5. Equity Incentive Plans and Stock-Based Compensation

As of September 30, 2012, 2,217,785 shares of the 21,400,000 shares approved under the 2006 Equity Incentive Plan (the “2006 Plan”) remain available for grant which included an increase of 6,500,000 shares approved by stockholders on April 26, 2012. The 2006 Plan is now the Company’s only plan for providing stock-based incentive awards to eligible employees, executive officers, non-employee directors and consultants; however, the 1997 Stock Option Plan (the “1997 Plan”) and the 1999 Non-statutory Stock Option Plan (the “1999 Plan”) will continue to govern awards previously granted under those plans.

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



	Shares Available for Grant
Shares available as of December 31, 2011	2,812,876
Increase in shares approved for issuance	6,500,000
Stock options granted (1)	(7,592,911	)
Stock options forfeited (2)	1,201,539
Stock options expired under former plans	(101,562	)
Nonvested equity stock and stock units granted (3)	(760,130	)
Nonvested equity stock and stock units forfeited (3)	157,973
Total available for grant as of September 30, 2012	2,217,785

_________________________________________


(1)	Amount includes 2,840,986 shares that were granted from the stock option exchange program (discussed below).


(2)	Amount excludes 6,449,255 shares that were surrendered from the stock option exchange program (discussed below) as the shares are no longer available for grant.


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

Stock Option Exchange Program

On April 26, 2012, at the 2012 Annual Meeting of Stockholders, the Company’s stockholders approved a one-time stock option exchange program (“option exchange”) for the employees other than the Company’s named executive officers, senior vice presidents and members of its Board of Directors, which allowed employees to surrender certain outstanding stock options for cancellation in exchange for the grant of new replacement options to purchase a lesser number of shares having an exercise price equal to the fair market value of the Company’s common stock on the replacement grant date. On June 22, 2012, the Company completed this offer. A total of 333 eligible employees participated in the option exchange. Pursuant to the terms and conditions of the option exchange, the Company accepted for exchange options totaling 6,449,255, representing approximately 87% of the total number of options eligible for exchange. All surrendered options were canceled effective as of the expiration of the option exchange, and immediately thereafter, in exchange therefore, the Company granted new options with an exercise price of $5.63 per share (representing the closing price of its common stock on June 22, 2012, as reported on the NASDAQ Global Select Market) to purchase an aggregate of 2,840,986 shares of common stock under the 2006 Plan. New options have a new contractual term of the longer of the original remaining contractual term of the surrendered options or five years, and generally will vest over a three-year period from the date of grant, with one-third of the shares vesting on the first year anniversary of the grant date and the remaining shares vesting monthly for the twenty-four months thereafter. The fair value of the new options granted was measured as the total of the unrecognized compensation cost of the original options surrendered and the incremental compensation cost of the new options granted. The incremental compensation cost of the new options granted was measured as the excess of the fair value of the new options granted over the fair value of the original options immediately before cancellation. As a result of the option exchange, the total incremental compensation cost of the new options was approximately $1.0 million. The total remaining unrecognized compensation cost related to the original options of $19.9 million and the incremental compensation cost of the new options granted of $1.0 million will be recognized over the three years requisite service period.

General Stock Option Information

The following table summarizes stock option activity under the 1997 Plan, 1999 Plan and 2006 Plan for the nine months ended September 30, 2012 and information regarding stock options outstanding, exercisable, and vested and expected to vest as of September 30, 2012.



	Options Outstanding
	Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
	(Dollars in thousands, except per share amounts)
Outstanding as of December 31, 2011	14,587,596		$	19.73
Options granted	7,592,911		5.83
Options exercised	(221,934	)	4.44
Options forfeited	(1,201,539	)	11.74
Options surrendered in stock option exchange program	(6,449,255	)	21.11
Outstanding as of September 30, 2012	14,307,779		12.64		6.22	$	1,506
Vested or expected to vest at September 30, 2012	12,492,826		13.48		5.84	1,173
Options exercisable at September 30, 2012	6,386,017		19.29		3.66	—

Included in stock options granted during the nine months ended September 30, 2012 are 1,745,000 stock options that contain a market condition. These options vest in three years if specified stock prices are achieved. The fair values of the options granted with a market condition were calculated using a binomial valuation model, which estimates the potential outcome of reaching the market condition based on simulated future stock prices. As of September 30, 2012, there were 1,485,000 stock options outstanding that require the Company to achieve minimum market conditions in order for the options to become exercisable. No options containing market conditions were outstanding as of December 31, 2011.

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value for in-the-money options at September 30, 2012, based on the $5.54 closing stock price of Rambus’ Common Stock on September 28, 2012 on the NASDAQ Global Select Market, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options outstanding and exercisable as of September 30, 2012 was 1,123,424 and 0, respectively.

Employee Stock Purchase Plan

Under the 2006 Employee Stock Purchase Plan (“ESPP”), the Company issued 169,398 shares at a price of $4.21 per share during the nine months ended September 30, 2012. The Company issued 146,034 shares at a price of $16.50 per share during the nine months ended September 30, 2011. As of September 30, 2012, 1,644,566 shares under the ESPP remain available for issuance which includes an increase of 1,500,000 shares approved by stockholders on April 26, 2012.

Stock-Based Compensation

For the nine months ended September 30, 2012 and 2011, the Company maintained stock plans covering a broad range of potential equity grants including stock options, nonvested equity stock and equity stock units and performance based instruments. In addition, the Company sponsors an ESPP, whereby eligible employees are entitled to purchase Common Stock semi-annually, by means of limited payroll deductions, at a 15% discount from the fair market value of the Common Stock as of specific dates.

Stock Options

During the three and nine months ended September 30, 2012, the Company granted 2,590,711 and 7,592,911 stock options (including options granted in the stock option exchange program and options granted that contain a market condition), respectively, with an estimated total grant-date fair value of $3.2 million and $32.3 million, respectively. During the three and nine months ended September 30, 2012, Rambus recorded stock-based compensation expense related to stock options of $3.6 million and $11.9 million, respectively.

During the three and nine months ended September 30, 2011, the Company granted 487,550 and 2,199,761 stock options, respectively, with an estimated total grant-date fair value of $4.6 million and $22.9 million, respectively. During the three and nine months ended September 30, 2011, Rambus recorded stock-based compensation expense related to stock options of $5.0 million and $15.2 million, respectively.

As of September 30, 2012, there was $31.3 million of total unrecognized compensation cost, net of expected forfeitures, related to non-vested stock-based compensation arrangements granted under the stock option plans. That cost is expected to be recognized over a weighted-average period of 3.0 years. The total fair value of shares vested as of September 30, 2012 was $84.7 million.

The total intrinsic value of options exercised was $0.1 million and $0.2 million for the three and nine months ended September 30, 2012, respectively. The total intrinsic value of options exercised was $1.7 million and $5.7 million for the three and nine months ended September 30, 2011, respectively. Intrinsic value is the total value of exercised shares based on the price of the Company’s common stock at the time of exercise less the cash received from the employees to exercise the options.

During the nine months ended September 30, 2012, net proceeds from employee stock option exercises totaled approximately $1.0 million.

Employee Stock Purchase Plan

For the three and nine months ended September 30, 2012, the Company recorded compensation expense related to the ESPP of $0.6 million and $1.9 million, respectively. For the three and nine months ended September 30, 2011, the Company recorded compensation expense related to the ESPP of $0.5 million and $1.3 million, respectively. As of September 30, 2012, there was $0.2 million of total unrecognized compensation cost related to stock-based compensation arrangements granted under the ESPP. That cost is expected to be recognized over one month.

There were no tax benefits realized as a result of employee stock option exercises, stock purchase plan purchases, and vesting of equity stock and stock units for the three and nine months ended September 30, 2012 and 2011 calculated in accordance with accounting for share-based payments.

Valuation Assumptions

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

The following table presents the weighted-average assumptions used to estimate the fair value of stock options granted that contain only service conditions in the periods presented:



	Stock Option Plans
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012		2011
Stock Option Plans
Expected stock price volatility	65		%	75		%	60-68%		50-75%
Risk free interest rate	0.6		%	2.3		%	0.6-0.9%		2.3-2.8%
Expected term (in years)	5.5			6.1			5.5-5.7		6.0-6.1
Weighted-average fair value of stock options granted to employees	$	3.06		$	9.48		$	3.61	$	10.43

During the three months ended September 30, 2012, the Company granted 1,745,000 stock options that contain a market condition. The fair values of the options granted with a market condition were calculated using a binomial valuation model, which estimates the potential outcome of reaching the market condition based on simulated future stock prices. The weighted-average fair value associated with these market condition options was immaterial.



	Employee Stock Purchase Plan
		Nine Months Ended
		September 30,
		2012			2011
Employee Stock Purchase Plan
Expected stock price volatility		63		%	56		%
Risk free interest rate		0.2		%	0.1		%
Expected term (in years)		0.5			0.5
Weighted-average fair value of purchase rights granted under the purchase plan		$	1.61		$	5.96

____________________________________

No shares were issued under the Employee Stock Purchase Plans during the three months ended September 30, 2012 and 2011.

Nonvested Equity Stock and Stock Units

The Company grants nonvested equity stock units to officers, employees and directors. During the three and nine months ended September 30, 2012, the Company granted nonvested equity stock units totaling 46,856 and 506,753 shares under the 2006 Plan, respectively. These awards have a service condition, generally a service period of four years, except in the case of grants to directors, for which the service period is one year. For the three and nine months ended September 30, 2012, the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately $0.2 million and $3.5 million, respectively. The Company occasionally grants nonvested equity stock units to its employees with vesting subject to the achievement of certain performance conditions. During the three and nine months ended September 30, 2012 and 2011, the achievement of certain performance conditions for certain performance equity stock units was considered probable, and as a result, the Company recognized stock-based compensation expense related to these performance stock units for all periods; the aggregate amounts were not significant.

For the three and nine months ended September 30, 2012, the Company recorded stock-based compensation expense of approximately $1.0 million and $4.3 million, respectively, related to all outstanding unvested equity stock grants. For the three and nine months ended September 30, 2011, the Company recorded stock-based compensation expense of approximately $1.8 million and $5.1 million, respectively, related to all outstanding unvested equity stock grants. Unrecognized stock-based compensation related to all nonvested equity stock grants, net of estimated forfeitures, was approximately $5.7 million at September 30, 2012. This is expected to be recognized over a weighted average period of 2.4 years years.

The following table reflects the activity related to nonvested equity stock and stock units for the nine months ended September 30, 2012:



Nonvested Equity Stock and Stock Units	Shares		Weighted- Average Grant-Date Fair Value
Nonvested at December 31, 2011	763,510		$	18.02
Granted	506,753		6.95
Vested	(312,099	)	18.31
Forfeited	(105,315	)	13.52
Nonvested at September 30, 2012	852,849		11.88