ofthese very important trials and having our proprietary products successful inthe marketplace, we do believe are two factors that should allow for something,I don't know if I would ever have said breakout, but obviously puts us in apretty advantageous position versus the DRAM industry that has been settled.Hope that helps.

Jeff Schreiner -American Tech Research

It does. Thank you very much for your time.

Harold Hughes

My pleasure.

Operator

We will take our next question from Mike Crawford with the RileyInvestment Management.

Mike Crawford - RileyInvestment Management

Thank you. First, on NAND, I think previously you said thatNAND needed to go faster for that market to see the benefits of Rambus'controller IP. Is there anymore color you can provide on NAND, like how fastdoes NAND have to go before a Rambus solution really helps?

Sharon Holt

Hi, Mike, this is Sharon.I seem to recall from the last conference call when we spoke about NAND, and, Ithink, in general, when we spoke about Flash, we mentioned that we were workingon some new technology to apply to Flash, and specifically to maybe enable theuse of Flash in applications where it has not traditionally been seen. And so,we're continuing to work towards that.

In terms of a specific speed, I wouldn't say that there is aspecific speed that would trigger the use of our technology, but if you tend tolook at the performance levels of Flash versus DRAM, Flash does still lagbehind particularly from the perspective of the interface and the performanceof the interface. So that may be the comment that you are referring to.

Mike Crawford - RileyInvestment Management

Okay, thank you. And I have another maybe, I don't know if Sharon this might be foryou as well. But Transmeta just signed a $250 million settlement with Intel,and they have some low power IP. Is there anyway you can compare and contrastwhat they have, what you have, is it complimentary or is it competitive over,tell me whether you have some comments on that?

Tom Lavelle

My recollection is that with regard to various processesspecific functionality, dealing with slowing down clocks speeds while stillmaintaining the system, and much of our technology, not surprisingly, isfocused on high-performance memory and to the extent that we have controllertechnology enabling that. It tends to be somewhat removed from what Transmetahave.

Mike Crawford - RileyInvestment Management

Okay, thank you. And then finally, I don't know if thismight be for Tom, but there had been counsel change in Delaware and I think Greg Stone had to comeinto the case late. Is he comfortable that everyone is up to speed there andyou are ready to go?

Tom Lavelle

We are very comfortable with Greg, as you probably know.Greg has done very well in our cases. I am very pleased that Greg is able tostep in and do this. But he knows this case very well and we are lucky to be ina position where we have a Greg Stone working with us.

Mike Crawford - RileyInvestment Management

Okay, thank you.

Tom Lavelle

Always good to give the ball to your best pitcher.

Operator

We will take our next question from Michael Cohen withPacific American Securities.

Michael Cohen -Pacific American Securities

Thank you. Congratulations on getting current with yourfilings.

Harold Hughes

Thank you.

Michael Cohen -Pacific American Securities

My first question is for Tom. We are all eagerly waiting theCAFC rulings and that has to do with this spoliation issue in the Samsung case.And then we on November 8th are going to see the spoliation trial start in Delaware. I wonder ifyou could talk a little bit about what would happen if we don’t have the CAFCruling prior to the start of that trial and how those two issues kind of relateto each other.

Tom Lavelle

Actually I don’t think the Delaware trial is going have any particularmajor impact, if we don’t hear from the CAFC first. We’re going forward withthat, and our plans on the Delawaretrial in front of Judge Robinson, irrespective of what happens in the CAFC.We’re obviously very hopeful about a decision in the CAFC, which could comedown any time now, and it could happen before, it could happen during, it couldhappen after, that’s the case in the Delaware.Our plans are to go forward and win in Delawareirrespective of what happens at the CAFC.

Michael Cohen -Pacific American Securities

Yes, hypothetically the CAFC ruled first and ruled in yourfavor. Could you see a situation where collateral estoppel might apply and wewouldn’t even need to finish trials?

Tom Lavelle

No, actually not, they are different parties. It offers avery interesting concept and I would rather not give out a legal lesson on aconference call but, it doesn’t work that way unfortunately for us.

Michael Cohen -Pacific American Securities

Okay. My other question is I believe you have some patentsup for reexamine in the PTO and I was wondering if you could talk a little bit,well that’s then.

Tom Lavelle

We’re comfortable with our patents, are well researched,well analyzed and will withstand scrutiny on the reexamine which as you werepointing out is happening in some of our patents, and as Harold pointed outearlier we've got a lot of patents. If one were to be found invalid, which sofar has not happened, but if one were to be found invalid or was changed by theprocess, we have a lot of other patents, upon which we rely and which we thinkconstitutes the value of this company going forward.

Michael Cohen -Pacific American Securities

Do you know off the top of your head how many are actuallyunder re-exam?

Tom Lavelle

Actually, no I was just counting the number of activelitigations on which were expecting outcomes and so I didn’t look at there-exams and put it into that list, so no don’t, I don’t have that number withme right now. I am sorry.

Michael Cohen -Pacific American Securities

Okay. But you are confident that you have some patents thathave already let's say Phase 2 (inaudible) state then deemed entrenched thatare not for re-exam?

Tom Lavelle

We’re confident as confident as we can be, based on thestatus of the patents that have been already in front of Judge Whyte and continuingto go forward with those patents and frankly as we said there are so many otherpatents we have. I am not too concerned about any one particular pattern.

Michael Cohen -Pacific American Securities

Okay. And my next question, probably will be that for Sharon. There are somevery interesting standardization efforts in the flash area called ONFI standsfor open NAND flash interface, and when I was looking at this, it looked reallylike to be a perfect place for your technology. And I was wondering if youcould talk a bit about, what you think about ONFI, if you think it’s apotential target market for the random technology or any comments do you haveon ONFI?

Sharon Holt

Sure Michael. So, first of all yes we are familiar with ONFIand in terms of commenting on whether we would be specifically targeting someof our technology towards that, I guess what I would say in general is thatwhat we try to do is rather than look at something that's already kind of outthere in the standardized space, we actually try to look further ahead tosolving new problems. So in that regard, we intend to run ahead of the market abit. And so, as we're looking at our NAND efforts going on here, we're actuallyobviously engaging with potential customers, taking a look at very difficultsystem levels problems and how we could apply our Flash technologies to those.That's the approach we're taking versus looking at the existing Flash space andeven existing standards in the current Flash market.

Michael Cohen -Pacific American Securities

Okay, thank you. And my last question is for Harold, this isa kind of expanding on the question that Jeff already asked about the breakoutyear. There was a recent PC World article that came out a few days ago and itstated that you see 2008 as a breakout year for Rambus technology to enterhigher volume production, as it wins over some HDTV clients. You already talkedabout Philips. It used the word clients plural. I was wondering if you couldtalk a little bit more about the HD, high-definition TV space and how you thinkthat fits into 2008 been a potentially good year?

Harold Hughes

Well, I think that specifics of the market are extremelyhigh bandwidth requirements and growing at rates, I think it surprise even us.And coupled with the high bandwidth requirement is the high bandwidth perdevice requirement in order to keep the clocks of the systems down in thesystem architecture, because these are becoming literally PCs within a TV lesscomplicated.

XDR, we believe is the ideal market as far as the XDR toenter. Obviously, we are engaging with as many of those designers as we can.Now, we will announce those well in advance to finding them. And many times aswe pointed out in the past, even when we do sign them, our customers are reluctantto allow us to talk about it and we never pre-announce the customer's product.So, we ask your forbearance here.

Michael Cohen -Pacific American Securities

Okay.

Harold Hughes

That there will be a while, but Sharon is working very hard in that area.

Michael Cohen -Pacific American Securities

Okay. Another thing the PC World article talked about is theXDR technology making headway into cell phone's mobile devices, another areayou touched on in the script. Is there any comments you would like to talkabout in terms of a low power that you have coming in?

Harold Hughes

I think that's the issue that I touched on earlier. It isamazing what people are doing with cell phones up to and including receivingbroadcast full motion video. This produces two very, very difficult to solveproblems.

The number one, the memory has to have a bandwidth necessaryto decompress and allow the presentation of full motion video. And number two,and probably even more vexing, that needs to be done with very, very littlepower dissipation.

You may recall that in January of this -- February of thisyear, we had a paper at ISSCC, they talked about our new technology in thatarea. So, the combination of that technology in the high bandwidth madepossible by the XDR architecture, again would be a pretty good solution for therole of cell phone manufacturers.

Michael Cohen -Pacific American Securities

Okay. And I missed the presentation from the InternationalSolid-State Circuit Conference, is that technology at a Capitol Hill?

Harold Hughes

That's correct.

Michael Cohen -Pacific American Securities

Okay. Thank you very much.

Harold Hughes

Thank you.

Operator

(Operator Instructions) We'll go next to Hamed Khorsand -BWS Financial

Hamed Khorsand - BWSFinancial

Good afternoon. My question was regarding the sequentialdecline that there has been in the royalty revenues? And wanted to see whatkind of assumptions are you using Q4?

Sharon Holt

Hamed this Sharon.Well, I can't obviously speak specifically to the details that are in the Q4guidance. Clearly we’re counting on an improvement over what we did in Q3. Aswe have mentioned in the last few calls, we have a lot of new businessdevelopment efforts going on, both on the product side as well as on the patentlicensing side.

We also do expect to see an up tick from customerengagements that are already underway. Some parts of our business do experienceseasonality, especially consumer electronics, where there are builds andpreparations for the Christmas season. So, we do see up ticks in royalties froma number of sources. So, we have got I would say all three of those things inplay here in the fourth quarter.

Hamed Khorsand - BWSFinancial

Just didn’t talk today on the conference call about theHD-TV’s and the previously with Texas Instruments. Is that the focus to seethem move forward on the consumer electronics side?

Sharon Holt

Well I think it depends on what you put into the consumerelectronics category. Right now we have four major markets of focus. Wecontinue to focus on computing systems, which has been a traditional area forRambus and high performance memory interfaces.

We also, as you know for many years have been a participantin the game console market, and we continue to focus on that for futureplatforms. In addition the HD-TV market, which we talked about here. And thenmobile, which is really a new market of focus for Rambus as we look at takingour low power technologies and applying them outside of our traditional marketsegments.

Hamed Khorsand - BWSFinancial

Okay. My last question is regarding the $1 million is beenheld by FTC, now is there been a transition away from the DDR to the FTC bythose customers to DDR, technologies is not under the FTC ruling.

Satish Rishi

Hamed this is Satish. No, not that we are aware of.

Hamed Khorsand - BWSFinancial

Okay. Should we expect that to happen with the new DDRreplacing the older DDR that’s been used currently by those customers?

Harold Hughes

Are you talking about the transition to DDR3?

Hamed Khorsand - BWSFinancial

Yeah.

Harold Hughes

Yeah, obviously over time that takes place, and as a resultthe model rates in the FTC ruling have less impact. But how and when thattransition takes place, we’ll be reluctant to speculate that time for now.

Tom Lavelle

And for clarification the FTC is not holding any of themoney it's either an Escrow or held in the bank.

Operator

That does conclude our question and answer session today atthis time I would like to turn the call back to over to our speakers for anyclosing remarks.

Satish Rishi

Thank you everybody for joining our call. We look forward toseeing you at the annual shareholders meeting. Thank you.

Operator

This does conclude today's conference call. We appreciateyour participation you may disconnect at this time.

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