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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K



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|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the year ended December 31,
    2002                                                    
|  
|or
|  
|o  |  | 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 000-31803



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Transmeta Corporation

(Exact name of registrant as specified in its
charter)


|                         |  |                                  
|------------------------ |  | ---------------------------------
|Delaware                 |  | 77-0402448                       
|(State of Incorporation) |  | (IRS Employer Identification No.)

3990 Freedom Circle, Santa Clara, CA
95054

(Address of Principal Executive Offices,
including zip code)


(408) 919-3000

(Registrants Telephone Number, including
area code)


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

None


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

Common Stock, $0.00001 par value per
share


Stock Purchase Rights


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 þ         No o

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

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

As of June 28,2002, the aggregate market
value of the shares of common stock held by non-affiliates of
the Registrant (based on the average bid and asked prices price
of $2.35 for the common stock as quoted by the Nasdaq National
Market on that date,) was approximately $250,580,726.

As of March 21, 2003, there were
138,530,976 shares of the Registrants common stock,
$0.00001 par value per share, outstanding. This is the only
outstanding class of common stock of the Registrant.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants definitive
Proxy Statement for its Annual Meeting of Stockholders to be
held in May 2003 are incorporated by reference into Parts II
and III of this report on Form 10-K.



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TABLE OF CONTENTS



|                                                  |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                           
|                                                  | Item 1. Business                                                                                       
|                                                  | Item 2. Properties                                                                                     
|                                                  | Item 3. Legal Proceedings                                                                              
|                                                  | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II                                          
|                                                  | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|                                                  | Item 6. Selected Financial Data                                                                        
|                                                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                  | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                    
|                                                  | Item 8. Financial Statements and Supplementary Data                                                    
|REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
|CONSOLIDATED BALANCE SHEETS                      
|CONSOLIDATED STATEMENTS OF OPERATIONS            
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY  
|                                                  | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|PART III                                         
|                                                  | Item 10. Directors and Executive Officers of the Registrant                                            
|                                                  | Item 11. Executive Compensation                                                                        
|                                                  | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                  | Item 13. Certain Relationships and Related Transactions                                                
|                                                  | Item 14. Controls and Procedures                                                                       
|PART IV                                          
|                                                  | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|SIGNATURES                                       
|POWER OF ATTORNEY                                
|CERTIFICATIONS                                   
|CERTIFICATIONS                                   
|EXHIBIT 23.01                                    
|EXHIBIT 99.01                                    
|EXHIBIT 99.02                                    



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TRANSMETA CORPORATION

FISCAL YEAR 2002 FORM 10-K


INDEX

|         |  |                                                                                           |  |      |    | 
|-------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|Item     |  |                                                                                           |  | Page
|         |  |                                                                                           |  |     
|PART I  
|Item 1   |  | Business                                                                                  |  |      | 2  | 
|Item 2   |  | Properties                                                                                |  |      | 9  | 
|Item 3   |  | Legal Proceedings                                                                         |  |      | 9  | 
|Item 4   |  | Submission of Matters to a Vote of Security
    Holders                                   |  |      | 11 | 
|PART II 
|Item 5   |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |  |      | 11 | 
|Item 6   |  | Selected Financial Data                                                                   |  |      | 12 | 
|Item 7   |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |      | 13 | 
|Item 7A  |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |  |      | 35 | 
|Item 8   |  | Financial Statements and Supplementary Data                                               |  |      | 36 | 
|Item 9   |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  |      | 65 | 
|PART III
|Item 10  |  | Directors and Executive Officers of the Registrant                                        |  |      | 65 | 
|Item 11  |  | Executive Compensation                                                                    |  |      | 65 | 
|Item 12  |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  |      | 65 | 
|Item 13  |  | Certain Relationships and Related Transactions                                            |  |      | 65 | 
|PART IV 
|Item 14  |  | Controls and Procedures                                                                   |  |      | 65 | 
|Item 15  |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |  |      | 66 | 
|         |  | Signatures                                                                                |  |      | 69 | 

We were incorporated in California in March 1995
and reincorporated in Delaware in October 2000. Our principal
executive offices are located at 3990 Freedom Circle,
Santa Clara, California 95054, and our telephone number at
that address is (408) 919-3000. Transmeta®, the
Transmeta logo, Crusoe®, the Crusoe logo, Code
MorphingTM, LongRun® and MidoriTM are
trademarks of Transmeta Corporation in the United States and
other countries. All other trademarks or trade names appearing
in this report are the property of their respective owners.

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CAUTION REGARDING FORWARD-LOOKING
STATEMENTS

This Report contains forward-looking statements
that are based upon our current expectations, estimates and
projections about our industry, and that reflect our beliefs and
certain assumptions based upon information made available to us
at the time of this Report. Words such as
anticipates, expects,
intends, plans, believes,
seeks, estimates, may,
could, will and variations of these
words or similar expressions are intended to identify
forward-looking statements. Such statements include, but are not
limited to, statements concerning anticipated trends or
developments in our business and the markets in which we
operate, the competitive nature and anticipated growth of those
markets, our expectations for our future performance and the
market acceptance of our products, our ability to migrate our
products to smaller process geometries, and our future gross
margins, operating expenses and need for additional capital.

Investors are cautioned that such forward-looking
statements are only predictions, which may differ materially
from actual results or future events. These statements are not
guarantees of future performance and are subject to risks,
uncertainties and assumptions that are difficult to predict.
Some of the important risk factors that may affect our business,
results of operations and financial condition are set out and
discussed below in the section entitled Risks That Could
Affect Future Results. You should carefully consider those
risks, in addition to the other information in this Report and
in our other filings with the SEC, before deciding to invest in
our company or to maintain or change your investment. Investors
are cautioned not to place reliance on these forward-looking
statements, which reflect managements analysis only as of
the date of this Report. We undertake no obligation to revise or
update any forward-looking statement for any reason.




PART I






|        |         
|------- | --------
|Item 1. | Business

Overview

Transmeta Corporation develops and sells
software-based microprocessors and develops additional hardware,
software and system technologies that enable manufacturers to
build highly efficient computing systems characterized by low
power consumption, reduced heat dissipation and the high
performance required to run standard x86 compatible programs. We
originally developed our family of Crusoe microprocessors for
lightweight notebook computers and other mobile computing
devices, but we have developed and are continuing to develop
microprocessors suitable for a variety of existing and emerging
end markets in which x86 program compatibility and energy and
thermal efficiency are desirable.

The Microprocessor Market

The microprocessor market includes at least two
categories, which are distinguished by the basic function of the
microprocessor. A microprocessor that performs general computing
tasks is known as the central processing unit (CPU) of a
computer system. A microprocessor used for control applications
is often referred to as an embedded processor. We have
historically supplied processors in the CPU category and have
focused particularly on supplying energy efficient
microprocessors for notebook and other mobile personal computers
(PCs). More recently, in January 2003, we publicly announced our
line of Crusoe Special Embedded (SE) processors, which are
energy efficient microprocessors suited for embedded
applications.

A CPU processor is an integrated circuit,
generally consisting of millions of transistors, that serves as
the brain of a computer system, such as a PC. The CPU processor
is typically the component most critical to the performance and
efficiency of PCs. The CPU processor controls data flowing
through the electronic system and manipulates data as specified
by the hardware and software that controls the system. In 1981,
International Business Machines Corporation
(IBM) introduced its first PC containing a microprocessor
based upon the x86 instruction set developed by Intel
Corporation and utilizing the Microsoft Corporation MS-DOS®
operating system. As circuit design and large scale integration
process technology have evolved, the performance and
functionality of each new generation of x86 microprocessors have
increased. Personal computers that retained software
compatibility with the x86 computer instruction language have
thrived, while

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those that tried to use other microprocessors
incompatible with the x86 PC have not sustained significant
market share. In addition to compatibility with standalone x86
PC software, the ability to access the entire Internet and
obtain the full Internet experience usually requires x86
compatibility. The x86 microprocessor market has been dominated
by Intel since IBMs introduction of the PC.


The x86 microprocessor market is characterized by
intense competition, short product life cycles and rapid
advances in product design and process technology. Today, we
believe that the greatest demand for microprocessors is from PC
manufacturers. With few exceptions, PC manufacturers require x86
microprocessors that are compatible with Microsoft Windows®
operating systems. Improvements in the performance
characteristics of microprocessors and decreases in production
costs resulting from advances in process technology have
broadened the market for PCs and, as a result, increased the
demand for microprocessors.

The market in which PC original equipment
manufacturers (OEMs) operate is intensely competitive. Most PC
suppliers have evolved from fully integrated manufacturers with
proprietary system designs to vendors focused on building brand
recognition and distribution capabilities. Almost all of these
suppliers now rely on Intel or other third-party manufacturers
for the major subsystems of their PCs, such as the motherboard
and chipsets. These suppliers are also increasingly outsourcing
the design and manufacture of complete systems. The third-party
manufacturers of these subsystems, based primarily in Asia, are
focused on providing PCs, motherboards and complementary chipset
devices that incorporate the latest trends in features and
performance at low prices. Increasingly, these third-party
manufacturers are also supplying fully configured PC systems
through alternative distribution channels.

Embedded processors also comprise a significant
segment of the microprocessor market. Embedded processors are
general purpose devices that perform dedicated applications with
limited or no user interface and programmability. A system
designed around an embedded processor is typically preprogrammed
to execute a specific task or function, making it a closed
system which cannot be programmed by an end user. Markets for
embedded processors include industrial automation, scientific
instrumentation, retail kiosks, point-of-sale terminals,
automotive infotainment, process control and home automation
systems.

Transmetas Product
Technologies

We develop and sell software-based
microprocessors and develop additional hardware, software, and
system technologies that enable manufacturers to build highly
efficient computing systems characterized by low power
consumption, reduced heat dissipation and the high performance
required to run standard x86 compatible programs. We originally
developed our family of Crusoe microprocessors for lightweight
notebook computers and other mobile computing devices, but we
have developed and are continuing to develop microprocessors
suitable for a variety of existing and emerging end markets in
which x86 program compatibility and energy and thermal
efficiency are desirable.

Our approach to microprocessor design implements
substantial portions of the microprocessor functionality in
software. Our microprocessors are unique because, unlike
traditional microprocessors that are built entirely with silicon
hardware, they are composed of both software and hardware
components. When combined, these two components form a
microprocessor solution that is compatible with software
programs designed for x86 PC compatible computers, operates
using less power than most other x86 microprocessors and runs
standard PC software and Internet applications. We believe that
there are several technical and economic benefits to this
approach. By partitioning the complex problem of designing a
microprocessor into two pieces, each piece is individually
simpler to implement. A substantial portion of the functionality
of our microprocessor is implemented with software, which allows
the remaining functionality to be implemented in a relatively
simple semiconductor chip.

We have developed substantial technical expertise
and technology in the following core elements of our
microprocessors:



| |   |                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Code Morphing Software.The software component of our
    microprocessors is called Code Morphing software, because it
    dynamically translates, or morphs, x86 instructions into
    instructions for our very long instruction word processors. Code
    Morphing software dynamically translates from the ones and

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | zeros of the x86 software instructions into a
    functionally equivalent but simpler set of ones and zeros for
    our hardware chip to decode and execute. The technology involved
    in Code Morphing software is similar to that used in advanced
    compilers, but with the input being binary programs rather than
    high-level language source code. Code Morphing software
    translates small groups of instructions incrementally, on an
    as-needed basis. Once a group of instructions is translated,
    those translated instructions are cached for successive
    executions without the need for further translation. Since
    instructions in an application often execute millions of times
    or more, performance costs associated with translation are
    quickly amortized. Code Morphing software constantly monitors
    the programs a user is running in order to re-optimize the
    operation of those programs so as to maximize the energy
    efficiency and performance of our microprocessors.                                                                                                                                                     
|
| |  | Very Long Instruction Word
    (VLIW) Processor Hardware.The
    hardware component of our microprocessors is a VLIW processor
    chip. Our VLIW chip is responsible for basic arithmetic
    computation, and the control and caching functions. It currently
    supports 128-bit and 64-bit wide instructions, and will support
    256-bit instructions for our next generation TM8000 processor.
    Each of these wide instructions can control multiple functional
    units in parallel for high performance under software control.
    For example, a single 128-bit VLIW instruction might
    simultaneously control an integer addition, an integer
    subtraction, a memory load and a branch. Our microprocessors
    currently employ a number of advanced features. Our
    microprocessors have relatively large Level 1 instruction
    caches and large Level 1 data caches. Our microprocessors
    also contain on-chip Level 2 caches that improve
    performance by reducing the average time to access data from
    memory, and also help reduce power by decreasing the number of
    power-burning memory accesses to dynamic random access memory,
    or DRAM.
|
| |  | LongRun Power Management.Our proprietary LongRun technology is
    enabled by the monitoring and optimization capabilities of Code
    Morphing software. LongRun monitors levels of user activity to
    determine how much performance is actually needed. Our chip has
    special purpose hardware that allows LongRun to rapidly adjust
    the frequency and voltage of the chip to a variety of levels to
    closely match the needed level of performance. Reducing
    frequency and voltage can substantially reduce the power
    consumed by our microprocessors, which in turn leads to longer
    battery life.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Integrated Northbridge Chipset.Because we have moved many traditional
    chip functions from hardware into software, the basic processor
    requires a relatively small chip area. This provides the
    opportunity to integrate a full PCI bus controller, a
    synchronous DRAM, or SDRAM, memory interface, and, on some
    Crusoe microprocessors, a double data rate SDRAM, or DDR SDRAM,
    memory interface. A PCI bus connects a processor to user
    input/output devices such as a graphics controller or modem.
    These functions have been traditionally provided in a second
    chip, called a northbridge. Our microprocessors integrate this
    northbridge functionality onto the same silicon die as the
    processor. This increased level of integration reduces both
    power requirements and motherboard area, which are critical
    resources in small mobile devices.                                                                                                                                                                                                                                                                                    

Our innovative software-based microprocessor
technologies can enable computers engineered with our
microprocessors to achieve a variety of benefits, including
extended battery life, reduced heat dissipation, lighter weight,
and competitive performance and full compatibility with x86 and
Internet software.

In support of our microprocessor development and
business, we are also are engaged in the research, design,
product development and system integration of many of the
software and hardware technologies that make up a complete x86
PC compatible computer system. In addition to the
microprocessor, the quality of the final computer system depends
on the successful integration and optimization of all of the
various hardware and software components in the computer. For
example, we have developed tools, methodologies, techniques and
related expertise in the development of basic input/output
software, or BIOS, power management technologies for energy
efficiency and battery life, and thermal management technologies
to reduce heat dissipation. We have also invested substantial
resources in developing tools, expertise and test environments
for compatibility testing. We test compatibility across three
major areas: x86 compatibility, hardware compatibility, and full
operating system and application compatibility. Our
understanding of the complete

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computer system and our ability to provide and
improve an optimized total platform solution for our customers
are the result of our core competencies and technologies.


We also design and build, on a limited scale,
PC-compatible computer systems based on our microprocessors. We
build these systems for internal engineering use in order to
test our microprocessors in a real system environment. We
believe that the detailed design specifications are valuable to
our customers as known working reference designs. By providing
schematics, motherboard layout and extensive design notes, we
can help our customers save time to market. We have a systems
engineering department that develops and builds reference
designs suitable for use in notebook computers and embedded
systems. We also use these systems for many in-house purposes,
such as testing new Code Morphing software, testing basic
input/output systems, benchmarking and compatibility testing. We
also take an active role in helping our customers debug and
optimize the design of their platforms for battery life and
performance.

Transmetas Strategy

Our objective is to supply industry-leading
energy efficient microprocessor solutions that deliver x86
software compatibility at a variety of compelling cost and
performance points. Key elements of our strategy include:

Extending Our Expertise in Software-Based
Microprocessor Technologies.We plan
to continue to extend our expertise in software-based
microprocessor technology in order to develop and bring to
market differentiated microprocessor products. We have and will
continue to develop successive generations of hardware
architectures and Code Morphing software optimizations to
further enhance power management and performance, while
maintaining x86 software compatibility. We also will continue to
exploit the unique characteristics of software to continue to
move additional functions from hardware into software, and to
develop and implement new features, such as security. We plan to
continuously extend the ability of our Code Morphing software to
learn about the characteristics of an application
program while it is running, and to use this knowledge to
improve performance and reduce power consumption.

Focusing on Mobile Computer Markets.Our initial goal has been to target
our microprocessors at growing markets where energy efficiency,
mobility and x86 PC software compatibility are paramount, such
as in the mobile Internet computing market. We believe that
mobile Internet computing devices are at the convergence point
between communications and computing. Our current products are
directed at the market for ultra-light mobile notebook
computers, which typically weigh less than three pounds and
feature extended battery life. We are also focused on evolving
markets, where energy efficiency and low cost are important.

Developing New Markets Beyond Mobile
Computing.We also believe that there
are new market opportunities for our microprocessors where
energy efficiency and x86 software compatibility are
particularly important, but where mobility and battery life may
not be a factor. Next generation cable television set-top boxes,
for example, will need x86 compatibility to provide Internet
connectivity and web browsing, and sufficient performance to
deliver streaming media in a home environment where a cool and
quiet system without a noisy fan will be desired. Other emerging
markets for which the energy efficiency advantages and
software-based design of our products are particularly
attractive include quiet desktop PCs, small office/home office
servers and high-density blade servers.

Collaborating with Other Companies that
Enhance Our Business.We work closely
with our OEM customers to collaborate on the specifications for
our next generation products. We have continued to develop our
working relationship with Microsoft in order both to ensure
compatibility between our microprocessors and Microsofts
software products and to collaborate on future products. We work
with our foundry partner Taiwan Semiconductor Manufacturing Co.,
or TSMC, to fabricate silicon wafers using advanced
manufacturing process technologies rather than developing our
own manufacturing facilities. We additionally work with Advanced
Semiconductor Engineering, or ASE, for substantially all of our
assembly and test services.

Developing and Sharing with Customers Our
Systems Expertise.To speed the
adoption of our technology and improve our customers
time-to-market, we often provide potential customers with
complete reference computer system solutions. By building an
entire computer system, we can innovate across all the

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components of a computer system and help our
customers resolve system design issues. We are committed to
bringing expertise to our customers not only in microprocessors,
but also in the engineering know-how of motherboard design,
porting of basic input/output system software, operating system
bring up, compatibility testing, power management tuning and
thermal design issues. We believe that our ability to provide
comprehensive systems expertise will continue to improve our
customers time-to-market and accelerate the adoption of
the Crusoe solution.


Products

In January 2000, we announced our first family of
microprocessor products under the brand name Crusoe. The Crusoe
microprocessor family has evolved to include multiple models
that feature different levels of performance and different cost
structures. Our current products include the TM5400/ TM5600
generation and TM5500/ TM5800 generation Crusoe microprocessors,
the Crusoe Special Embedded (SE) microprocessors, and our next
generation TM8000 microprocessor expected to be commercially
available during the third quarter of 2003.

The TM5400 and TM5600 processors were
manufactured prior to 2002 in a 0.18 micron CMOS technology.
These microprocessors are similar except in the size of their
level 2 cache. The TM5400 has a 256 KByte level 2
cache, and the TM5600 has a 512 KByte level 2 cache.
Both processors have a 64 KByte level 1 data cache and
64 KByte level 1 instruction cache as well as an
integrated northbridge, which consists of a PCI bus
controller, a SDR DRAM controller, and a DDR DRAM controller.
These processors feature maximum operating frequencies up to
667 MHz.

The TM5500 and TM5800 processors are manufactured
in a 0.13 micron CMOS technology. These microprocessors are
similar except in the size of their level 2 cache. The
TM5500 has a 256 KByte level 2 cache, and the TM5800 has a
512 KByte level 2 cache. Both processors have a
64 KByte level 1 data cache and 64 KByte
level 1 instruction cache as well as an integrated
northbridge, which consists of a PCI bus controller,
a SDR DRAM controller, and a DDR DRAM controller. These
processors currently feature maximum operating frequencies up to
1000 MHz. We introduced the TM5500/ TM5800 in June 2001 and
began to derive product revenue from TM5500/ TM5800 sales during
the fourth quarter of 2001.

The Crusoe SE processors are x86 software
compatible general purpose processors designed specifically for
embedded applications. They are also manufactured in a 0.13
micron CMOS technology.

The TM8000 processor, our next generation
microprocessor product, was publicly demonstrated in November
2002. We publicly announced information about the TM8000 in
February 2003. Our TM8000 processors will also be manufactured
in a 0.13 micron CMOS technology. In addition to our legacy
Code Morphing software and LongRun technologies, the TM8000
includes three new high performance bus interfaces. It has an
on-chip 400 MHz HyperTransportTM bus interface,
for increased input/output efficiency. The new processor also
includes an on-chip Double Date Rate 400 (DDR-400) SDRAM
memory interface, which will substantially increase throughput
over earlier DDR-266 interfaces. The TM8000 also has an on-chip
AGP-4X graphics interface for industry standard, high
performance graphics solutions. All three of these new
interfaces allow the TM8000 processor to achieve more work per
clock, which results in greater energy efficiency and longer
battery life for mobile computer users. The first TM8000
processors are expected to feature maximum operating frequencies
up to 1200 MHz, and to be commercially available in the
third quarter of 2003.

Customers

We currently sell our products to many of the
computing industrys leaders who in turn produce cutting
edge mobile computing solutions. Our customers include, among
others, Sony Electronics, Fujitsu, Uniquest (acting as the
distributor of our product for the Hewlett-Packard Tablet PC),
Toshiba, NEC, Hitachi, Sharp, Casio and Siltrontech Electronics.
Our server customers include RLX Technologies and NEC. Sony
Electronics and Fujitsu accounted for 37% and 26%, respectively,
of our net product revenue in fiscal 2002.

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Sales and Marketing

We sell our products directly to OEMs and, to a
lesser extent, through distributors, stocking representatives
and manufacturers representatives. We have added
manufacturers representatives and distributors in Europe,
and manufacturers representatives in North America. Etron
Corporation Ltd. is our manufacturers representative for
Korea. Uniquest, Siltrontech Electronics and Edom Technology are
our primary distributors in Hong Kong and Taiwan, and All
American Semiconductor is our exclusive distributor in North
America. Inno Micro Corporation and Shinden Hightex Corporation
have been added as distributors for Japan. Our distributors are
restricted from selling to certain OEMs and major notebook
manufacturers and have provisions in their agreements specifying
inventory levels, price protection policies and rights of return
policies for non end-of-life products. As needed, we will
continue to add representation to our current sales and
distribution network.

In addition, we have field applications engineers
who work directly with our customers. We have opened offices in
Taiwan and Japan to provide sales and customer support. We work
with our potential customers to select, integrate and tune
hardware and software system components that make up the final
computer system. We also provide potential customers with
reference platform designs, which we believe will enable our
customers to achieve easier and faster transitions from the
initial prototype designs through final production releases. We
believe these reference platform designs also will enhance our
targeted customers confidence that our products will meet
their market requirements and product introduction schedules.

Manufacturing

We use third-party manufacturers for wafer
fabrication. By subcontracting our manufacturing, we focus our
resources on product design and eliminate the high cost of
owning and operating a semiconductor fabrication facility. This
fabless business model also allows us to take advantage of the
research and development efforts of manufacturers, and permits
us to work with those manufacturers that offer the most advanced
manufacturing processes and competitive prices.

We currently use Taiwan Semiconductor
Manufacturing Co., or TSMC, to fabricate wafers for our
microprocessors. We place orders with TSMC on a purchase order
basis. We do not have a manufacturing agreement with TSMC or a
guaranteed level of production capacity or long term contractual
wafer pricing with TSMC. TSMC may allocate capacity to other
companies and reduce deliveries to us on short notice.

Our designs are compatible with industry-standard
CMOS manufacturing processes. Substantially all of our products
are now fabricated using 0.13 micron process technologies. We
continuously evaluate the benefits, on a product-by-product
basis, of migrating to a smaller geometry process technology to
reduce costs and increase the performance of our
microprocessors. Difficulties in shifting to smaller geometry
process technologies or new manufacturing processes have and may
continue to lead to delays in product deliveries or may lead to
reductions in manufacturing yields.

We currently contract with Advance Semiconductor
Engineering, or ASE, to perform the initial testing of the
silicon wafers that contain our microprocessors. After initial
testing, the silicon wafers are cut into individual
semiconductors and assembled into packages. All testing is
performed on standard test equipment using proprietary test
programs developed by our test engineering group. We
periodically inspect our test facilities to ensure that their
procedures remain consistent with those required for the
assembly of our products. We rely upon ASE to assemble and test
substantially all of our products. This reliance on ASE could
result in product shortages or delays in the future. If these
shortages or delays were significant, our customers might seek
alternative sources of supply, which could harm our operating
results and reputation.

We participate in quality and reliability
monitoring through each stage of the production cycle by
reviewing data from our wafer fabrication plants and assembly
subcontractor. We closely monitor wafer fabrication plant
production to enhance product quality and reliability and yield
levels.

7



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##### Table of Contents



Competition

The market for microprocessors is intensely
competitive, rapidly evolving and subject to rapid technological
change. We believe that competition will become more intense in
the future and may cause price reductions, reduced gross margins
and loss of market share, any one of which could significantly
reduce our future revenue and increase our losses. Significant
competitors that offer microprocessors for the notebook computer
market include Intel, Advanced Micro Devices and VIA
Technologies. Intel currently manufactures lower power versions
of its microprocessors targeting applications in the ultra-light
notebook computer market.

We compete on the basis of a variety of factors,
including:



| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | technical innovation;                                                                                                          
|
| |  | performance of our products, including their
    power usage, product system compatibility, speed, reliability
    and density;
|
| |  | product price;                                                                                                                 
|
| |  | product availability;                                                                                                          
|
| |  | reputation and branding; and                                                                                                   
|
| |  | technical support.                                                                                                             

Many of our current and potential competitors
have longer operating histories, significantly greater
financial, technical, product development and marketing
resources, greater name recognition and larger customer bases
than we do. Many of our competitors also have significant
influence in the industry. We may not be able to compete
effectively against current and potential competitors,
especially those with significantly greater resources and market
leverage.

Intellectual Property

Our success depends in part upon our ability to
maintain the proprietary aspects of our technology and to
operate without infringing the proprietary rights of others. We
rely on a combination of patents, copyrights, trademarks, trade
secret laws and contractual restrictions on disclosure to
protect our intellectual property rights. Our current patents
principally cover microprocessors, software, components for
microprocessors and systems including microprocessors. It is
possible that no patents will issue from additional patent
applications that we have filed. Even if additional patents are
issued, taken together with our existing patents, they may not
provide sufficiently broad protection to protect our proprietary
rights. We hold a number of trademarks, including Transmeta,
Crusoe, LongRun and Code Morphing.

Legal protections afford only limited protection
for our technology. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy
aspects of our products or to obtain and use information that we
regard as proprietary. In addition, leading companies in the
semiconductor industry have extensive intellectual property
portfolios relating to semiconductor technology. From time to
time, third parties, including these leading companies, may
assert exclusive patent, copyright, trademark and other
intellectual property rights to technologies and related methods
that are important to us. We have received, and may in the
future receive, communications from third parties asserting
patent or other intellectual property rights covering our
products. There are currently no such third party claims that we
believe to be material. In the future, however, litigation may
be necessary to defend against claims of infringement or
invalidity, to determine the validity and scope of the
proprietary rights of others, to enforce our intellectual
property rights, or to protect our trade secrets.

Employees

At December 31, 2002, we employed
289 people in the United States, Japan, Taiwan and Europe.
Of these employees, 216 were engaged in research and
development, 28 were engaged in sales and marketing and 45 were
engaged in general and administrative functions. None of our
employees is subject to any collective bargaining agreements. We
believe that our employee relations are good.

8



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##### Table of Contents



Available Information

We make available free of charge on or through
our Internet address located at www.transmeta.com our
annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments
to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after we
electronically file that material with, or furnish it to, the
Securities and Exchange Commission.






|        |           
|------- | ----------
|Item 2. | Properties

We lease a total of approximately
131,225 square feet of office space in four buildings in a
business park complex located in Santa Clara, California.
We lease space in these buildings under four separate leases all
of which expire in June 2008. During fiscal 2002, we subleased
approximately 8,280 square feet of office space in
Santa Clara to a single subtenant. The sublease agreement
expired in July 2002 and the subtenant vacated the subleased
office space. We also lease approximately 5,000 square feet
of office space in a two-story office building located in Acton,
Massachusetts under a separate lease agreement, which expires in
February 2004. We also lease office space in Taiwan, Japan and
Europe to support our sales and marketing personnel worldwide.
As a result of our workforce reduction completed in the third
quarter of fiscal 2002, we vacated a total of approximately
72,730 square feet of office space in Santa Clara,
California and Acton, Massachusetts as of September 30,
2002. We have listed the excess office space with a real estate
broker in an effort to secure one or more subtenants, and in
early fiscal 2003, we subleased 8,600 square feet of our
vacant facilities. We believe the facilities we currently occupy
are adequate to meet our needs for the foreseeable future.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

Beginning in June 2001, Transmeta, its directors,
and certain of its officers were named as defendants in several
putative shareholder class actions filed in the United States
District Court for the Northern District of California.(1) The
Court consolidated those complaints into a single action
entitled In re Transmeta Corporation Securities Litigation, Case
No. C 01-02450 WHA. In December 2001, plaintiffs filed
their consolidated amended complaint. The consolidated amended
complaints purported to allege a class action on behalf of all
persons, other than the individual defendants and the other
officers of Transmeta, who purchased or acquired common stock of
Transmeta during the period from November 7, 2000 to
July 19, 2001. The consolidated amended complaints alleged
violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended, and Rule 10b-5
promulgated thereunder, and Sections 11 and 15 of the
Securities Act of 1933, as amended. In March 2002, the Court
granted in part and denied in part defendants motions to
dismiss the consolidated amended complaint. In May 2002, the
Court granted in part and denied in part defendants motion
to dismiss the second amended complaint, and denied
plaintiffs motion for leave to file a third amended
complaint. In June 2002, defendants answered the second amended
complaint as to the only surviving claim. In July 2002,
defendants filed a motion for summary judgment relating to that
claim. Plaintiffs moved for class certification, and the Court
was scheduled to hear defendants motion for summary
judgment and plaintiffs motion for class certification in
December 2002. We believe that the allegations in the second
amended complaint and the antecedent complaints are without
merit and have defended the consolidated action vigorously.
Notwithstanding this belief, and in order to avoid any
additional waste of management time and expense, the Company and
the individual defendants entered into an agreement with
plaintiffs counsel to settle this action for approximately
$5.5 million, all of which monies have been paid by



---

1Hertzfeld, et al. v. Transmeta
Corp., et al. (Case No. C-01-2450-JL, N.D. Cal.);
Pond Equities v. Transmeta Corp., et al. (Case
No. C-01-2463-JL, N.D. Cal.); McCarvill v.
Transmeta Corp., et al. (Case No. C-01-2534-BZ,
N.D. Cal.); Puente v. Transmeta Corp., et al.
(Case No. C-01-2464-EDL, N.D. Cal.); Koroluk v.
Transmeta Corp., et al. (Case No. C-01-2587-EDL,
N.D. Cal.); Gammino v. Transmeta Corp., et al.
(Case No. C-01-2614- EDL, N.D. Cal.); Dunnavant v.
Transmeta Corp., et al. (Case No. C-01-20647-EDL,
N.D. Cal.); LaFleur v. Transmeta Corp., et al.
(Case No. C-01-03263 WHA, N.D. Cal.); Bernstein v.
Transmeta Corp., et al. (Case No. C-01-03264 WHA,
N.D. Cal.); and Shekleton v. Transmeta Corp.,
et al. (Case No. C-01-03291 WHA, N.D. Cal.).


9



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##### Table of Contents



the defendants directors and officers
(D&O) liability insurance. In December 2002, the
court granted preliminary approval to the proposed settlement
agreement. In March 2003, the Court granted final approval of
the settlement agreement.


Beginning in June 2001, the directors and certain
officers of Transmeta were sued in four purported shareholder
derivative actions.(2) In October 2001, those cases were
consolidated in and by the Superior Court for Santa Clara
County in a single action entitled In re Transmeta Corporation
Derivative Litigation, Master File No. CV 799491. In
April 2002, plaintiffs filed a consolidated amended complaint.
Like its antecedents, the consolidated amended complaint is
based upon the same general allegations set out in the purported
shareholder class actions described above. In May and June 2002,
Transmeta and the individual defendants filed two demurrers to
the second amended complaint. In July 2002, the Court sustained
Transmetas demurrer based on plaintiffs lack of
standing, gave plaintiffs 90 days to file an amended
complaint, and deferred consideration of the individual
defendants demurrer as moot. We believe that the
allegations in the second amended complaint and its antecedents
are without merit and we have defended the action vigorously.
Notwithstanding this belief, and in order to avoid any
additional waste of management time and expense, the Company and
the individual defendants agreed to settle this action for a sum
of money to be paid entirely by defendants
D&O liability insurance, similar to the proposed
agreement to settle all of the claims in the federal class
action. In December 2002, the parties executed a memorandum of
understanding dated October 3, 2002 (the MOU).
The MOU provides for a settlement of the consolidated derivative
action pursuant to a definitive agreement and subject to
judicial approval. The proposed settlement includes a dismissal
with prejudice of all asserted claims, a release in favor of all
defendants, and a payment to fees to counsel for the derivative
plaintiffs in an amount to be approved by the Court but not to
exceed $300,000. The court has scheduled a hearing on the
proposed settlement for April 29, 2003.

Beginning in June 2001, the Company, certain of
its directors and officers, and certain of the underwriters for
its initial public offering were named as defendants in three
putative shareholder class actions filed in the United States
District Court for the Southern District of New York. In January
2002, the Court ordered that all matters in the Southern
District of New York be consolidated under In re Transmeta
Corporation Initial Public Offering Securities Litigation,
No. 01 CV 6492. On April 19, 2002,
plaintiffs filed a consolidated amended complaint. The
consolidated amended complaint alleges that the prospectus from
Transmetas November 7, 2000 initial public offering
failed to disclose certain alleged actions by the underwriters
for the offering. The consolidated amended complaint alleges
claims against Transmeta and several of its officers and
directors under Sections 11 and 15 of the Securities Act of
1933, as amended, and under Sections 10(b) and
Section 20(a) of the Securities Exchange Act of 1934, as
amended. Other actions have been filed making similar
allegations regarding the initial public offerings of more than
300 other companies. All of these consolidated cases have
been coordinated for pretrial purposes as In re Initial Public
Offering Securities Litigation, Master File
No. 21 MC 92 (SAS). We believe that the
allegations in the consolidated amended complaint and its
antecedents are without merit and intend to defend the action
vigorously. In November 2002, Transmeta joined a coordinated
motion to dismiss filed on behalf of all issuers and individual
defendants. In March 2003, the Court granted in part and denied
in part that coordinated motion to dismiss, and issued an order
regarding pleading of amended complaints.





---

2Pereira v. David Ditzel, et al.
(Case No. CV 799491), Sweeney v. Mark Allen,
et al. (Case No. CV 799667), and
Scotter v. David Ditzel, et al. (Case No. CV
808264), all filed in Superior Court for Santa Clara
County, California, and Krim v. David R. Ditzel,
et al. (Case No. CV 418524), filed in Superior
Court for San Mateo County, California, and later
transferred to Santa Clara County pursuant to stipulated
consolidation order.


10



---



##### Table of Contents








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

Not applicable.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Market Information for Common Stock

Transmetas common stock began trading on
the Nasdaq National Market on November 6, 2000 under the
symbol TMTA. The following table shows the high and
low sale prices reported on the Nasdaq National Market for the
periods indicated. The market price of our common stock has been
volatile. See Managements Discussion and Analysis of
Financial Condition and Results of Operations  Risks
That Could Affect Future Results. On March 21, 2003,
the closing price of our common stock was $1.24.

|                                    |                |      |   |       |  |  |   |       | 
|----------------------------------- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|                                    |                | High |   | Low  
|                                    |                |      |   |      
|Fiscal year ended December 31, 2002 |                |      |   |       |  |  |   |      
|                                    | First quarter  |      | $ | 4.47  |  |  | $ | 2.15  | 
|                                    | Second quarter |      |   | 3.87  |  |  |   | 1.79  | 
|                                    | Third quarter  |      |   | 2.34  |  |  |   | 0.85  | 
|                                    | Fourth quarter |      |   | 1.64  |  |  |   | 0.74  | 
|Fiscal year ended December 31, 2001 |                |      |   |       |  |  |   |      
|                                    | First quarter  |      | $ | 37.25 |  |  | $ | 12.00 | 
|                                    | Second quarter |      |   | 25.00 |  |  |   | 5.12  | 
|                                    | Third quarter  |      |   | 5.55  |  |  |   | 1.25  | 
|                                    | Fourth quarter |      |   | 3.22  |  |  |   | 1.17  | 

Stockholders

As of March 21, 2003, we had approximately
603 holders of record of our common stock. This does not include
the number of persons whose stock is in nominee or
streetname accounts through brokers.

Dividends

Transmeta has never declared or paid cash
dividends on our common stock. We currently intend to retain all
available funds and any future earnings to fund the development
and growth of our business and do not anticipate declaring or
paying any cash dividends on our common stock in the foreseeable
future.

Securities Authorized For Issuance Under
Equity Compensation Plans

The information required by this item is
incorporated by reference to the caption Equity
Compensation Plan Information in our Proxy Statement for
our May 2003 Annual Meeting.

Recent Sales of Unregistered
Securities

During the year ended December 31, 2002, we
issued and sold the following unregistered securities:

In February 2002, we issued 340,483 shares
of common stock, valued at $1.0 million, to an intellectual
property owner as partial consideration for certain intellectual
property and related assets that we acquired in February 2001.

The sales and issuance of securities listed above
were determined to be exempt from registration under
Section 4(2) of the Securities Act or Regulation D
promulgated under the Securities Act as transactions by an
issuer not involving a public offering.

11



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##### Table of Contents



Use of Proceeds From Sales of Registered
Securities

Our Registration Statement on Form S-1 (File
No. 333-44030) related to our initial public offering was
declared effective by the Securities and Exchange Commission on
November 6, 2000. A total of 14,950,000 shares of our
common stock were registered with the Securities and Exchange
Commission with an aggregate offering price of approximately
$314 million. Net offering proceeds to us (after deducting
underwriting discounts and offering expenses) were approximately
$289.4 million.

As of December 31, 2002, we paid
$14.5 million of the net proceeds to IBM under the terms of
our amended license agreement, approximately $13.2 million
in property and equipment purchases and $20.5 million for
the purchase of intellectual property and related assets from
Seiko Epson and other intellectual property owners. We have also
paid approximately $190.6 million to fund ordinary
operating expenses. The remaining net proceeds have been
invested in short-term interest bearing, investment-grade
securities.






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following table reflects selected unaudited
consolidated financial information for Transmeta for the past
five fiscal years. We have prepared this information using the
historical audited consolidated financial statements of
Transmeta Corporation for the five years ended December 31,
2002.

It is important that you read this selected
historical financial data with the historical consolidated
financial statements and related notes contained in this Report
as well as the section of this Report titled
Managements Discussion and Analysis of Financial
Condition and Results of Operations. These historical
results are not necessarily indicative of results to be expected
in any future period.

|                                                            |                                                                 |                                       |          |        |         |      |          |        |         |      |          |        |         |   |         |        |        |   |         |        |        | 
|----------------------------------------------------------- | --------------------------------------------------------------- | ------------------------------------- | -------- | ------ | ------- | ---- | -------- | ------ | ------- | ---- | -------- | ------ | ------- | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                            |                                                                 |                                      
|                                                            |                                                                 | Year Ended December 31,              
|                                                            |                                                                 |                                      
|                                                            |                                                                 | 2002                                  |          | 2001   |         | 2000 |          | 1999   |         | 1998
|                                                            |                                                                 |                                       |          |        |         |      |          |        |         |     
|                                                            |                                                                 |                                      
|                                                            |                                                                 | (In thousands, except per share data)
|Consolidated Statement of Operations
    Data:              |                                                                 |                                       |          |        |         |      |          |        |         |      |          |        |         |   |         |        |        |   |         |       
|Revenue:                                                    |                                                                 |                                       |          |        |         |      |          |        |         |      |          |        |         |   |         |        |        |   |         |       
|                                                            | Product                                                         |                                       | $        | 24,247 |         |      | $        | 35,590 |         |      | $        | 16,180 |         |   | $       | 76     |        |   | $       | 326    |       
|                                                            | License                                                         |                                       |          |       |         |      |          |       |         |      |          |       |         |   |         | 5,000  |        |   |         | 28,000 |       
|                                                            |                                                                 |                                       |          |        |         |      |          |        |         |      |          |        |         |   |         |        |        |   |         |       
|                                                            |                                                                 | Total revenue                         |          |        | 24,247  |      |          |        | 35,590  |      |          |        | 16,180  |   |         |        | 5,076  |   |         |        | 28,326 | 
|Cost of revenue(1)                                          |                                                                 |                                       | 17,127   |        |         |      | 48,694   |        |         |      | 9,461    |        |         |   | 18      |        |        |   | 71      |       
|                                                            |                                                                 |                                       |          |        |         |      |          |        |         |      |          |        |         |   |         |        |        |   |         |       
|Gross profit (loss)                                         |                                                                 |                                       | 7,120    |        |         |      | (13,104  | )      |         |      | 6,719    |        |         |   | 5,058   |        |        |   | 28,255  |       
|Operating expenses:                                         |                                                                 |                                       |          |        |         |      |          |        |         |      |          |        |         |   |         |        |        |   |         |       
|                                                            | Research and development                                        |                                       |          | 63,603 |         |      |          | 67,639 |         |      |          | 61,415 |         |   |         | 33,122 |        |   |         | 23,467 |       
|                                                            | Purchased in-process research and development                   |                                       |          |       |         |      |          | 13,600 |         |      |          |       |         |   |         |       |        |   |         |       |       
|                                                            | Selling, general and administrative                             |                                       |          | 29,917 |         |      |          | 35,460 |         |      |          | 27,045 |         |   |         | 12,811 |        |   |         | 12,616 |       
|                                                            | Restructuring charges(2)                                        |                                       |          | 14,726 |         |      |          |       |         |      |          |       |         |   |         |       |        |   |         |       |       
|                                                            | Amortization of deferred charges, patents and
    patent rights |                                       |          | 11,392 |         |      |          | 17,556 |         |      |          | 10,416 |         |   |         | 218    |        |   |         |       |       
|                                                            | Impairment write-off of deferred charges(3)                     |                                       |          |       |         |      |          | 16,564 |         |      |          |       |         |   |         |       |        |   |         |       |       
|                                                            | Stock compensation(4)                                           |                                       |          | 1,809  |         |      |          | 20,954 |         |      |          | 13,056 |         |   |         |       |        |   |         |       |       
|                                                            |                                                                 |                                       |          |        |         |      |          |        |         |      |          |        |         |   |         |        |        |   |         |       
|                                                            |                                                                 | Total operating expenses              |          |        | 121,447 |      |          |        | 171,773 |      |          |        | 111,932 |   |         |        | 46,151 |   |         |        | 36,083 | 
|                                                            |                                                                 |                                       |          |        |         |      |          |        |         |      |          |        |         |   |         |        |        |   |         |       
|Operating loss                                              |                                                                 |                                       | (114,327 | )      |         |      | (184,877 | )      |         |      | (105,213 | )      |         |   | (41,093 | )      |        |   | (7,828  | )     
|                                                            | Interest and other income                                       |                                       |          | 4,962  |         |      |          | 14,686 |         |      |          | 9,174  |         |   |         | 2,456  |        |   |         | 892    |       
|                                                            | Interest expense                                                |                                       |          | (601   | )       |      |          | (1,060 | )       |      |          | (1,666 | )       |   |         | (1,952 | )      |   |         | (1,154 | )     
|                                                            |                                                                 |                                       |          |        |         |      |          |        |         |      |          |        |         |   |         |        |        |   |         |       
|Loss before income taxes                                    |                                                                 |                                       | (109,966 | )      |         |      | (171,251 | )      |         |      | (97,705  | )      |         |   | (40,589 | )      |        |   | (8,090  | )     
|                                                            | Provision for income taxes                                      |                                       |          |       |         |      |          |       |         |      |          |       |         |   |         | 500    |        |   |         | 2,000  |       
|                                                            |                                                                 |                                       |          |        |         |      |          |        |         |      |          |        |         |   |         |        |        |   |         |       
|Net loss                                                    |                                                                 | $                                     | (109,966 | )      |         | $    | (171,251 | )      |         | $    | (97,705  | )      |         | $ | (41,089 | )      |        | $ | (10,090 | )     
|                                                            |                                                                 |                                       |          |        |         |      |          |        |         |      |          |        |         |   |         |        |        |   |         |       
|Net loss per share  basic and diluted                      |                                                                 | $                                     | (0.82    | )      |         | $    | (1.33    | )      |         | $    | (2.18    | )      |         | $ | (1.51   | )      |        | $ | (0.44   | )     
|                                                            |                                                                 |                                       |          |        |         |      |          |        |         |      |          |        |         |   |         |        |        |   |         |       
|Weighted average shares outstanding 
    basic and diluted |                                                                 |                                       | 134,719  |        |         |      | 129,002  |        |         |      | 44,741   |        |         |   | 27,236  |        |        |   | 23,074  |       
|                                                            |                                                                 |                                       |          |        |         |      |          |        |         |      |          |        |         |   |         |        |        |   |         |       

12



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##### Table of Contents



|                                              |  |                |         |      |  |      |         |      |  |      |         |  |  |   |        |  |  |   |        | 
|--------------------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------ |  |  | - | ------ | 
|                                              |  |               
|                                              |  | December 31,  
|                                              |  |               
|                                              |  | 2002           |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                              |  |                |         |      |  |      |         |      |  |     
|                                              |  |               
|                                              |  | (In thousands)
|Consolidated Balance Sheet Data:              |  |                |         |      |  |      |         |      |  |      |         |  |  |   |        |  |  |   |        | 
|Cash and cash equivalents                     |  | $              | 16,613  |      |  | $    | 57,747  |      |  | $    | 259,744 |  |  | $ | 46,645 |  |  | $ | 27,809 | 
|Short-term investments                        |  |                | 112,837 |      |  |      | 183,941 |      |  |      | 83,358  |  |  |   | 19,799 |  |  |   |       | 
|Working capital                               |  |                | 116,033 |      |  |      | 217,152 |      |  |      | 343,004 |  |  |   | 58,912 |  |  |   | 21,909 | 
|Total assets                                  |  |                | 197,555 |      |  |      | 309,024 |      |  |      | 412,536 |  |  |   | 99,443 |  |  |   | 43,497 | 
|Long-term obligations, net of current portion |  |                | 18,116  |      |  |      | 29,295  |      |  |      | 20,950  |  |  |   | 27,020 |  |  |   | 10,798 | 
|Total stockholders equity                    |  |                | 140,847 |      |  |      | 244,965 |      |  |      | 364,916 |  |  |   | 63,083 |  |  |   | 24,032 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Cost of revenue includes a charge of
    $28.1 million related to an inventory charge taken in the
    second quarter of 2001, which was partially offset by the sale
    of such previously written off inventory and reversal of
    previously accrued inventory charges of $1.9 million and
    $2.5 million in fiscal 2002 and 2001, respectively.
|   
|(2) | Restructuring charges primarily includes
    $8.9 million for excess facilities, $1.6 million for
    property and equipment and prepaid software maintenance
    write-offs and $4.1 million related to a reduction in
    workforce.                                                                                                                 
|   
|(3) | During the fourth quarter of 2001, we wrote-off
    $16.6 million of long-lived asset balances related to
    deferred charges under licensing agreements.                                                                                                                                                                                             
|   
|(4) | Stock compensation in fiscal 2001 includes
    variable stock compensation charges of $2.5 million,
    $16.6 million of deferred stock compensation as a result of
    options granted prior to November 2000 and $1.7 million in
    forgiveness of interest on notes receivables associated with
    option exercises.                              






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

NOTE: For a more complete understanding of our
financial condition and results of operations, and some of the
risks that could affect future results, see Risks That
Could Affect Future Results. This section should also be
read in conjunction with the Consolidated Financial Statements
and related Notes, which immediately follow this
section.

Overview

We develop and sell software-based
microprocessors and develop additional hardware, software, and
system technologies that enable manufacturers to build highly
efficient computing systems characterized by low power
consumption, reduced heat dissipation and the high performance
required to run standard x86 compatible programs. We originally
developed our family of Crusoe microprocessors for lightweight
notebook computers and other mobile computing devices, but we
have developed and are continuing to develop microprocessors
suitable for a variety of existing and emerging end markets in
which energy and thermal efficiency along with x86 software
compatibility are desirable. We rely on independent, third party
contractors to perform manufacturing, assembly and test
functions. Our fabless approach allows us to focus on designing,
developing and marketing our products and to significantly
reduce the amount of capital needed to invest in manufacturing
infrastructure.

From our inception in March 1995 through January
2000, we were engaged primarily in research and development. In
1999, we began focusing on achieving design wins with original
equipment manufacturers, or OEMs, in addition to our ongoing
development activities. In January 2000, we introduced our
Crusoe family of microprocessors and began recognizing product
revenue from sales of these microprocessors in the first half of
2000. Through June 30, 2000, product shipments consisted of
development systems and prototypes. We expect to be dependent on
sales of Crusoe microprocessors and successive generations of
these products for the foreseeable future.

We sell our products directly to OEMs and, to a
lesser extent, through distributors, stocking representatives
and manufacturers representatives. We have added
manufacturers representatives and distributors in

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Europe, and manufacturers representatives
in North America. Etron Corporation Ltd. is our
manufacturers representative for Korea. Uniquest,
Siltrontech Electronics and Edom Technology are our primary
distributors in Hong Kong and Taiwan, and All American
Semiconductor is our exclusive distributor in North America.
Inno Micro Corporation and Shinden Hightex Corporation have been
added as distributors for Japan. Our distributors are restricted
from selling to certain OEMs and major notebook manufacturers
and have provisions in their agreements specifying inventory
levels, price protection policies and rights of return policies
for non end-of-life products. As needed, we will continue to add
representation to our current sales and distribution network.


The majority of our sales have been to a limited
number of customers and sales are highly concentrated.
Additionally, we derive a significant portion of our revenue
from customers located in Asia. Sales to two customers, each of
which is located in Japan, accounted for 37% and 26%,
respectively, of our net product revenue in fiscal 2002. The
same two customers accounted for 30% and 12%, respectively, of
our net product revenue in fiscal 2001 and 60% and 28%,
respectively, of our net product revenue in fiscal 2000. Sales
to two additional customers, each of which is located in Japan,
accounted for 18% and 11%, respectively, of our net product
revenue in fiscal 2001. The loss of a major customer, or the
delay of significant orders from these customers could reduce or
delay our recognition of revenue. Three customers accounted for
78% of our accounts receivable balance as of December 31,
2002, and four different customers accounted for 92% of our
accounts receivable balance as of December 31, 2001.

All of our product sales to date have been
denominated in U.S. dollars and we expect that most of our
sales in the future will be denominated in U.S. dollars. We
have not engaged in any foreign currency hedging activities,
although we may do so in the future. Our product sales in 2002,
2001 and 2000 were primarily made to the notebook computer
market. If our Crusoe products fail to achieve widespread
acceptance in the notebook computer market we may not achieve
revenue sufficient to sustain our business.

Cost of revenue consists primarily of the costs
of manufacturing, assembly and test of our silicon chips, and
compensation and associated costs related to manufacturing
support, logistics and quality assurance personnel. Gross margin
is the percentage derived from dividing gross profit by revenue.
Our gross margin each quarter is affected by a number of
factors, including competitive pricing, mix, foundry pricing,
yields, production flow costs and speed distribution of our
products. Research and development expenses consist primarily of
salaries and related overhead costs associated with employees
engaged in research, design and development activities, as well
as the cost of masks, wafers and other materials and related
test services and equipment used in the development process.
Selling, general and administrative expenses consist of salaries
and related overhead costs for sales, marketing and
administrative personnel and legal and accounting services.

We previously recorded deferred stock
compensation representing the difference between the deemed fair
value of our common stock at the date of grant for accounting
purposes and the exercise price of these options. Deferred stock
compensation is presented as a reduction of stockholders
equity and is amortized on the graded vesting method. As of
December 31, 2002, approximately $3.0 million was
recorded on our balance sheet, which will be amortized through
2004 using an accelerated graded method.

Historically we have incurred significant losses.
As of December 31, 2002, we had an accumulated deficit of
$454.9 million. We expect to incur substantial losses for
the foreseeable future. We also expect to incur significant
research and development and selling, general and administrative
expenses. As a result, if our revenue does not increase
substantially, our operating results will be adversely affected,
and we will not achieve profitability. During the fourth quarter
of fiscal 2001 and into the first quarter of fiscal 2002 our
revenue was primarily impacted by production difficulties.
Additionally, beginning in the second quarter of fiscal 2001 and
continuing through the fourth quarter of fiscal 2002 our net
product revenues have been adversely affected by the slow
worldwide and particularly, Japanese economies. If we experience
additional production constraints or if economic conditions do
not improve, or worsen, we would continue to experience adverse
impacts on our revenue and operating results.

For ease of presentation, the accompanying
financial information has been shown as of December 31 and
calendar quarter ends for all annual and quarterly financial
statement captions. Fiscal years 2002, 2001 and 2000 each
consisted of 52 weeks and ended on December 27,
December 28 and December 29, respectively.

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Critical Accounting Policies

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



| |   |                                               
| | - | ----------------------------------------------
| |  | Estimation of inventory valuations;           
|
| |  | Valuation of long-lived and intangible assets;
|
| |  | Restructuring charges; and                    
|
| |  | Revenue reserves.                             

Estimation of Inventory Valuations.In accordance with several accounting
pronouncements, including Accounting Research Bulletin 43,
our inventory valuation policy stipulates that at the end of
each reporting period we write-down or write-off our inventory
for estimated obsolescence or unmarketable inventory. The amount
of the write-down or write-off is equal to the difference
between the cost of the inventory and the estimated market value
of the inventory based upon reasonable assumptions about future
demand and market conditions. If actual market conditions are
less favorable than those projected by management, additional
inventory write-downs or write-offs may be required.
Additionally, as we introduce product enhancements and new
products, and improve our manufacturing processes, demand for
our existing products in inventory may decrease. Inventory on
hand in excess of forecasted demand, which is generally twelve
months or less, is not valued. At the end of the second quarter
of 2001, consistent with this policy, we recorded a charge of
$28.1 million primarily to write-off certain older
inventory products as a result of an actual decrease of future
demand for these older products. In the future, we may find that
similar assessments may warrant another significant write-down
or write-off of inventory.

Valuation of Long-Lived and Intangible Assets.Our accounting policy related to the
valuation and impairment of long-lived assets is in accordance
with the Financial Accounting Standards Boards (FASB)
Statement of Financial Accounting Standards (SFAS) 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.
In accordance with our policy, at the end of each accounting
period we evaluate our long-lived and intangible assets for
impairment whenever events or changes in circumstances indicate
that the carrying amount of long-lived assets may not be
recoverable. Recoverability of assets to be held and used is
determined by comparing the carrying amount of an asset to the
future undiscounted cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds the future
undiscounted cash flows the asset is considered to be impaired
and the impairment charge recognized is measured by the amount
by which the carrying amount of the asset exceeds the fair value
of the asset. During the fourth quarter of 2001, consistent with
this policy, we recorded an impairment write-off charge of
$16.6 million related to deferred charges under certain
license agreements with IBM and Toshiba. Although we do not now
believe that our existing long-lived assets will be impaired in
the future, we continue to periodically evaluate our long-lived
assets for impairment in accordance with SFAS 144 and
acknowledge it is at least reasonably possible that such
evaluation might result in future adjustments for impairment.
Such an impairment might adversely affect our operating results.

Restructuring Charges.In fiscal 2002, in accordance with
EITF Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring), we accrued for restructuring costs when we
made a commitment to a firm exit plan that specifically
identified all significant actions to be taken in conjunction
with our response to a change in our strategic plan, product
demand, increased costs or other environmental factors. Our
assumptions used in determining the estimation of restructuring
expenses include the determination of the period that it will
take to sublet our vacated premises, the market price that we
will be able to command for the subleased space and the
discounted interest rate that we are using to determine the
present value of our future lease obligations. Any significant
variation in these estimates compared to actual results may have
a material impact on our restructuring expenses and our
operating results. We reassess the prior restructuring accruals
on a quarterly basis to reflect changes in the costs of the
restructuring activities, and we record new restructuring
accruals as commitments are incurred. During the second quarter
of fiscal 2002, we recorded restructuring charges of
$10.6 million primarily related to lease costs and
equipment write-offs. We recorded restructuring charges of

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$4.1 million related to a reduction in
workforce during the third quarter of fiscal 2002. Any future
restructuring costs, if any, would be recorded in accordance
with Statement of Financial Accounting Standards No. 146
Accounting for Costs Associated with Exit or Disposal
Activities (SFAS 146), which requires that a
liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred.
SFAS 146 is effective for exit or disposal activities that
are initiated after December 31, 2002.


Revenue Reserves.We
record a provision for estimated sales returns and allowances on
product sales in the same period as the related revenues are
recorded. We base these estimates on actual historical sales
returns, allowances and other known factors. Actual returns and
allowances could be different from our estimates and current
provisions, resulting in future adjustments to our operating
results.

Results of Operations



| |        
| | -------
| | Revenue

Fiscal 2002 Compared to Fiscal 2001.Total net product revenue for fiscal
2002 was $24.2 million, compared to $35.6 million in
fiscal 2001. The decrease of $11.4 million is due to
several factors, including production difficulties at the
beginning of fiscal 2002, decreases in average selling prices
during fiscal 2002, as well as unfavorable global economic
conditions and reduced information technology spending,
particularly in Japan. During fiscal 2002 and 2001, demand for
our products continued to depend primarily on sales by our OEM
customers of notebook computers that incorporate our products.

Fiscal 2001 Compared to Fiscal 2000.Total net product revenue for fiscal
2001 was $35.6 million, compared to $16.2 million in
fiscal 2000. The increase of $19.4 million is a result of a
full year of volume shipments of products during 2001 compared
to volume shipments in the last two quarters of fiscal 2000.



| |             
| | ------------
| | Gross Margin

Fiscal 2002 Compared to Fiscal 2001.For fiscal 2002, gross margin was
29.4%, compared to (36.8)% for fiscal 2001. Gross margin for
fiscal 2001 included an inventory charge of $28.1 million
to cost of revenue in the second quarter primarily related to
the write-off of excess inventory. In fiscal 2002 and 2001, we
recognized 100% gross profit of $0.7 million and
$1.7 million, respectively, related to the sale of
previously written-off inventory. In fiscal 2002 and 2001, we
recognized 100% gross profit of $1.2 million and
$0.8 million, respectively, related to the reversal of
previously accrued inventory related purchase commitments due to
favorable settlements of such purchase commitments.

Fiscal 2001 Compared to Fiscal 2000.For fiscal 2001, gross margin was
(36.8)%, compared to 41.5% in 2000. Gross margin for fiscal 2001
included an inventory charge of $28.1 million to cost of
revenue in the second quarter of fiscal 2001 primarily related
to the write-off of excess inventory. Inventory purchases and
commitments are based upon product demand forecasts. We built
inventory levels for certain components with long lead times and
entered into commitments for certain components. Due to a sudden
and significant decrease in demand for our products in fiscal
2001, inventory levels and purchase commitments exceeded our
estimated requirements based on demand forecasts. We believe the
decrease in demand was primarily due to unfavorable economic
conditions and reduced information technology spending,
particularly in Japan. The inventory charge was calculated based
on inventory levels in excess of forecasted demand for each
specific product. Subsequently, we recognized 100% gross profit
of $1.7 million in fiscal 2001 related to the sale of
previously written-off inventory and $0.8 million related
to the reversal of previously accrued inventory related purchase
commitments due to favorable settlements of such purchase
commitments. During each of the third, and particularly the
fourth quarters of 2001, our gross margin also decreased due in
part to lower than expected product revenue, which did not allow
for adequate overhead absorption and the scrapping of older
inventory.



| |                         
| | ------------------------
| | Research and Development

Fiscal 2002 Compared to Fiscal 2001.Research and development expenses were
$63.6 million in fiscal 2002 compared to $67.6 million
in fiscal 2001. The decrease is primarily due to lower employee
compensation

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and benefit costs and consultant fees related to
our reduction in workforce in the third quarter of fiscal 2002.
Additionally, depreciation expense decreased in fiscal 2002 as a
result of the write-off of certain fixed assets related to our
restructuring activities in the second quarter of fiscal 2002.
These decreases were partially offset by an increase in
prototype expenditures related to updates of our existing
microprocessors, as well as next-generation microprocessors.


Fiscal 2001 Compared to Fiscal 2000.Research and development expenses were
$67.6 million in fiscal 2001, compared to
$61.4 million in fiscal 2000. The increase is primarily due
to increased employee compensation and benefit costs and
consultant fees, as well as increased software maintenance costs
associated with product development. These increases were
partially offset by a decrease in prototype expenditures
compared to fiscal 2000.



| |                                                  
| | -------------------------------------------------
| | Purchased In-Process Research and
    Development

In April 2001, we licensed certain computing
technologies and intellectual property from Advanced Micro
Devices, Inc. (AMD), including AMDs HyperTransport
interconnect technology for our future products and technology
initiatives. As initial consideration for the patents and patent
rights licensed under the agreement, we issued 1,000,000
unregistered shares of our common stock valued at
$15.0 million based upon the average closing price of our
stock prior to issuance. For accounting purposes, however, the
value of the shares was determined using the closing price of
the stock at the date of issuance, or $13.60, resulting in a
recorded value of $13.6 million. The entire
$13.6 million was expensed as purchased in-process research
and development during the second quarter of 2001 because the
HyperTransport technology is designed for use in products that
are currently in research and development.



| |                                        
| | ---------------------------------------
| | Selling, General and
    Administrative

Fiscal 2002 Compared to Fiscal 2001.Selling, general and administrative
expenses were $29.9 million in fiscal 2002, compared to
$35.5 million in fiscal 2001. The decrease is primarily due
to lower employee compensation and benefit costs and consultant
fees related to our reduction in workforce in the third quarter
of fiscal 2002. Additionally, our efforts to reduce overall
operating expenses resulted in decreases in travel, trade show
and advertising costs during the third and fourth quarters of
fiscal 2002. These decreases were partially offset by increases
in our insurance renewal premiums for our various corporate
insurance policies.

Fiscal 2001 Compared to Fiscal 2000.Selling, general and administrative
expenses were $35.5 million in fiscal 2001, compared to
$27.0 million in fiscal 2000. The increase was primarily
due to increased employee compensation and benefit costs,
consultant fees and recruiting costs.



| |                      
| | ---------------------
| | Restructuring Charges

During fiscal 2002, we recorded restructuring
charges of $14.7 million. We recorded charges of
$10.6 million in the second quarter of fiscal 2002
consisting primarily of lease costs, equipment write-offs and
other costs as we identified a number of leased facilities and
leased equipment that were no longer required. We recorded
severance and termination charges of $4.1 million in the
third quarter of fiscal 2002 related to the reduction in
workforce. Approximately 195 employees and contractors were
terminated on July 18, 2002. Other than future lease
payments for our vacated facilities, the majority of our
restructuring activities have been completed. We evaluated the
restructuring reserve balance as of December 31, 2002 and
determined no adjustments were needed.



| |                                                                
| | ---------------------------------------------------------------
| | Amortization of Deferred Charges, Patents
    and Patent Rights

Amortization charges for fiscal 2002 and fiscal
2001 relate to various patents and patent rights acquired from
Seiko Epson and others during fiscal 2001. Amortization charges
for fiscal 2001 and fiscal 2000 also include charges related to
our IBM and Toshiba technology license agreements, as amended,
which were originally entered into during fiscal 1997 and 1998,
respectively. See Note 4 and Note 5 in the Notes
to Consolidated Financial Statements for further
discussion of our technology license agreements and patents and
patent rights.

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Fiscal 2002 Compared to Fiscal 2001.We recorded amortization charges of
$11.4 million, compared to $17.6 million in fiscal
2001. The decrease is due to the impairment charge recorded
during the fourth quarter of fiscal 2001 to adjust the IBM and
Toshiba license agreements to their respective fair values,
resulting in no additional amortization expenses being recorded
in fiscal 2002 related to these deferred charges.

Fiscal 2001 Compared to Fiscal 2000.We recorded amortization charges of
$17.6 million in fiscal 2001, compared to
$10.4 million in fiscal 2000. The increase is due to the
capitalization and subsequent amortization related to the
patents acquired from Seiko Epson and others in fiscal 2001.



| |                                             
| | --------------------------------------------
| | Impairment Write-off of Deferred
    Charges

Deferred charges related to IBM and Toshiba
technology license agreements were being amortized on a
straight-line basis through December 2003, which was the
remaining license term during which the reacquired rights were
originally in effect. See Note 4 in the Notes to
Consolidated Financial Statements for further discussion
of our technology license agreements. During the fourth quarter
of 2001, due to the emergence of indicators of impairment, we
performed an assessment of the carrying value our long-lived
assets to be held and used. The assessment was performed in
connection with our internal policies and pursuant to
SFAS 121 Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of because
of the significant negative industry and economic trends
affecting both our current operations and expected future
operating cash flows. The conclusion of that assessment was that
the anticipated future undiscounted cash flows was less than the
carrying value for all long-lived assets, including the deferred
charges. As a result, during the fourth quarter of 2001, we
recorded a charge of $16.6 million to reduce the carrying
amount of the deferred charges under license agreements based on
the amount by which the carrying amount of these assets exceeded
their fair value. Although these assets were impaired and
written off, the associated remaining payments due to IBM of
$23.0 million are still required and will continue to
accrete interest until the final payment is made.



| |                   
| | ------------------
| | Stock Compensation

Fiscal 2002 Compared to Fiscal 2001.Amortization of deferred stock
compensation associated with options granted prior to November
2000, net of cancellation, was $3.6 million in fiscal 2002,
compared to $16.6 million in 2001. The decrease is
primarily a result of amortizing the deferred charge on an
accelerated graded method, as well as a credit recorded to stock
compensation expense of $1.7 million in the third quarter
of fiscal 2002 related to our workforce reduction. The total
credit to deferred compensation expense for cancellations was
$3.4 million and $3.1 million for fiscal 2002 and
2001, respectively. In connection with stock options grants
through November 2000, we expect to record $2.6 million in
2003 and $0.4 million in 2004.

We apply variable accounting for certain stock
option grants, which is included in deferred stock compensation,
because during the fourth quarter of fiscal 2001, we did not
enforce the recourse provisions of certain employee notes
associated with option exercises. Therefore, we account for all
outstanding notes as if they had terms equivalent to
non-recourse notes, even though the terms of these notes were
not in fact changed from recourse to non-recourse. As a result,
we have and will continue to record variable stock compensation
expense on the associated stock awards until the notes are paid.
This variable stock compensation charge is based on the excess,
if any, of the current market price of our stock as of
period-end over the purchase price of the stock award, adjusted
for vesting and prior stock compensation expense recognized on
the stock award. Stock compensation for fiscal 2002 included a
credit of $1.8 million recorded to stock compensation
expense due to a lower market price of our stock at the end of
fiscal 2002 compared the end of fiscal 2001. Stock compensation
expense in fiscal 2001 included $2.5 million in variable
stock compensation and $1.7 million in forgiveness of
interest related to officer resignations.

In the future, if the price of our stock
increases $1 per share it will result in approximately
$1.5 million of additional stock compensation expense, or
if the stock price decreases $1 per share it will result in
a benefit (reduction) in stock compensation expense of
approximately the same amount. Because variable stock
compensation expense is calculated based on the current market
value of our common stock at the end of each accounting period,
future stock compensation expense for these variable stock
awards could increase

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significantly in periods when our stock price
rises, and could reverse and become a benefit in periods when
our stock price falls.


Fiscal 2001 Compared to Fiscal 2000.Deferred stock compensation expense,
net of cancellation, was $16.6 million in fiscal 2001,
compared to $13.1 million in fiscal 2000. Additionally,
stock compensation expense in fiscal 2001 included
2.5 million in variable stock compensation and
$1.7 million in forgiveness of interest related to officer
resignations, compared to zero in fiscal 2000. The increase is a
result of a full year of amortization of the total deferred
stock compensation expense of $46.0 million recorded in
connection with our initial public offering in November 2000.
The total credit to deferred compensation expense for
cancellations was $3.1 million for fiscal 2001.



| |                                                   
| | --------------------------------------------------
| | Interest and Other Income and Interest
    Expense

Fiscal 2002 Compared to Fiscal 2001.Interest and other income was
$5.0 million in fiscal 2002, compared to $14.7 million
in fiscal 2001. The decrease is due to a decrease in the average
invested cash balances during 2002 as we continue to use cash to
fund operations, as well as a significant decrease in interest
rates earned on investments during the period. As we continue to
use cash to fund operations, our investment balances will
decrease and as a result our interest income is expected to
decrease over time. Interest expense was $0.6 million in
fiscal 2002, compared to $1.1 million in fiscal 2001. The
decrease year over year is the result of lower average debt
balances due to several lease-financing arrangements expiring
during 2002.

Fiscal 2001 Compared to Fiscal 2000.Interest and other income was
$14.7 million in fiscal 2001, compared to $9.2 million
in fiscal 2000. The increase year over year is primarily due to
larger average invested cash balances resulting from the closing
of an equity offering in April 2000 and our initial public
offering in November 2000. Interest expense was
$1.1 million in fiscal 2001, compared to $1.7 million
in fiscal 2000. The decrease year over year is due to lower
average debt balances due to several lease-financing
arrangements expiring during 2001.

Liquidity and Capital Resources

Since our inception, we have financed our
operations primarily through sales of equity securities and, to
a lesser extent, from product revenue and lease financing. At
December 31, 2002, we had $129.5 million in cash, cash
equivalents and short-term investments compared to
$241.7 million at December 31, 2001.

Net cash used in operating activities was
$93.9 million for the year ended December 31, 2002.
This was primarily the result of the net loss of
$110.0 million, as well as increases in inventories of
$9.5 million and accounts receivable of $2.4 million,
and a decrease in accounts payable and accrued liabilities of
$3.4 million. The net loss and changes in operating assets
and liabilities were partially offset by non-cash charges
related to amortization of patents and patent rights of
$11.4 million, $6.1 million of depreciation and
amortization, $1.8 million in amortization of deferred
compensation and $1.6 million of non cash restructuring
charges. The net loss was further offset by a decrease in
prepaid expenses and other current assets of $2.3 million.

Net cash provided by investing activities was
$49.7 million for the year ended December 31, 2002,
and consisted primarily of $70.5 million net proceeds from
the maturity of available-for-sale investments. These proceeds
were partially offset by the $15.0 million partial
settlement of long-term payable obligations for licensing
agreements and patents and patent rights, as well as purchases
of property and equipment of $5.6 million in fiscal 2002.

Net cash provided by financing activities was
$3.1 million for the year ended December 31, 2002, and
consisted primarily of net proceeds from option exercises and
employee stock purchase plan purchases of $4.6 million and
proceeds from capital lease obligations of $1.1 million,
partially offset by repayment of debt and capital leases
obligations of $2.7 million.

At December 31, 2002, we had
$16.6 million in cash and cash equivalents and
$112.8 million in short-term investments. We lease our
facilities under non-cancelable operating leases expiring in
2008, and we lease

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equipment and software under non-cancelable
leases with terms ranging from 36 to 48 months. At
December 31, 2002, we had the following contractual
obligations:


|                                   |  |                        |        |                  |  |           |        |               |  |   |        |  |  |   |       | 
|---------------------------------- |  | ---------------------- | ------ | ---------------- |  | --------- | ------ | ------------- |  | - | ------ |  |  | - | ----- | 
|                                   |  |                       
|                                   |  | Payments Due by Period
|                                   |  |                       
|Contractual Obligations            |  | Total                  |        | Less Than 1 Year |  | 1-3 Years |        | After 4 Years
|                                   |  |                        |        |                  |  |           |        |              
|                                   |  |                       
|                                   |  | (In thousands)        
|Debt Obligations                   |  | $                      | 31     |                  |  | $         | 31     |               |  |   |       |  |  |   |      | 
|Capital Lease Obligations          |  | $                      | 1,630  |                  |  | $         | 888    |               |  | $ | 742    |  |  |   |      | 
|Operating Leases                   |  | $                      | 24,475 |                  |  | $         | 4,216  |               |  | $ | 13,178 |  |  | $ | 7,081 | 
|Unconditional Purchase Obligations |  | $                      | 2,000  |                  |  | $         | 2,000  |               |  |   |       |  |  |   |      | 
|Other Long Term Obligations        |  | $                      | 39,500 |                  |  | $         | 16,000 |               |  | $ | 23,500 |  |  |   |      | 

We believe that existing cash and cash
equivalents and short-term investments balances will be
sufficient to fund our operations for the next twelve months.
After this period, capital requirements will depend on many
factors, including general economic conditions, the rate of
sales growth, market acceptance of our products, costs of
securing access to adequate manufacturing capacity, the timing
and extent of research and development projects, increases in
our operating expenses, and ultimately our ability to generate
profits from operations. To the extent that existing cash and
cash equivalents and short-term investments balances and any
cash from operations are insufficient to fund our future
activities, we may need to raise additional funds through public
or private equity or debt financing. Although we are currently
not a party to any agreement or letter of intent with respect to
a potential acquisition or business combination, we may enter
into acquisitions or business combinations in the future, which
also could require us to seek additional equity or debt
financing. Additional funds may not be available on terms
favorable to us or at all.

Recent Accounting Pronouncements

In July 2002, the FASB issued SFAS 146
Accounting for Costs Associated with Exit or Disposal
Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). The principal difference between
SFAS 146 and EITF 94-3 relates to the timing of the
recognition of a liability for a cost associated with an exit or
disposal activity. SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized
when the liability is incurred. A liability for an exit cost as
generally defined in EITF 94-3 is to be recognized at the
date of an entitys commitment to an exit plan.
SFAS 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. We accounted for our
restructuring activity during fiscal 2002 under EITF 94-3. We do
not expect the adoption of SFAS 146 to have a material
impact on our financial position or results of operations.

In November 2002, the FASB issued FASB
Interpretation No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others.
FIN 45 requires that upon issuance of a guarantee, a
guarantor must recognize a liability for the fair value of an
obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual
financial statements about the obligations associated with
guarantees issued. The recognition provisions of FIN 45 are
effective for any guarantees issued or modified after
December 31, 2002. The disclosure requirements are
effective for financial statements of interim or annual periods
ending after December 15, 2002. Our adoption of FIN 45
did not have a material impact on our financial position or
results of operations.

In December 2002, the FASB issued SFAS 148
Accounting for Stock-Based Compensation 
Transition and Disclosure, which amends SFAS 123
Accounting for Stock-Based Compensation and provides
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 to require prominent disclosures
in both annual and interim financial statements about the method
of accounting for stock-based employee compensation and the
effect of the method used on reporting results. The transition
guidance and annual disclosures provisions of SFAS 148 are
effective for fiscal years ending

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after December 15, 2002. The interim
disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning
after December 15, 2002. We adopted the disclosure
provisions of SFAS 148 for this Form 10-K. We will
continue to account for stock-based compensation under the
provisions of APB 25 Accounting for Stock Issued to
Employees using the intrinsic value method.
Accordingly, the adoption of SFAS 148 is not anticipated to
have a material effect on our financial position, results of
operations, or cash flows.


In January 2003, the FASB issued FIN No. 46
Consolidation of Variable Interest Entities.
FIN 46 requires a variable interest to be consolidated by a
company if that company is subject to a majority of the risk of
loss from the variable interest entitys activities or
entitled to a receive a majority of the entitys residual
returns or both. A variable interest entity is a corporation,
partnership, trust, or any other legal structure used for
business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the
entity to support its activities. A variable interest entity
often holds financial assets, including loans or receivables,
real estate or other property. A variable interest entity may be
essentially passive or it may engage in research and development
or other activities on behalf of another company. The
consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the
first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply
to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established.
We do not expect that the adoption of this standard will have a
material impact on our financial position or results of
operations.

Risks that Could Affect Future
Results

The factors discussed below are cautionary
statements that identify important factors that could cause
actual results to differ materially from those anticipated in
the forward-looking statements in this Form 10-K. If any of
the following risks actually occurs, our business, financial
condition and results of operations would suffer. In this case,
the trading price of our common stock could decline and
investors might lose all or part of their investment in our
common stock.



| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | We Have a History of Losses, Expect to
    Incur Further Significant Losses and May Never Achieve or
    Maintain Profitability.

We have a history of substantial losses and
expect to incur further significant losses. We incurred net
losses of $110.0 million in 2002, $171.3 million in
2001 and $97.7 million in 2000. As of December 31,
2002, we had an accumulated deficit of $454.9 million.
Historically, we have increased our research and development,
sales and marketing, and administrative expenses over time.
Although we have recently taken steps to reduce operating
expenses, we cannot assure you that our operating expenses will
not increase in future periods. We also expect to incur
substantial non-cash charges relating to the amortization of
deferred charges, patents and patent rights and deferred stock
and variable stock compensation, which will serve to increase
our net losses further. Our revenue must increase if we are to
achieve profitability under our current business model. We
cannot assure you that our revenue will increase, so we may
never achieve profitability. Even if we achieve profitability,
we may not be able to sustain or increase profitability on a
quarterly or an annual basis.



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | Our Business Is Difficult to Forecast
    Because We Recognized Our First Product Revenue in the First
    Half of 2000.

We introduced our first Crusoe microprocessors in
January 2000 and recognized our first product revenue from these
products in the first half of 2000. Through June 30, 2000,
we had manufactured only limited quantities of our products. In
September 2000, we began volume shipments. Thus, we have only a
very limited operating history with our products. This limited
history makes it difficult to forecast our business. Until 2000,
we derived substantially all of our revenue from license fees,
but we do not expect any significant license fee revenue in the
foreseeable future. We need to generate substantial future
revenue from product sales, but our ability to manufacture our
products in production quantities and the revenue and income
potential of our

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products and business are unproven. You should
consider our chances of financial and operational success in
light of the risks, uncertainties, expenses, delays and
difficulties associated with new businesses in highly
competitive technology fields, many of which may be beyond our
control. If we fail to address these risks, uncertainties,
expenses, delays and difficulties, the value of an investment in
our common stock would decline further.




| |                                                                     
| | --------------------------------------------------------------------
| | We Depend Upon Increasing Demand for Our
    Crusoe Microprocessors.

We expect to derive virtually all of our revenue
for the foreseeable future from the sale of our Crusoe
microprocessors, which we only began to ship in volume in
September 2000. Since September 2000 we have recognized
substantially all of our revenue from sales of our Crusoe
microprocessors. Therefore, our future operating results will
depend on the demand for Crusoe products by existing and future
customers. If our Crusoe microprocessors are not widely accepted
by the market due to performance, price, compatibility or any
other reason, or if, following acceptance, we fail to enhance
our Crusoe products in a timely manner, demand for our products
may fail to increase, or may diminish. If demand for our Crusoe
products does not increase, our revenue will not increase and
the value of an investment in our common stock would likely
decline further.



| |                                                              
| | -------------------------------------------------------------
| | We Are Subject to General Economic and
    Market Conditions.

Our business is subject to the effects of general
economic conditions in the United States and worldwide, and, in
particular, market conditions in the semiconductor and notebook
computer industries. In fiscal 2001 and 2002, our operating
results were adversely affected by unfavorable global economic
conditions and reduced information technology spending,
particularly in Japan, where we currently generate the majority
of our revenue. These adverse conditions resulted in decreased
demand for notebook computers and, as a result, our products,
which are components of notebook computers. Further, demand for
our products decreases as computer manufacturers seek to manage
their component and finished product inventory levels. If the
economic conditions in Japan and worldwide do not improve, or
worsen, we may continue to experience material adverse effects
on our business, operating results, and financial condition.



| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If We Experience Continued Difficulties in
    Transitioning to New Manufacturing Technologies, We Could
    Experience Reduced Manufacturing Yields, Delays in Product
    Deliveries and Increased Expenses.

Transitioning to new manufacturing technologies
involves extensive redesigning of products and modifying the
manufacturing processes for the products. Difficulties in
shifting to smaller geometry process technologies and other new
manufacturing processes have led to delays in product deliveries
and increased expenses. In particular, during the third and
fourth quarters of fiscal 2001 and to a lesser extent the first
quarter of fiscal 2002, we experienced difficulties in bringing
our products into volume production and distribution. As a
result, in part, of these delays, our net product revenue in
2001 declined from $10.5 million in the second quarter to
$5.0 million in the third quarter and then to
$1.5 million in the fourth quarter. In addition, if we
experience continued delays in product deliveries, our target
customers could design a competitors microprocessor into
their product, which would lead to lost sales and impede our
ability to increase our revenue. Further, problems associated
with manufacturing processes divert engineering personnel from
product development and other tasks.



| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | Our Future Revenue Depends Upon Our Ability
    to Penetrate the Notebook Computer Market.

Our success depends upon our ability to sell our
Crusoe microprocessors in volume to the small number of OEMs
that manufacture notebook computers. Due to our software-based
approach to microprocessor design, we have been required, and
expect to continue to be required, to devote substantial
resources to educate prospective customers in the notebook
computer market about the benefits of our Crusoe products and to
assist potential customers with their designs. In addition,
since computer products generally are designed to incorporate a
specific microprocessor, OEMs must design new products to
utilize different microprocessors such as our Crusoe products.
Given the complexity of these computer products and their many
components, designing new products requires significant
investments. For instance, OEMs may need to design new computer
casings, basic input/output system software and motherboards.
Our target customers

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may not choose our products for technical,
performance, packaging, novelty, design cost or other reasons.
If our Crusoe products fail to achieve widespread acceptance in
the notebook computer market, we would likely never achieve
revenue sufficient to sustain our business and the value of an
investment in our common stock would likely decline
significantly.




| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | The Growth of Our Business Depends in Part
    upon the Development of Emerging Markets and Our Ability to Meet
    the Needs of These Markets.

The growth of our business depends in part on
acceptance and use of our products in new markets such as the
high-density server market and new embedded processor
applications. We depend on the ability of our target customers
to develop new products and enhance existing products for these
markets that incorporate our products and to introduce and
promote their products successfully. These new markets often
rely on newly developed technologies, which will require
extensive development and marketing before widespread acceptance
is achieved, so the new markets may grow slowly, if at all. If
the new markets do not grow as we anticipate, our target
customers do not incorporate our products into theirs, or our
products are not widely accepted by end users, our growth would
be impeded and we will not be able to factor the related
revenues into our growth in the future. In addition,
manufacturers within emerging markets may have widely varying
requirements. To meet the requirements of different
manufacturers and markets, we may be required to change our
product design or features, sales methods or pricing policies.
The costs of addressing these requirements could be substantial
and could delay or prevent any improvement in our operating
results.



| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | The Cyclical Nature of the Semiconductor
    Industry Could Create Fluctuations in Our Operating
    Results.

The semiconductor industry has historically been
cyclical, and characterized by wide fluctuations in product
supply and demand. From time to time, the industry has also
experienced significant downturns, often in connection with, or
in anticipation of, maturing product cycles and declines in
general economic conditions. Industry downturns have been
characterized by diminished product demand, production
overcapacity and accelerated decline of average selling prices,
and in some cases have lasted for more than a year. The industry
experienced a downturn of this type in 1997 and 1998, and has
been experiencing a downturn again since 2001. Our net product
revenue has decreased in response to industry-wide fluctuations,
and could decrease further. In addition, we may determine to
lower our prices of our products to increase or maintain market
share, which would likely decrease our operating results.



| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Operating Results Are Difficult to
    Predict and Fluctuate Significantly, and a Failure to Meet the
    Expectations of Securities Analysts or Investors Has Resulted in
    a Substantial Decline in Our Stock Price.

Our operating results fluctuate significantly
from quarter to quarter and we expect our results to fluctuate
in the future. You should not rely on quarter-to-quarter
comparisons of our results of operations as an indication of our
future performance. Our stock price declined substantially since
our stock began trading publicly in November of 2000. If our
future operating results fail to meet or exceed the expectations
of securities analysts or investors, our stock price would
likely decline further in the future.

Our results could fluctuate because of the amount
of revenue we recognize or the amount of cash we spend in a
particular period. For example, our results could fluctuate due
to the following factors:



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | the gain or loss of significant customers, or
    significant changes in their purchasing volume;      
|
| |  | the amount and timing of our operating expenses
    and capital expenditures;                          
|
| |  | pricing concessions that we might grant on volume
    sales;                                           
|
| |  | the effectiveness of our product cost reduction
    efforts and those of our suppliers;                
|
| |  | changes in the average selling prices of our
    microprocessors or the products that incorporate them;
|
| |  | charges to earnings for workforce reductions;                                                          

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| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to specify, develop, complete,
    introduce and market new products and technologies, and bring
    them to volume production in a timely manner; and
|
| |  | changes in the mix of products that we sell.                                                                                                                      

Our reliance on third parties for wafer
fabrication, assembly, test and warehouse services also could
contribute to fluctuations in our quarterly results, based upon
factors such as the following:



| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | fluctuations in manufacturing yields;                                                                                                                                                      
|
| |  | cancellations, changes or delays of deliveries to
    us by our manufacturer;                                                                                                              
|
| |  | the cost and availability of manufacturing,
    assembly and test capacity;                                                                                                                
|
| |  | delays in deliveries to customers of our
    products; and                                                                                                                                 
|
| |  | problems or delays resulting from shifting our
    products to smaller geometry process technologies or from
    designing our products to achieve higher levels of design
    integration.

In addition, our results could fluctuate from
quarter to quarter due to factors in our industry that are
outside of our control, including the following factors:



| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the timing, rescheduling or cancellation of
    customer orders;                                                                                        
|
| |  | the varying length of our sales cycles;                                                                                                                 
|
| |  | the availability and pricing of competing
    products and technologies, and the resulting effect on sales and
    pricing of our products;             
|
| |  | the availability and pricing of products that
    compete with products that incorporate our microprocessors;                                           
|
| |  | fluctuations in the cost and availability of
    complementary components that our customers require to build
    systems that incorporate our products;
|
| |  | fluctuations in the cost and availability of raw
    materials, such as wafers, chip packages and chip capacitors;                                      
|
| |  | the rate of adoption and acceptance of new
    industry standards in our target markets;                                                                
|
| |  | seasonality in some of our target markets;                                                                                                              
|
| |  | changes in demand by the end users of our
    customers products;                                                                                      
|
| |  | variability of our customers product life
    cycles; and                                                                                              
|
| |  | economic and market conditions in the
    semiconductor industry and in the industries served by our
    customers.                                     

A large portion of our expenses, including rent,
salaries and capital leases, is fixed and difficult to reduce.
Our expenses are based in part on expectations for our revenue.
If our revenue does not meet our expectations, the adverse
effect of the revenue shortfall upon our operating results may
be acute in light of the fixed nature of our expenses. We make
many shipments of our products at or near the end of the fiscal
quarter, which makes it difficult to estimate or adjust our
operating activities quickly in response to a shortfall in
expected revenue.



| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Recent Reduction In Workforce May
    Adversely Affect the Morale and Performance of Our Personnel,
    Our Ability To Hire New Personnel and Our
    Operations.

In July 2002, as part of our effort to reduce
operating expenses, we announced a restructuring and related
reduction in our workforce. Our restructuring plan included the
termination of approximately 195 employees and contractors,
which constituted approximately 40 percent of our
workforce. As a result of the recent workforce reduction, we
have incurred substantial costs related to severance and other
employee-related costs.

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Our workforce reduction may also subject us to
litigation risks and expenses. In addition, our restructuring
plan may yield unanticipated consequences, such as attrition
beyond our planned reduction in workforce. As a result of these
reductions, our ability to respond to unexpected challenges may
be impaired and we may be unable to take advantage of new
opportunities. In addition, some of the employees who were
terminated had specific and valuable knowledge or expertise, the
loss of which may adversely affect our operations. Further, the
reduction in force may reduce employee morale and may create
concern among existing employees about job security, which may
lead to increased attrition or turnover. As a result of these
factors, our remaining personnel may decide to seek employment
with more established companies, and we may have difficulty
attracting new personnel that we might wish to hire in the
future.




| |                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We Might Not Be Able to Execute on Our
    Business Plan if We Lose Key Management or Technical Personnel,
    on Whose Knowledge, Leadership and Technical Expertise We Rely,
    or if We Fail to Work Effectively With New Members of Our
    Management Team.

Our success depends heavily upon the
contributions of our key management and technical personnel,
whose knowledge, leadership and technical expertise would be
difficult to replace. Many of these individuals have been with
us for several years and have developed specialized knowledge
and skills relating to our technology and business. Others,
including our president and chief executive officer, have joined
us in senior management roles only recently. During 2002, we had
significant changes in senior management. In April 2002, Matthew
R. Perry joined us as chief executive officer and president,
replacing Murray A. Goldman and R. Hugh Barnes, who served in
positions of chief executive officer and president and chief
operating officer, respectively, from October 2001 to April
2002. In June 2002 Svend-Olav Carlsen, our vice president of
finance and corporate controller, began serving as acting chief
financial officer. In August 2002, Ray Holzworth joined us as
vice president of operations. In March 2003, Arthur L. Swift
joined us as senior vice president of marketing. Our success
will depend in part upon the ability of these new executives to
work effectively together and with the rest of our employees to
continue to develop our technology and manage the operation and
growth of our business. All of our executive officers and key
personnel are employees at will. We have no employment contracts
and do not maintain key person insurance on any of our
personnel. We might not be able to execute on our business plan
if we were to lose the services of any of our key personnel. If
any of these individuals were to leave Transmeta unexpectedly,
we could face substantial difficulty in hiring qualified
successors and could experience a loss in productivity while any
such successor develops the necessary training and experience.



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | The Price of our Common Stock Has Been
    Volatile and is Subject to Wide Fluctuations.

The market price of our common stock has been
volatile and is likely to remain to be subject to wide
fluctuations in the future. Many factors could cause the market
price of our common stock to fluctuate, including:



| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | variations in our quarterly results;                                                                           
|
| |  | market conditions in our industry, the industries
    of our customers and the economy as a whole;             
|
| |  | announcements of technological innovations by us
    or by our competitors;                                    
|
| |  | introductions of new products or new pricing
    policies by us or by our competitors;                         
|
| |  | acquisitions or strategic alliances by us or by
    our competitors;                                           
|
| |  | recruitment or departure of key personnel;                                                                     
|
| |  | the gain or loss of significant orders;                                                                        
|
| |  | the gain or loss of significant
    customers; and                                                             
|
| |  | changes in the estimates of our operating
    performance or changes in recommendations by securities analysts.

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In addition, the stock market generally and the
market for semiconductor and other technology-related stocks in
particular has experienced a decline during 2000, 2001 and
through the third quarter of 2002, and could decline further,
which could cause the market price of our common stock to fall
for reasons not necessarily related to our business, results of
operations or financial condition. The market price of our stock
also might decline in reaction to events that affect other
companies in our industry even if these events do not directly
affect us. Accordingly, you may not be able to resell your
shares of common stock at or above the price you paid.
Securities class action litigation is often brought against a
company following a period of volatility in the market price of
its securities, and we are defending several purported
securities class action lawsuits. Further, certain of our
management and directors have also been sued in purported
shareholder derivative actions. Although we believe that the
lawsuits lack merit, an adverse determination could have a
significant effect upon our business and materially affect the
price of our stock. Moreover, regardless of the ultimate result,
it is likely that the lawsuits will divert managements
attention and resources from other matters, which could also
adversely affect our business and the price of our stock.



| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We Face Intense Competition in the
    Semiconductor Market; Our Competitors Are Much Larger Than We
    Are and Have Significantly Greater Resources; We May Not Be Able
    to Compete Effectively.

The market for microprocessors is dominated by
established firms and subject to rapid technological change. We
face particularly strong competitive pressure in the United
States and we believe that such pressure is increasing on a
worldwide basis. Competition may cause price reductions, reduced
gross margins and loss of market share, any one of which could
significantly reduce our future revenue and increase our losses.
For example, we may determine to lower the prices of our
products in order to increase or maintain market share, which
would likely increase our losses. Significant competitors
include Intel, Advanced Micro Devices, VIA Technologies and
licensees of technology from ARM Holdings and MIPS Technologies.

Our current and potential competitors have longer
operating histories, significantly greater financial, technical,
product development and marketing resources, greater name
recognition and significantly larger customer bases than we do.
Our competitors may be able to develop products comparable or
superior to those we offer, adapt more quickly than we do to new
technologies, evolving industry trends and customer
requirements, and devote greater resources to the development,
promotion and sale of their products than we can. Many of our
competitors also have well-established relationships with our
existing and prospective customers and suppliers. As a result of
these factors, many of our competitors, either alone or with
other companies, have significant influence in our target
markets that could outweigh any advantage that we may possess.
For example, negotiating and maintaining favorable customer and
strategic relationships are and will continue to be critical to
our business. If our competitors use their influence to
negotiate strategic relationships on more favorable terms than
we are able to negotiate, or if they structure relationships
that impair our ability to form strategic relationships, our
competitive position and our business would be substantially
damaged.

Furthermore, our competitors may merge or form
strategic relationships that might enable them to offer, or
bring to market earlier, products that are superior to ours in
terms of features, quality, pricing or other factors. We expect
additional competition from other established and emerging
companies and technologies. We may not be able to compete
effectively against current and potential competitors,
especially those with significantly greater resources and market
leverage.



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Products May Have Defects, Which Could
    Damage Our Reputation, Decrease Market Acceptance of Our
    Products, Cause Us to Lose Customers and Revenue, and Result in
    Liability to Us.

Highly complex products such as our
microprocessors may contain hardware or software defects or bugs
for many reasons, including design issues or defective materials
or manufacturing processes. Often, these defects and bugs are
not detected until after the products have been shipped. If any
of our products contain defects, or has reliability, quality or
compatibility problems, our reputation might be damaged
significantly and customers might be reluctant to buy our
products, which could result in the loss of or failure to
attract customers. In addition, these defects could interrupt or
delay sales. We may have to invest significant capital and other
resources to correct these problems. If any of these problems
are not found until after we have commenced commercial
production of a new product, we might incur substantial
additional development

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costs. If we fail to provide solutions to the
problems, such as software upgrades or patches, we could also
incur product recall, repair or replacement costs. These
problems might also result in claims against us by our customers
or others. In addition, these problems might divert our
technical and other resources from other development efforts.
Moreover, we would likely lose, or experience a delay in, market
acceptance of the affected product or products, and we could
lose credibility with our current and prospective customers.
This is particularly significant as we are a new entrant to a
market dominated by large well-established companies.




| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We Derive a Substantial Portion of Our
    Revenue From a Small Number of Customers, and Our Revenue Would
    Decline Significantly if Any Major Customer Were to Cancel,
    Reduce or Delay a Purchase of Our Products.

Sales to two customers in the aggregate accounted
for 63% of net product revenue in 2002. These customers are
located in Japan, which subjects us to economic cycles in that
country. We expect that a small number of OEM customers and
distributors will continue to account for a significant portion
of our revenue. Our future success will depend upon the timing
and size of future purchase orders, if any, from these customers
and new customers and, in particular:



| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | the success of our customers in marketing
    products that incorporate our products;
|
| |  | the product requirements of our
    customers; and                                   
|
| |  | the financial and operational success of our
    customers.                          

We have entered into distributor agreements and
rely in part on distributors and stocking representatives for
sales of our products in large territories, including Japan,
Taiwan, Hong Kong, Europe, China, Korea and North America. These
agreements do not contain minimum purchase commitments.
Additionally, we have entered into agreements with
manufacturers representatives in North America and Europe.
Any distributor, stocking representative or manufacturers
representative that fails to emphasize sales of our products,
chooses to emphasize alternative products or devices to promote
products of our competitors might not sell a significant amount
or any of our products. We expect that our sales to OEM
customers will continue to be made on the basis of purchase
orders rather than long-term commitments. In addition, customers
can delay, modify or cancel orders without penalty. Many of our
customers and potential customers are significantly larger than
we are and have sufficient bargaining power to demand reduced
prices and favorable nonstandard terms. The loss of any major
customer, or the delay of significant orders from these
customers, could reduce or delay our recognition of revenue.



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | Our Dependence on TSMC to Fabricate Wafers
    Limits Our Control Over the Production, Supply and Delivery of
    Our Products.

The cost, quality and availability of third-party
manufacturing operations are essential elements to the
successful production of our products. We currently rely
exclusively on TSMC to fabricate our wafers. We do not have a
manufacturing agreement with TSMC that guarantees any particular
production capacity or any particular price from TSMC. We place
orders on a purchase order basis and TSMC may allocate capacity
to other companies products while reducing deliveries to
us on short notice. The absence of dedicated capacity means
that, with little or no notice, TSMC could refuse to continue to
fabricate all or some of the wafers that we require or change
the terms under which it fabricates wafers. If TSMC were to stop
manufacturing for us, we would likely be unable to replace the
lost capacity in a timely manner. Transferring to another
manufacturer would require a significant amount of time and
money, and a smooth and timely transition would be unlikely. As
a result, we could lose potential sales and fail to meet
existing obligations to our customers. In addition, if TSMC were
to change the terms under which it manufactures for us, our
manufacturing costs could increase.

Our reliance on third-party manufacturers exposes
us to the following risks outside our control:



| |   |                                                                   
| | - | ------------------------------------------------------------------
| |  | unpredictability of manufacturing yields and
    production costs;
|
| |  | interruptions in shipments;                                       

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| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | potential lack of adequate capacity to fill all
    or part of the services we require;
|
| |  | inability to control quality of finished products;                                     
|
| |  | inability to control product delivery
    schedules; and                               
|
| |  | potential lack of access to key fabrication
    process technologies.                  



| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | If We Fail to Forecast Demand for Our
    Products Accurately, We Could Lose Sales and Incur Inventory
    Losses.

Because we only introduced our products in
January 2000 and did not start volume shipments of commercial
products until September 2000, we have little historical
information about demand for our products. Many shipments of our
products are made near the end of the fiscal quarter, which also
makes it difficult to estimate demand for our products. The
demand for our products depends upon many factors and is
difficult to forecast. We expect that it will become more
difficult to forecast demand as we introduce a larger number of
products and as competition in the markets for our products
intensifies. Significant unanticipated fluctuations in demand
have caused, and in the future could cause, problems in our
operations.

The lead-time required to fabricate large volumes
of wafers is often longer than the lead-time our customers
provide to us for delivery of their product requirements.
Therefore, we often must place our orders in advance of expected
purchase orders from our customers. As a result, we have only a
limited ability to react to fluctuations in demand for our
products, which could cause us to have either too much or too
little inventory of a particular product. If demand does not
develop as we expect, we could have excess production. Excess
production would result in excess inventories of finished
products, which would use cash and could result in inventory
write-downs and write-offs. We have limited capability to reduce
ongoing production once wafer fabrication has commenced. For
example, due to the sudden and significant decrease in actual
and forecasted demand for our products during the second and
third quarters of 2001, we recorded a net charge of
$25.6 million to cost of revenue related to excess
inventory and related purchase commitments. Further, as we
introduce product enhancements and new products, and improve our
manufacturing processes, demand for our existing products
decreases. Conversely, if demand exceeds our expectations, TSMC,
might not be able to fabricate wafers as quickly as we need
them. Also, ASE, which provides our assembly and test services,
might not be able to increase assembly functions in a timely
manner. In that event, we would need to increase production and
assembly rapidly at TSMC and ASE or find, qualify and begin
production and assembly at additional manufacturers, which may
not be possible within a time frame acceptable to our customers.
The inability of TSMC and ASE to increase production rapidly
enough could cause us to fail to meet customer demand. In
addition, rapid increases in production levels to meet
unanticipated demand could result in higher costs for
manufacturing and other expenses. These higher costs could lower
our gross margins.



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | We May Experience Manufacturing
    Difficulties That Could Increase the Cost and Reduce the Supply
    of Our Products.

The fabrication of wafers for our microprocessors
is a highly complex and precise process that requires production
in a tightly controlled, clean room environment. Minute
impurities, difficulties in the fabrication process, defects in
the masks used to print circuits on a wafer or other factors can
cause numerous die on each wafer to be nonfunctional. The
proportion of functional die expressed as a percentage of total
die on a wafer is referred to as product yield.
Semiconductor companies frequently encounter difficulties in
achieving expected product yields. During 2001, we experienced
yield problems as we migrated our manufacturing processes to
smaller geometries, which caused increases in our product costs,
delays in product availability and diversion of engineering
personnel. Even with functional die, normal variations in wafer
fabrication can cause some die to run faster than others.
Variations in speed yield could lead to excess inventory, a
resulting unfavorable impact on gross margins and insufficient
inventory of faster products, depending upon customer demand.
Yield problems may not be identified and resolved until a
product has been manufactured and can be analyzed and tested, if
ever. As a result, yield problems are often difficult, time
consuming and expensive to correct. Yield problems have in the
past and could in the future hamper our ability to deliver our
products to our customers in a timely manner.

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| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | Our Dependence on ASE to Provide Assembly
    and Test Services Limits Our Control Over Production Costs and
    Product Supply.

We rely on ASE for substantially all of our
assembly and test services. As a result, we do not directly
control our product delivery schedules. This lack of control
could result in product shortages, which could increase our
costs or delay delivery of our products. We do not have a
contract with ASE for test and assembly services, and we
typically procure these services from ASE on a per order basis.
ASE could cease to perform all of the services that we require,
or could change the terms upon which it performs services for
us. Therefore, we may not be able to obtain assembly and testing
services for our products on acceptable terms, or at all. If we
are required to find and qualify alternative assembly or testing
services, we could experience delays in product shipments,
increased product costs or a decline in product quality.



| |                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our California Facilities and the
    Facilities of Third Parties Upon Which We Rely to Provide Us
    Critical Services are Located in Regions that are Subject to
    Earthquakes and Other Natural Disasters.

Our California facilities, including our
principal executive offices, are located near major earthquake
fault lines. If there is a major earthquake or any other natural
disaster in a region where one of our facilities is located, our
business could be materially and adversely affected. In
addition, TSMC, upon which we currently rely to fabricate our
wafers, and ASE, upon which we currently rely for substantially
all of our assembly and test services, are located in Taiwan.
Taiwan has experienced significant earthquakes and could be
subject to additional earthquakes in the future. Any earthquake
or other natural disaster in Taiwan could materially disrupt
TSMCs production capabilities and ASEs assembly and
test capabilities and could result in our experiencing a
significant delay in delivery, or substantial shortage, of
wafers and possibly in higher wafer prices.



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | If We Fail to Establish and Maintain
    Relationships With Key Participants in Our Target Markets, We
    May Have Difficulty Selling Our Products.

In addition to our customers, we will need to
establish and maintain relationships with companies that develop
technologies that work in conjunction with our microprocessors.
These technologies include operating systems, basic input/output
systems, graphics chips, dynamic random access memory, or DRAM,
and other hardware components and software that are used in
computers. If we fail to establish and maintain these
relationships, it would be more difficult for us to develop and
market products with features that address emerging market
trends.



| |                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If Our Products Are Not Compatible With the
    Other Components That Our Customers Design Into Their Systems,
    Sales of Our Products Could Be Delayed or Cancelled and a
    Substantial Portion of Our Products Could Be
    Returned.

Our products are designed to function as
components of a system. Our customers use our products in
systems that have differing specifications and that require
various other components, such as dynamic random access memory,
or DRAM, and other semiconductor devices. If our customers
systems are to function properly, all of the components must be
compatible with each other. If our customers experience
system-level incompatibilities between our products and the
other components in their systems, we could be required to
modify our products to overcome the incompatibilities or delay
shipment of our products until the manufacturers of other
components modify their products or until our customers select
other components. These events would delay purchases of our
products, cause orders for our products to be cancelled or
result in product returns. System-level incompatibilities that
are significant, or are perceived to be significant could also
result in negative publicity and could significantly damage our
business.



| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | If Our Customers Are Not Able to Obtain the
    Other Components Necessary to Build Their Systems, Sales of Our
    Products Could Be Delayed or Cancelled.

Suppliers of other components incorporated into
our customers systems may experience shortages, which
could reduce the demand for our products. For example, from time
to time, the computer and semiconductor

29



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industries have experienced shortages of some
materials and devices, such as memory components, displays, and
storage devices. Our customers could defer or cancel purchases
of our products if they are not able to obtain the other
components necessary to build their systems.




| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | There May Be Software Applications or
    Operating Systems That Are Not Compatible With Our Products,
    Which May Prevent Our Products from Achieving Market Acceptance
    and Prevent Us From Receiving Significant Revenue.

Software applications, games or operating systems
with machine-specific routines programmed into them can result
in specific incompatibilities. If a particular software
application, game or operating system is programmed in a manner
that makes it unable to respond correctly to our microprocessor,
it will appear to users of that software that our microprocessor
is not compatible with PC software. We might encounter
incompatibilities in the future. If any incompatibilities are
significant or are perceived to be significant, our products
might never achieve market acceptance and we might not receive
significant revenue from product sales.



| |                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Evolution of Our Business Could Place
    Significant Strain on Our Management Systems, Infrastructure and
    Other Resources, and Our Business May Not Succeed if We Fail to
    Manage Effectively.

Our ability to implement our business plan in a
rapidly evolving market requires effective planning and
management process. Changes in our business plans could place
significant strain on our management systems, infrastructure and
other resources. In addition, we expect that we will continue to
improve our financial and managerial controls and procedures. We
will also need to expand, train and manage our workforce
worldwide. Furthermore, we expect that we will be required to
manage an increasing number of relationships with suppliers,
manufacturers, customers and other third parties. If we fail to
manage change effectively, our employee-related costs and
employee turnover could increase and our business may not
succeed.



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | Our Lengthy and Variable Sales Cycles Make
    It Difficult for Us to Predict When and if a Design Win Will
    Result in Volume Shipments.

We depend upon other companies designing our
microprocessors into their products, which we refer to as design
wins. Many of our targeted customers consider the choice of a
microprocessor to be a strategic decision. Thus our targeted
customers may take a long time to evaluate our products, and
many individuals may be involved in the evaluation process. We
anticipate that the length of time between our initial contact
with a customer and the time when we recognize revenue from that
customer will vary. We expect our sales cycles to range from six
to twelve months from the time we achieve a design win to the
time the customer begins volume production of products that
incorporate our microprocessors. We do not have historical
experience selling our products that is sufficient for us to
determine how our sales cycles will affect the timing of our
revenue. Variations in the length of our sales cycles could
cause our revenue to fluctuate widely from period to period.
While potential customers are evaluating our products and before
they place an order with us, we may incur sales and marketing
expenses and expend significant management and engineering
resources without any assurance of success. The value of any
design win depends upon the commercial success of our
customers products. If our customers cancel projects or
change product plans, we could lose anticipated sales. We can
offer no assurance that we will achieve further design wins or
that the products for which we achieve design wins will
ultimately be introduced or will, if introduced, be commercially
successful.



| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | If We Do Not Keep Pace With Technological
    Change, Our Products May Not Be Competitive and Our Revenue and
    Operating Results May Suffer.

The semiconductor industry is characterized by
rapid technological change, frequent new product introductions
and enhancements, and ongoing customer demands for greater
performance. In addition, the average selling price of any
particular microprocessor product has historically decreased
substantially over its life, and we expect that trend to
continue. As a result, our products may not be competitive if we
fail to

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introduce new products or product enhancements
that meet evolving customer demands. It may be difficult or
costly for us or we may not be able to enhance existing products
to fully meet customer demands. For instance, in order to meet
the demands of our customers for enhancement of our existing
products, we may incur manufacturing or other costs that would
harm our operating margins and financial condition. Further, we
may not achieve further design wins with current customers
unless we continue to meet their evolving needs by developing
new products. The development of new products is complex, and we
may not be able to complete development in a timely manner, or
at all. To introduce and improve products on a timely basis, we
must:




| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | accurately define and design new products to meet
    market needs;                           
|
| |  | design features that continue to differentiate
    our products from those of our competitors;
|
| |  | transition our products to new manufacturing
    process technologies;                        
|
| |  | identify emerging technological trends in our
    target markets;                             
|
| |  | anticipate changes in end-user preferences with
    respect to our customers products;       
|
| |  | bring products to market on a timely basis at
    competitive prices; and                     
|
| |  | respond effectively to technological changes or
    product announcements by others.          

We believe that we will need to continue to
enhance our products and develop new products to keep pace with
competitive and technological developments and to achieve market
acceptance for our products.



| |                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Products May Infringe the Intellectual
    Property Rights of Others, Which May Cause Us to Become Subject
    to Expensive Litigation, Cause Us to Incur Substantial Damages,
    Require Us to Pay Significant License Fees or Prevent Us From
    Selling Our Products.

Our industry is characterized by the existence of
a large number of patents and frequent claims and related
litigation regarding patent and other intellectual property
rights. We cannot be certain that our products do not and will
not infringe issued patents, patents that may be issued in the
future, or other intellectual property rights of others. In
addition, leading companies in the semiconductor industry have
extensive intellectual property portfolios with respect to
semiconductor technology. From time to time, third parties,
including these leading companies, may assert exclusive patent,
copyright, trademark and other intellectual property rights to
technologies and related methods that are important to us. We
expect that we may become subject to infringement claims as the
number of products and competitors in our target markets grows
and the functionality of products overlaps. We have received,
and may in the future receive, communications from third parties
asserting patent or other intellectual property rights covering
our products. Litigation may be necessary in the future to
defend against claims of infringement or invalidity, to
determine the validity and scope of the proprietary rights of
others, to enforce our intellectual property rights, or to
protect our trade secrets. We may also be subject to claims from
customers for indemnification. Any resulting litigation,
regardless of its resolution, could result in substantial costs
and diversion of resources.

If it were determined that our products infringe
the intellectual property rights of others, we would need to
obtain licenses from these parties or substantially reengineer
our products in order to avoid infringement. We might not be
able to obtain the necessary licenses on acceptable terms, or at
all, or to reengineer our products successfully. Moreover, if we
are sued for infringement and lose the suit, we could be
required to pay substantial damages or be enjoined from
licensing or using the infringing products or technology. Any of
the foregoing could cause us to incur significant costs and
prevent us from selling our products.



| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If We Are Unable to Protect Our Proprietary
    Rights Adequately, Our Competitors Might Gain Access to Our
    Technology and We Might Not Compete Successfully In Our
    Market.

We believe that our success will depend in part
upon our proprietary technology. We rely on a combination of
patents, copyrights, trademarks, trade secret laws and
contractual obligations with employees and third parties to
protect our proprietary rights. These legal protections provide
only limited protection and may be time consuming and expensive
to obtain and enforce. If we fail to protect our proprietary
rights

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adequately, our competitors might gain access to
our technology. As a result, our competitors might offer similar
products and we might not be able to compete successfully in our
market. Moreover, despite our efforts to protect our proprietary
rights, unauthorized parties may copy aspects of our products
and obtain and use information that we regard as proprietary.
Also, our competitors may independently develop similar, but not
infringing, technology, duplicate our products, or design around
our patents or our other intellectual property. In addition,
other parties may breach confidentiality agreements or other
protective contracts with us, and we may not be able to enforce
our rights in the event of these breaches. Furthermore, we
expect that we will increase our international operations in the
future, and the laws of many foreign countries do not protect
our intellectual property rights to the same extent as the laws
of the United States. We may be required to spend significant
resources to monitor and protect our intellectual property
rights.


Our pending patent and trademark applications may
not be approved. Our patents, including any patents which may
result from our patent applications may not provide us with any
competitive advantage or may be challenged by third parties. If
challenged, our patents might not be upheld or their claims
could be narrowed. Any litigation surrounding our rights could
force us to divert important financial and other resources from
our business operations.



| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We Will Not Be Able to Grow Our Business if
    We Are Unable to Hire, Train and Retain Sales, Marketing,
    Operations, Engineering and Finance Personnel.

To grow our business successfully and maintain a
high level of quality, we will need to recruit, train, retain
and motivate highly skilled sales, marketing, engineering and
finance personnel. We will need to develop our sales and
marketing organizations in order to increase market awareness of
our products and to increase revenue. In addition, as a company
focused on the development of complex products, we will need to
hire skilled engineering staff of various experience levels in
order to meet our product roadmap. We may not be able to hire on
a timely basis a sufficient number of skilled employees, which
could lead to delays in product deliveries or the development of
new products. Competition for skilled employees, particularly in
the San Francisco Bay Area, is intense. We may have
difficulty recruiting potential employees and retaining our key
personnel if prospective or current employees perceive the
equity component of our compensation package to be less valuable
than that of other employers.



| |                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If We Fail to Meet the Continued Listing
    Requirements of the Nasdaq Stock Market, Our Common Stock Could
    be Delisted, Which Would Likely Result in a Further Decrease in
    the Trading Price and Liquidity of Our Common
    Stock.

Our common stock is listed on the Nasdaq National
Market. The Nasdaq Stock Markets Marketplace Rules impose
requirements for companies listed on the Nasdaq National Market
to maintain their listing status. One of these requirements is
that we must maintain a minimum closing bid price of
$1.00 per share for our common stock. If we fail to meet
this requirement for 30 consecutive business days, we will
receive a deficiency notice from Nasdaq. Upon
receipt of this notice, we would then have 90 calendar days to
comply, and during this period the minimum closing bid price per
share must be above $1.00 per share for 10 consecutive
business days during this period to comply. Following this
period, we could appeal to Nasdaq for a hearing regarding the
determination to delist our common stock from the Nasdaq
National Market. On March 21, 2003, the closing bid price
of our common stock was $1.24 per share. Delisting could reduce
the ability of holders of our common stock to purchase or sell
shares as quickly and as inexpensively as they have done
historically. For instance, failure to obtain listing on another
market or exchange may make it more difficult for traders to
sell our securities. Broker-dealers may be less willing or able
to sell or make a market in our common stock. Not maintaining a
listing on a major stock market may result in a decrease in the
trading price of our common stock due to a decrease in
liquidity, reduced analyst coverage and less interest by
institutions and individuals in investing in our common stock.

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| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | We May Make Acquisitions, Which Could Put a
    Strain on Our Resources, Cause Dilution to Our Stockholders and
    Adversely Affect Our Financial Results.

We may acquire companies and technology to expand
our business and for other strategic reasons. Integrating newly
acquired organizations and technologies into our company could
put a strain on our resources and be expensive and time
consuming. We may not be successful in integrating acquired
businesses or technologies and may not achieve anticipated
revenue and cost benefits. In addition, future acquisitions
could result in potentially dilutive issuances of equity
securities or the incurrence of debt, contingent liabilities or
incurrence of charges related to goodwill and other intangible
assets, any of which could adversely affect our balance sheet
and operating results. Moreover, we may not be able to identify
future suitable acquisition candidates or, if we are able to
identify suitable candidates, we may not be able to make these
acquisitions on commercially reasonable terms or at all.



| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | We Plan to Expand Our International
    Operations, and the Success of Our International Expansion Is
    Subject to Significant Uncertainties.

We believe that we must expand our international
sales and distribution operations to be successful. We have
sold, and in the future we expect to sell a significant portion
of our products to customers in Asia. As part of our
international expansion, we have personnel in Taiwan, Japan and
Europe who provide sales and customer support. In addition, we
have appointed distributors, stocking representatives and
manufacturers representatives to sell products in Japan,
Taiwan, Hong Kong, Europe, China, Korea and North America. In
attempting to conduct and expand business internationally, we
are exposed to various risks that could adversely affect our
international operations and, consequently, our operating
results, including:



| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | difficulties and costs of staffing and managing
    international operations;                         
|
| |  | fluctuations in currency exchange rates;                                                              
|
| |  | unexpected changes in regulatory requirements,
    including imposition of currency exchange controls;
|
| |  | longer accounts receivable collection cycles;                                                         
|
| |  | import or export licensing requirements;                                                              
|
| |  | potentially adverse tax consequences;                                                                 
|
| |  | political and economic instability; and                                                               
|
| |  | potentially reduced protection for intellectual
    property rights.                                  

In addition, because we have suppliers that are
located outside of the United States, we are subject to risks
generally associated with contracting with foreign suppliers and
may experience problems in the timeliness and the adequacy or
quality of product deliveries.



| |                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Certificate of Incorporation and
    Bylaws, Stockholder Rights Plan and Delaware Law Contain
    Provisions That Could Discourage or Prevent a Takeover, Even if
    an Acquisition Would Be Beneficial to Our
    Stockholders.

Provisions of our certificate of incorporation
and bylaws, as well as provisions of Delaware law, could make it
more difficult for a third party to acquire us, even if doing so
would be beneficial to our stockholders. These provisions
include:



| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | establishing a classified board of directors so
    that not all members of our board may be elected at one time;            
|
| |  | providing that directors may be removed only
    for cause and only with the vote of 66 2/3% of
    our outstanding shares;
|
| |  | requiring super-majority voting to amend some
    provisions in our certificate of incorporation and bylaws;                 

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| |   |                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | authorizing the issuance of blank
    check preferred stock that our board could issue to
    increase the number of outstanding shares and to discourage a
    takeover attempt;
|
| |  | limiting the ability of our stockholders to call
    special meetings of stockholders;                                                                                             
|
| |  | prohibiting stockholder action by written
    consent, which requires all stockholder actions to be taken at a
    meeting of our stockholders;                                    
|
| |  | eliminating cumulative voting in the election of
    directors; and                                                                                                                
|
| |  | establishing advance notice requirements for
    nominations for election to our board or for proposing matters
    that can be acted upon by stockholders at stockholder meetings.

In addition, the stockholder rights, which we
implemented in 2002, and Section 203 of the Delaware
General Corporation Law may discourage, delay or prevent a
change in control.



| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If We Need Additional Financing, We May Not
    Be Able to Raise Further Financing or It May Only Be Available
    on Terms Unfavorable to Us or Our Stockholders.

We believe that our available cash resources are
sufficient to meet our anticipated working capital and capital
expenditure requirements for at least the next twelve months. We
might need to raise additional funds, however, to respond to
business contingencies, which could include the need to:



| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | fund expansion;                                                        
|
| |  | fund marketing expenditures;                                           
|
| |  | develop new products or enhance existing products;                     
|
| |  | enhance our operating infrastructure;                                  
|
| |  | fund working capital if our revenue does not
    increase, or declines;
|
| |  | hire additional personnel;                                             
|
| |  | respond to competitive pressures; or                                   
|
| |  | acquire complementary businesses or technologies.                      

If we were to raise additional funds through the
issuance of equity or convertible debt securities, the
percentage ownership of our stockholders would be reduced, and
these newly issued securities might have rights, preferences or
privileges senior to those of our then-existing stockholders.
Additional financing might not be available on terms favorable
to us, or at all. If adequate funds were not available or were
not available on acceptable terms, our ability to fund our
operations, take advantage of unanticipated opportunities,
develop or enhance our products or otherwise respond to
competitive pressures would be significantly limited.



| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | Recently Enacted and Proposed Changes in
    Securities Laws and Regulations are Likely to Increase Our
    Costs.

The Sarbanes-Oxley Act of 2002 that became law in
July 2002 requires changes in some of our corporate governance,
public disclosure and compliance practices. The Act also
requires the SEC to promulgate new rules on a variety of
subjects. In addition to final rules and rule proposals already
made by the SEC, the National Association of Securities Dealers
has proposed revisions to its requirements for companies, such
as us, that are Nasdaq-listed. We expect these developments to
increase our legal and financial compliance costs, and to make
some activities, such as SEC reporting requirements, more
difficult. Additionally, we expect these developments to make it
more difficult and more expensive for us to obtain director and
officer liability insurance, and we may be required to accept
reduced coverage or incur substantially higher costs to obtain
coverage. These developments could make it more difficult for us
to attract qualified executive officers and attract and retain
qualified members of our board of directors, particularly to
serve on our audit committee. We are presently evaluating and
monitoring regulatory developments and cannot estimate the
timing or magnitude of additional costs we may incur as a result.

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|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

Interest Rate Risk.Our cash equivalents and short-term
investments are exposed to financial market risk due to
fluctuations in interest rates, which may affect our interest
income. As of December 31, 2002, our cash equivalents and
short-term investments included money market funds and short and
medium term corporate bonds and earned interest at an average
rate of 2.2%. Due to the relative short-term nature of our
investment portfolio, our interest income is extremely
vulnerable to sudden changes in market interest rates. We do not
use our investment portfolio for trading or other speculative
purposes.

The table below presents principle amounts and
related weighted average interest rates by year of maturity for
our investment portfolio as of December 31, 2002 (in
thousands):

|                       |              |      |        |      |   |            |        |       |   |            |   |   |  |   |         |     |   |   |         |  | 
|---------------------- | ------------ | ---- | ------ | ---- | - | ---------- | ------ | ----- | - | ---------- | - | - |  | - | ------- | --- | - | - | ------- |  | 
|                       |              | 2002 |        | 2003 |   | Thereafter |        | Total |   | Fair Value
|                       |              |      |        |      |   |            |        |       |   |           
|Cash equivalents       |              | $    | 16,613 |      |   |            |       |       |   |            |  |   |  | $ | 16,613  |     |   | $ | 16,613  | 
|                       | Average rate |      |        | 1.8  | % |            |        |      |   |            |   |  |  |   |         | 1.8 | % |   |         |  | 
|Short term investments |              | $    | 79,703 |      |   | $          | 33,000 |       |   |            |  |   |  | $ | 112,703 |     |   | $ | 112,837 | 
|                       | Average rate |      |        | 2.1  | % |            |        | 2.7   | % |            |   |  |  |   |         | 2.3 | % |   |         |  | 

Foreign Currency Exchange Risk.All of our sales and substantially all
of our expenses are denominated in U.S. dollars. As a
result, we have relatively little exposure to foreign currency
exchange risk. We do not currently enter into forward exchange
contracts to hedge exposures denominated in foreign currencies
or any other derivative financial instruments for trading or
speculative purposes. However, in the event our exposure to
foreign currency risk increases, we may choose to hedge those
exposures.

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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

The following financial statements are filed as
part of this Report:

|                                                      |  |      |    | 
|----------------------------------------------------- |  | ---- | -- | 
|                                                      |  | Page
|                                                      |  |     
|Report of Ernst & Young LLP, Independent
    Auditors |  |      | 37 | 
|Consolidated Balance Sheets                           |  |      | 38 | 
|Consolidated Statements of Operations                 |  |      | 39 | 
|Consolidated Statements of Stockholders
    Equity   |  |      | 40 | 
|Consolidated Statements of Cash Flows                 |  |      | 41 | 
|Notes to Consolidated Financial Statements            |  |      | 42 | 

36



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##### Table of Contents






REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS

The Board of Directors and Stockholders

Transmeta Corporation


We have audited the accompanying consolidated
balance sheets of Transmeta Corporation as of December 31,
2002 and 2001, and the related consolidated statements of
operations, stockholders equity, and cash flows for each
of the three years in the period ended December 31, 2002.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Transmeta Corporation at
December 31, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

San Jose, California

January 13, 2003 except for


Note 15, as to which the date


is March 25, 2003


37



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##### Table of Contents



TRANSMETA CORPORATION






CONSOLIDATED BALANCE SHEETS


|                                                                         |                                                                                                                                          |                                                                                 |                                            |         |         |         |          |         |         |         | 
|------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------- | ------- | -------- | ------- | ------- | ------- | 
|                                                                         |                                                                                                                                          |                                                                                
|                                                                         |                                                                                                                                          | December 31,                                                                   
|                                                                         |                                                                                                                                          |                                                                                
|                                                                         |                                                                                                                                          | 2002                                                                            |                                            | 2001   
|                                                                         |                                                                                                                                          |                                                                                 |                                            |        
|                                                                         |                                                                                                                                          |                                                                                
|                                                                         |                                                                                                                                          | (In thousands, except for                                                      
|                                                                         |                                                                                                                                          | share and per share data)                                                      
|ASSETS                                                                  
|Current assets:                                                          |                                                                                                                                          |                                                                                 |                                            |         |         |         |          |        
|                                                                         | Cash and cash equivalents                                                                                                                |                                                                                 | $                                          | 16,613  |         |         | $        | 57,747  |        
|                                                                         | Short-term investments                                                                                                                   |                                                                                 |                                            | 112,837 |         |         |          | 183,941 |        
|                                                                         | Accounts receivable, net of allowances for
    doubtful accounts of $90 and $0, in 2002 and 2001, respectively                           |                                                                                 |                                            | 4,060   |         |         |          | 1,749   |        
|                                                                         | Inventories                                                                                                                              |                                                                                 |                                            | 10,937  |         |         |          | 1,388   |        
|                                                                         | Prepaid expenses and other current assets                                                                                                |                                                                                 |                                            | 4,722   |         |         |          | 7,091   |        
|                                                                         |                                                                                                                                          |                                                                                 |                                            |         |         |         |          |        
|                                                                         |                                                                                                                                          |                                                                                 | Total current assets                       |         |         | 149,169 |          |         |         | 251,916 | 
|Property and equipment, net                                              |                                                                                                                                          |                                                                                 | 9,574                                      |         |         |         | 11,622   |        
|Patents and patent rights, net                                           |                                                                                                                                          |                                                                                 | 36,623                                     |         |         |         | 43,469   |        
|Other assets                                                             |                                                                                                                                          |                                                                                 | 2,189                                      |         |         |         | 2,017    |        
|                                                                         |                                                                                                                                          |                                                                                 |                                            |         |         |         |          |        
|                                                                         |                                                                                                                                          |                                                                                 | Total assets                               |         | $       | 197,555 |          |         | $       | 309,024 | 
|                                                                         |                                                                                                                                          |                                                                                 |                                            |         |         |         |          |        
|                                                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                
|                                                                        
|Current liabilities:                                                     |                                                                                                                                          |                                                                                 |                                            |         |         |         |          |        
|                                                                         | Accounts payable                                                                                                                         |                                                                                 | $                                          | 2,311   |         |         | $        | 5,421   |        
|                                                                         | Accrued compensation and related compensation
    liabilities                                                                            |                                                                                 |                                            | 3,195   |         |         |          | 5,129   |        
|                                                                         | Other accrued liabilities                                                                                                                |                                                                                 |                                            | 8,216   |         |         |          | 6,553   |        
|                                                                         | Current portion of accrued restructuring costs                                                                                           |                                                                                 |                                            | 2,549   |         |         |          |        |        
|                                                                         | Current portion of long-term payables                                                                                                    |                                                                                 |                                            | 16,000  |         |         |          | 15,000  |        
|                                                                         | Current portion of long-term debt and capital
    lease obligations                                                                      |                                                                                 |                                            | 865     |         |         |          | 2,661   |        
|                                                                         |                                                                                                                                          |                                                                                 |                                            |         |         |         |          |        
|                                                                         |                                                                                                                                          |                                                                                 | Total current liabilities                  |         |         | 33,136  |          |         |         | 34,764  | 
|Long-term payables, net of current portion                               |                                                                                                                                          |                                                                                 | 17,449                                     |         |         |         | 28,904   |        
|Long-term accrued restructuring costs, net of
    current portion        |                                                                                                                                          |                                                                                 | 5,456                                      |         |         |         |         |        
|Long-term debt and capital lease obligations, net
    of current portion |                                                                                                                                          |                                                                                 | 667                                        |         |         |         | 391      |        
|Commitments and contingencies                                            |                                                                                                                                          |                                                                                 |                                            |         |         |         |          |        
|Stockholders equity:                                                    |                                                                                                                                          |                                                                                 |                                            |         |         |         |          |        
|                                                                         | Convertible preferred stock, $0.00001 par
    value, at amounts paid in; Authorized shares 
    5,000,000. None issued in 2002 and 2001 |                                                                                 |                                            |        |         |         |          |        |        
|                                                                         | Common stock, $0.00001 par value, at amounts
    paid in;                                                                                |                                                                                 |                                            |         |         |         |          |         |        
|                                                                         |                                                                                                                                          | Authorized shares  1,000,000,000.                                              |                                            |         |         |         |          |         |         |        
|                                                                         |                                                                                                                                          | Issued and outstanding shares 
    136,086,142 in 2002 and 132,234,558 in 2001 |                                            |         | 601,119 |         |          |         | 603,464 |        
|Treasury stock  796,875 shares in
    2002 and 2001                     |                                                                                                                                          |                                                                                 | (2,439                                     | )       |         |         | (2,439   | )      
|Deferred stock compensation                                              |                                                                                                                                          |                                                                                 | (3,039                                     | )       |         |         | (11,818  | )      
|Accumulated other comprehensive income                                   |                                                                                                                                          |                                                                                 | 134                                        |         |         |         | 720      |        
|Accumulated deficit                                                      |                                                                                                                                          |                                                                                 | (454,928                                   | )       |         |         | (344,962 | )      
|                                                                         |                                                                                                                                          |                                                                                 |                                            |         |         |         |          |        
|                                                                         |                                                                                                                                          |                                                                                 | Total stockholders equity                 |         |         | 140,847 |          |         |         | 244,965 | 
|                                                                         |                                                                                                                                          |                                                                                 |                                            |         |         |         |          |        
|                                                                         |                                                                                                                                          |                                                                                 | Total liabilities and stockholders equity |         | $       | 197,555 |          |         | $       | 309,024 | 
|                                                                         |                                                                                                                                          |                                                                                 |                                            |         |         |         |          |        

(See accompanying notes)

38



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##### Table of Contents



TRANSMETA CORPORATION






CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                            |                                                                 |                                           |          |        |         |      |          |        |         |   |          |        |         | 
|----------------------------------------------------------- | --------------------------------------------------------------- | ----------------------------------------- | -------- | ------ | ------- | ---- | -------- | ------ | ------- | - | -------- | ------ | ------- | 
|                                                            |                                                                 |                                          
|                                                            |                                                                 | Years Ended December 31,                 
|                                                            |                                                                 |                                          
|                                                            |                                                                 | 2002                                      |          | 2001   |         | 2000
|                                                            |                                                                 |                                           |          |        |         |     
|                                                            |                                                                 |                                          
|                                                            |                                                                 | (In thousands, except for per share data)
|Net product revenue                                         |                                                                 | $                                         | 24,247   |        |         | $    | 35,590   |        |         | $ | 16,180   |       
|Cost of revenue                                             |                                                                 |                                           | 17,127   |        |         |      | 48,694   |        |         |   | 9,461    |       
|                                                            |                                                                 |                                           |          |        |         |      |          |        |         |   |          |       
|Gross profit (loss)                                         |                                                                 |                                           | 7,120    |        |         |      | (13,104  | )      |         |   | 6,719    |       
|                                                            |                                                                 |                                           |          |        |         |      |          |        |         |   |          |       
|Operating expenses:                                         |                                                                 |                                           |          |        |         |      |          |        |         |   |          |       
|                                                            | Research and development(1)(2)                                  |                                           |          | 63,603 |         |      |          | 67,639 |         |   |          | 61,415 |        
|                                                            | In-process research and development                             |                                           |          |       |         |      |          | 13,600 |         |   |          |       |        
|                                                            | Selling, general and administrative(3)(4)                       |                                           |          | 29,917 |         |      |          | 35,460 |         |   |          | 27,045 |        
|                                                            | Restructuring charges(5)                                        |                                           |          | 14,726 |         |      |          |       |         |   |          |       |        
|                                                            | Amortization of deferred charges, patents and
    patent rights |                                           |          | 11,392 |         |      |          | 17,556 |         |   |          | 10,416 |        
|                                                            | Impairment write-off of deferred charges                        |                                           |          |       |         |      |          | 16,564 |         |   |          |       |        
|                                                            | Stock compensation                                              |                                           |          | 1,809  |         |      |          | 20,954 |         |   |          | 13,056 |        
|                                                            |                                                                 |                                           |          |        |         |      |          |        |         |   |          |       
|                                                            |                                                                 | Total operating expenses                  |          |        | 121,447 |      |          |        | 171,773 |   |          |        | 111,932 | 
|                                                            |                                                                 |                                           |          |        |         |      |          |        |         |   |          |       
|Operating loss                                              |                                                                 |                                           | (114,327 | )      |         |      | (184,877 | )      |         |   | (105,213 | )     
|                                                            | Interest and other income                                       |                                           |          | 4,962  |         |      |          | 14,686 |         |   |          | 9,174  |        
|                                                            | Interest expense                                                |                                           |          | (601   | )       |      |          | (1,060 | )       |   |          | (1,666 | )      
|                                                            |                                                                 |                                           |          |        |         |      |          |        |         |   |          |       
|Net loss                                                    |                                                                 | $                                         | (109,966 | )      |         | $    | (171,251 | )      |         | $ | (97,705  | )     
|                                                            |                                                                 |                                           |          |        |         |      |          |        |         |   |          |       
|Net loss per share  basic and diluted                      |                                                                 | $                                         | (0.82    | )      |         | $    | (1.33    | )      |         | $ | (2.18    | )     
|                                                            |                                                                 |                                           |          |        |         |      |          |        |         |   |          |       
|Weighted average shares outstanding 
    basic and diluted |                                                                 |                                           | 134,719  |        |         |      | 129,002  |        |         |   | 44,741   |       
|                                                            |                                                                 |                                           |          |        |         |      |          |        |         |   |          |       



---



|    |                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes $4,364, $8,292 and $5,557 in
    amortization of deferred stock compensation for the year ended
    December 31, 2002, 2001 and 2000, respectively.
|   
|(2) | Excludes $(408) and $2,006 in variable stock
    compensation for the year ended December 31, 2002 and 2001,
    respectively.                              
|   
|(3) | Excludes $950, $8,460 and $7,499 in amortization
    of deferred stock compensation for the year ended
    December 31, 2002, 2001 and 2000, respectively.  
|   
|(4) | Excludes $(1,360) and $2,196 in variable stock
    compensation for the year ended December 31, 2002 and 2001,
    respectively.                            
|   
|(5) | Excludes $(1,737) in amortization of deferred
    stock compensation related to employee terminations for year
    ended December 31, 2002.                 

(See accompanying notes)

39



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##### Table of Contents



TRANSMETA CORPORATION






CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY


|                                                                                                                                                         |  |                                                     |          |        |  |          |         |              |  |              |        |               |  |             |         |               |  |   |         |   |  |   |      |   |  |   |          |   |  |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------- | -------- | ------ |  | -------- | ------- | ------------ |  | ------------ | ------ | ------------- |  | ----------- | ------- | ------------- |  | - | ------- | - |  | - | ---- | - |  | - | -------- | - |  | - | -------- | -
|                                                                                                                                                         |  |                                                     |          |        |  |          |         | Notes        |  |              |        | Accumulated   |  |             |         |              
|                                                                                                                                                         |  | Convertible                                         |          |        |  |          |         | Receivable   |  | Deferred     |        | Other         |  |             |         | Total        
|                                                                                                                                                         |  | Preferred                                           |          | Common |  | Treasury |         | from         |  | Stock        |        | Comprehensive |  | Accumulated |         | Stockholders
|                                                                                                                                                         |  | Stock                                               |          | Stock  |  | Stock    |         | Stockholders |  | Compensation |        | Income/(Loss) |  | Deficit     |         | Equity       
|                                                                                                                                                         |  |                                                     |          |        |  |          |         |              |  |              |        |               |  |             |         |              
|                                                                                                                                                         |  |                                                    
|                                                                                                                                                         |  | (In thousands, except for share and per share data)
|Balance at December 31, 1999                                                                                                                             |  | $                                                   | 134,980  |        |  | $        | 7,183   |              |  | $            |       |               |  | $           | (3,071  | )             |  | $ |        |   |  | $ | (3   | ) |  | $ | (76,006  | ) |  | $ | 63,083   |  
|Issuance of 7,040,000 shares of
    Series G convertible preferred stock to investors for cash
    at $12.50 per share, net of issuance costs of $58,000 |  |                                                     | 87,942   |        |  |          |        |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   | 87,942   |  
|Issuance of 14,950,000 shares of common
    stock in initial public offering, net of issuance costs of
    $24.4 million                                 |  |                                                     |         |        |  |          | 289,638 |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   | 289,638  |  
|Conversion of preferred stock into
    73,174,342 shares of common stock                                                                                 |  |                                                     | (222,922 | )      |  |          | 222,922 |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   |         |  
|Issuance of 5,312,768 shares of common stock
    to employees under option exercises, net of repurchases                                                 |  |                                                     |         |        |  |          | 15,225  |              |  |              |       |               |  |             | (14,681 | )             |  |   |        |   |  |   |     |   |  |   |         |   |  |   | 544      |  
|Issuance of 80,000 shares of common stock
    upon exercise of a warrant                                                                                 |  |                                                     |         |        |  |          | 50      |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   | 50       |  
|Stock compensation in connection with severance
    arrangement                                                                                          |  |                                                     |         |        |  |          | 945     |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   | 945      |  
|Issuance of warrants to
    purchase 8,000 shares of common stock in connection
    with consulting agreement                                            |  |                                                     |         |        |  |          | 30      |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   | 30       |  
|Issuance of 1,200,000 shares of common stock
    to a development partner                                                                                |  |                                                     |         |        |  |          | 6,750   |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   | 6,750    |  
|Issuance of 1,200,000 shares in connection
    with the conversion of a note                                                                             |  |                                                     |         |        |  |          | 433     |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   | 433      |  
|Stock compensation                                                                                                                                       |  |                                                     |         |        |  |          | 46,044  |              |  |              |       |               |  |             |        |               |  |   | (46,044 | ) |  |   |     |   |  |   |         |   |  |   |         |  
|Amortization of deferred stock compensation                                                                                                              |  |                                                     |         |        |  |          |        |              |  |              |       |               |  |             |        |               |  |   | 13,056  |   |  |   |     |   |  |   |         |   |  |   | 13,056   |  
|Other comprehensive income  unrealized
    gain on available-for-sale investments, net                                                                  |  |                                                     |         |        |  |          |        |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   | 150  |   |  |   |         |   |  |   | 150      |  
|Net loss                                                                                                                                                 |  |                                                     |         |        |  |          |        |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   | (97,705  | ) |  |   | (97,705  | )
|                                                                                                                                                         |  |                                                     |          |        |  |          |         |              |  |              |        |               |  |             |         |               |  |   |         |   |  |   |      |   |  |   |          |   |  |   |          |  
|Comprehensive income/(loss)                                                                                                                              |  |                                                     |         |        |  |          |        |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   | (97,555  | )
|                                                                                                                                                         |  |                                                     |          |        |  |          |         |              |  |              |        |               |  |             |         |               |  |   |         |   |  |   |      |   |  |   |          |   |  |   |          |  
|Balance at December 31, 2000                                                                                                                             |  |                                                     |         |        |  |          | 589,220 |              |  |              |       |               |  |             | (17,752 | )             |  |   | (32,988 | ) |  |   | 147  |   |  |   | (173,711 | ) |  |   | 364,916  |  
|Issuance costs related to issuance of shares of
    common stock in initial public offering                                                              |  |                                                     |         |        |  |          | (256    | )            |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   | (256     | )
|Issuance of 1,995,457 shares of common stock
    to employees under option exercises and employee stock purchase
    plan, net of repurchases            |  |                                                     |         |        |  |          | 2,371   |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   | 2,371    |  
|Issuance of 798,649 shares of common stock
    in connection with the purchase of patents and patent rights                                              |  |                                                     |         |        |  |          | 13,813  |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   | 13,813   |  
|Issuance of 618,817 shares of common stock
    in connection with net warrant exercises                                                                  |  |                                                     |         |        |  |          | 170     |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   | 170      |  
|Stock compensation in connection with employee
    severance arrangement                                                                                 |  |                                                     |         |        |  |          | 75      |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   | 75       |  
|Issuance of 1,000,000 shares in connection
    with the purchase of in- process research and development                                                 |  |                                                     |         |        |  |          | 13,600  |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   | 13,600   |  
|Stock compensation                                                                                                                                       |  |                                                     |         |        |  |          | (1,960  | )            |  |              |       |               |  |             | 1,744   |               |  |   | 21,170  |   |  |   |     |   |  |   |         |   |  |   | 20,954   |  
|Purchase of 796,875 shares of treasury stock
    in exchange for cancellation of shareholder notes                                                       |  |                                                     |         |        |  |          |        |              |  |              | (2,439 | )             |  |             | 2,439   |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   |         |  
|Reduction of shareholder notes relating to
    termination of officers and application of non-recourse
    accounting to remaining notes                 |  |                                                     |         |        |  |          | (13,569 | )            |  |              |       |               |  |             | 13,569  |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   |         |  
|Other comprehensive income  unrealized
    gain on available-for-sale investments, net                                                                  |  |                                                     |         |        |  |          |        |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   | 573  |   |  |   |         |   |  |   | 573      |  
|Net loss                                                                                                                                                 |  |                                                     |         |        |  |          |        |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   | (171,251 | ) |  |   | (171,251 | )
|                                                                                                                                                         |  |                                                     |          |        |  |          |         |              |  |              |        |               |  |             |         |               |  |   |         |   |  |   |      |   |  |   |          |   |  |   |          |  
|Comprehensive income/(loss)                                                                                                                              |  |                                                     |         |        |  |          |        |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   | (170,678 | )
|                                                                                                                                                         |  |                                                     |          |        |  |          |         |              |  |              |        |               |  |             |         |               |  |   |         |   |  |   |      |   |  |   |          |   |  |   |          |  
|Balance at December 31, 2001                                                                                                                             |  |                                                     |         |        |  |          | 603,464 |              |  |              | (2,439 | )             |  |             |        |               |  |   | (11,818 | ) |  |   | 720  |   |  |   | (344,962 | ) |  |   | 244,965  |  
|Issuance of 3,511,101 shares of common stock
    to employees under option exercises and employee stock purchase
    plan, net of repurchases            |  |                                                     |         |        |  |          | 4,168   |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   | 4,168    |  
|Stock compensation                                                                                                                                       |  |                                                     |         |        |  |          | (5,201  | )            |  |              |       |               |  |             |        |               |  |   | 8,779   |   |  |   |     |   |  |   |         |   |  |   | 3,578    |  
|Repayment of notes from stockholders                                                                                                                     |  |                                                     |         |        |  |          | 456     |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   | 456      |  
|Variable stock compensation                                                                                                                              |  |                                                     |         |        |  |          | (1,768  | )            |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   | (1,768   | )
|Other comprehensive income  unrealized
    gain/(loss) on available-for-sale investments, net                                                           |  |                                                     |         |        |  |          |        |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   | (586 | ) |  |   |         |   |  |   | (586     | )
|Net loss                                                                                                                                                 |  |                                                     |         |        |  |          |        |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   | (109,966 | ) |  |   | (109,966 | )
|                                                                                                                                                         |  |                                                     |          |        |  |          |         |              |  |              |        |               |  |             |         |               |  |   |         |   |  |   |      |   |  |   |          |   |  |   |          |  
|Comprehensive income/(loss)                                                                                                                              |  |                                                     |         |        |  |          |        |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   | (110,552 | )
|                                                                                                                                                         |  |                                                     |          |        |  |          |         |              |  |              |        |               |  |             |         |               |  |   |         |   |  |   |      |   |  |   |          |   |  |   |          |  
|Balance at December 31, 2002                                                                                                                             |  | $                                                   |         |        |  | $        | 601,119 |              |  | $            | (2,439 | )             |  | $           |        |               |  | $ | (3,039  | ) |  | $ | 134  |   |  | $ | (454,928 | ) |  | $ | 140,847  |  
|                                                                                                                                                         |  |                                                     |          |        |  |          |         |              |  |              |        |               |  |             |         |               |  |   |         |   |  |   |      |   |  |   |          |   |  |   |          |  

(See accompanying notes)

40



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##### Table of Contents



TRANSMETA CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                            |                                                                                               |                                                                 |         |          |        |      |          |          |        |   |         |          |         |  
|--------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------- | ------- | -------- | ------ | ---- | -------- | -------- | ------ | - | ------- | -------- | ------- | -
|                                                                            |                                                                                               |                                                                
|                                                                            |                                                                                               | Years Ended December 31,                                       
|                                                                            |                                                                                               |                                                                
|                                                                            |                                                                                               | 2002                                                            |         | 2001     |        | 2000
|                                                                            |                                                                                               |                                                                 |         |          |        |     
|                                                                            |                                                                                               |                                                                
|                                                                            |                                                                                               | (In thousands)                                                 
|Cash flows from operating activities:                                       |                                                                                               |                                                                 |         |          |        |      |          |          |        |   |         |         
|                                                                            | Net loss                                                                                      |                                                                 | $       | (109,966 | )      |      | $        | (171,251 | )      |   | $       | (97,705  | )      
|                                                                            | Adjustments to reconcile net loss to net cash
    used in operating activities:               |                                                                 |         |          |        |      |          |          |        |   |         |          |        
|                                                                            |                                                                                               | Stock compensation                                              |         |          | 1,809  |      |          |          | 20,954 |   |         |          | 13,056  |  
|                                                                            |                                                                                               | Depreciation                                                    |         |          | 5,888  |      |          |          | 6,494  |   |         |          | 6,091   |  
|                                                                            |                                                                                               | Loss on disposal of fixed assets, net                           |         |          | 148    |      |          |          |       |   |         |          |        |  
|                                                                            |                                                                                               | Allowance for doubtful accounts                                 |         |          | 90     |      |          |          |       |   |         |          |        |  
|                                                                            |                                                                                               | Amortization of other assets                                    |         |          | 201    |      |          |          | 190    |   |         |          |        |  
|                                                                            |                                                                                               | Fair value of equity instruments issued for
    services        |         |          |       |      |          |          | 170    |   |         |          | 30      |  
|                                                                            |                                                                                               | Stock compensation in connection with severance
    agreement   |         |          |       |      |          |          | 75     |   |         |          | 945     |  
|                                                                            |                                                                                               | Amortization of deferred charges, patents and
    patent rights |         |          | 11,392 |      |          |          | 17,556 |   |         |          | 10,416  |  
|                                                                            |                                                                                               | Impairment write-off of deferred charges                        |         |          |       |      |          |          | 16,564 |   |         |          |        |  
|                                                                            |                                                                                               | Accretion of interest payable to a development
    partner      |         |          |       |      |          |          |       |   |         |          | 45      |  
|                                                                            |                                                                                               | Write-off of purchased in-process research and
    development  |         |          |       |      |          |          | 13,600 |   |         |          |        |  
|                                                                            |                                                                                               | Non cash restructuring charges                                  |         |          | 1,629  |      |          |          |       |   |         |          |        |  
|                                                                            | Changes in operating assets and liabilities:                                                  |                                                                 |         |          |        |      |          |          |        |   |         |          |        
|                                                                            |                                                                                               | Accounts receivable                                             |         |          | (2,401 | )    |          |          | 1,549  |   |         |          | (3,298  | )
|                                                                            |                                                                                               | Inventories                                                     |         |          | (9,549 | )    |          |          | 14,065 |   |         |          | (15,453 | )
|                                                                            |                                                                                               | Prepaid expenses and other current assets                       |         |          | 2,320  |      |          |          | 730    |   |         |          | (6,209  | )
|                                                                            |                                                                                               | Other non-current assets                                        |         |          | (103   | )    |          |          | (904   | ) |         |          |        |  
|                                                                            |                                                                                               | Accounts payable and accrued liabilities                        |         |          | (3,381 | )    |          |          | (275   | ) |         |          | 13,532  |  
|                                                                            |                                                                                               | Accrued restructuring charges                                   |         |          | 8,005  |      |          |          |       |   |         |          |        |  
|                                                                            |                                                                                               | Deposits received under subleasing agreements                   |         |          |       |      |          |          | (138   | ) |         |          | (93     | )
|                                                                            |                                                                                               |                                                                 |         |          |        |      |          |          |        |   |         |         
|Net cash used in operating activities                                       |                                                                                               |                                                                 | (93,918 | )        |        |      | (80,621  | )        |        |   | (78,643 | )       
|                                                                            |                                                                                               |                                                                 |         |          |        |      |          |          |        |   |         |         
|Cash flows from investing activities:                                       |                                                                                               |                                                                 |         |          |        |      |          |          |        |   |         |         
|                                                                            | Purchase of available-for-sale investments                                                    |                                                                 |         | (178,596 | )      |      |          | (255,610 | )      |   |         | (526,218 | )      
|                                                                            | Proceeds from sale or maturity of
    available-for-sale investments                          |                                                                 |         | 249,114  |        |      |          | 155,600  |        |   |         | 462,811  |        
|                                                                            | Purchase of property and equipment                                                            |                                                                 |         | (5,581   | )      |      |          | (7,634   | )      |   |         | (8,036   | )      
|                                                                            | Loans to founders                                                                             |                                                                 |         |         |        |      |          | 5,446    |        |   |         | (5,250   | )      
|                                                                            | Payment to development partner                                                                |                                                                 |         | (6,000   | )      |      |          | (3,500   | )      |   |         | (5,000   | )      
|                                                                            | Purchase of patents and patent rights                                                         |                                                                 |         | (9,000   | )      |      |          | (12,041  | )      |   |         |         |        
|                                                                            | Other assets                                                                                  |                                                                 |         | (258     | )      |      |          | (466     | )      |   |         | (326     | )      
|                                                                            |                                                                                               |                                                                 |         |          |        |      |          |          |        |   |         |         
|Net cash provided by/ (used in) investing
    activities                    |                                                                                               |                                                                 | 49,679  |          |        |      | (118,205 | )        |        |   | (82,019 | )       
|                                                                            |                                                                                               |                                                                 |         |          |        |      |          |          |        |   |         |         
|Cash flows from financing activities:                                       |                                                                                               |                                                                 |         |          |        |      |          |          |        |   |         |         
|                                                                            | Net proceeds from issue of preferred stock                                                    |                                                                 |         |         |        |      |          |         |        |   |         | 87,942   |        
|                                                                            | Net proceeds from initial public offering of
    common stock                                 |                                                                 |         |         |        |      |          | (256     | )      |   |         | 289,638  |        
|                                                                            | Common stock issued under stock option plans and
    employee stock purchase programs         |                                                                 |         | 4,168    |        |      |          | 2,371    |        |   |         | 544      |        
|                                                                            | Repayment of notes from stockholders                                                          |                                                                 |         | 456      |        |      |          |         |        |   |         |         |        
|                                                                            | Issuance of common stock upon exercise of a
    warrant                                       |                                                                 |         |         |        |      |          |         |        |   |         | 50       |        
|                                                                            | Proceeds from debt and capital lease obligations                                              |                                                                 |         | 1,140    |        |      |          |         |        |   |         | 1,248    |        
|                                                                            | Repayment of debt and capital lease obligations                                               |                                                                 |         | (2,659   | )      |      |          | (5,286   | )      |   |         | (5,661   | )      
|                                                                            |                                                                                               |                                                                 |         |          |        |      |          |          |        |   |         |         
|Net cash provided by/(used in) financing
    activities                     |                                                                                               |                                                                 | 3,105   |          |        |      | (3,171   | )        |        |   | 373,761 |         
|                                                                            |                                                                                               |                                                                 |         |          |        |      |          |          |        |   |         |         
|Change in cash and cash equivalents                                         |                                                                                               |                                                                 | (41,134 | )        |        |      | (201,997 | )        |        |   | 213,099 |         
|Cash and cash equivalents at beginning of period                            |                                                                                               |                                                                 | 57,747  |          |        |      | 259,744  |          |        |   | 46,645  |         
|                                                                            |                                                                                               |                                                                 |         |          |        |      |          |          |        |   |         |         
|Cash and cash equivalents at end of period                                  |                                                                                               | $                                                               | 16,613  |          |        | $    | 57,747   |          |        | $ | 259,744 |         
|                                                                            |                                                                                               |                                                                 |         |          |        |      |          |          |        |   |         |         
|Supplemental disclosure of cash paid during the
    period:                 |                                                                                               |                                                                 |         |          |        |      |          |          |        |   |         |         
|                                                                            | Cash paid for interest                                                                        |                                                                 | $       | 639      |        |      | $        | 908      |        |   | $       | 1,534    |        
|                                                                            | Cash paid for taxes                                                                           |                                                                 |         |         |        |      |          |         |        |   |         | 1        |        
|Supplemental disclosure of non-cash financing and
    investing activities: |                                                                                               |                                                                 |         |          |        |      |          |          |        |   |         |         
|                                                                            | Issuance of warrants                                                                          |                                                                 |         |         |        |      |          |         |        |   |         | 30       |        
|                                                                            | Issuance of common stock in connection with net
    exercise of warrants                      |                                                                 |         |         |        |      |          | 170      |        |   |         |         |        
|                                                                            | Issuance of common stock to employees for notes
    receivable                                |                                                                 |         |         |        |      |          | 40       |        |   |         | 14,817   |        
|                                                                            | Issuance of common stock upon conversion of a
    note payable to development partner         |                                                                 |         |         |        |      |          |         |        |   |         | 433      |        
|                                                                            | Issuance of common stock in connection with
    purchase of patent and patent rights          |                                                                 |         |         |        |      |          | 13,813   |        |   |         |         |        
|                                                                            | Issuance of common stock in connection with
    purchased in-process research and development |                                                                 |         |         |        |      |          | 13,600   |        |   |         |         |        
|                                                                            | Issuance of common stock in connection with
    license agreement                             |                                                                 |         |         |        |      |          |         |        |   |         | 6,750    |        
|                                                                            | Purchase of treasury stock in exchange for
    cancellation of shareholder notes              |                                                                 |         |         |        |      |          | 2,439    |        |   |         |         |        
|                                                                            | Issuance of payable to development partner                                                    |                                                                 |         |         |        |      |          |         |        |   |         | 5,000    |        

(See accompanying notes)

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##### Table of Contents



TRANSMETA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Overview



| |            
| | -----------
| | The Company

Transmeta develops and sells software-based
microprocessors and develops additional hardware, software, and
system technologies that enable manufacturers to build highly
efficient computing systems characterized by low power
consumption, reduced heat dissipation and the high performance
required to run standard x86 compatible programs. The Company
originally developed its family of Crusoe microprocessors for
lightweight notebook computers and other mobile computing
devices, but has developed and is continuing to develop
microprocessors suitable for a variety of existing and emerging
end markets in which energy and thermal efficiency along with
x86 software compatibility are desirable.

Transmeta was incorporated in California as
Transmeta Corporation on March 3, 1995, and was principally
engaged in research and development, marketing, sales, raising
capital, establishing sources of supplies, commencing production
and building its management team through January 2000.
Substantially all of Transmetas revenue was derived from
technology license agreements with development partners prior to
this period. In January 2000, the Company introduced its Crusoe
family of microprocessors and subsequently began to recognize
product revenue from sales of microprocessor products,
prototypes and development systems. Effective October 26,
2000, Transmeta reincorporated as a Delaware corporation.



| |            
| | -----------
| | Fiscal Year

Transmetas fiscal year ends on the last
Friday in December. For ease of presentation, the accompanying
financial statements have been shown as ending on
December 31 and calendar quarter ends for all annual and
quarterly financial statement captions. Fiscal years 2002, 2001
and 2000 consisted of 52 weeks each and ended on
December 27, December 28 and December 29,
respectively.



| |            
| | -----------
| | Stock Split

On October 26, 2000, the Company effected a
2-for-1 stock split of its common stock. All share and per share
amounts have been retroactively adjusted to reflect this split.

2.     Summary of
Significant Accounting Policies



| |                            
| | ---------------------------
| | Principles of Consolidation

The accompanying consolidated financial
statements include the financial statements of Transmeta and its
wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
accordance with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements. Actual results could differ from those estimates.
Significant estimates made in preparing the financial statements
include inventory valuations, long-lived and intangible asset
valuations, restructuring charges and revenue reserves.



| |                              
| | -----------------------------
| | Concentrations of Credit Risk

Financial instruments that potentially subject
the Company to credit risk consist primarily of cash
equivalents, short-term investments and accounts receivable.
Substantially all of the Companys cash equivalents are
invested in highly liquid money market funds and commercial
securities with high-quality financial institutions in the
United States. Short-term investments consist of
U.S. government and commercial

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##### Table of Contents



TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

bonds and notes. The Company performs ongoing
credit evaluations of its customers, maintains an allowance for
potential credit losses and does not generally require
collateral.



| |                        
| | -----------------------
| | Supplier Concentrations

The Company depends on a single or limited number
of outside contractors to fabricate, assemble and test its
semiconductor devices. While the Company seeks to maintain a
sufficient level of supply and endeavors to maintain ongoing
communications with suppliers to guard against interruptions or
cessation of supply, business and results of operations could be
adversely affected by a stoppage or delay of supply from these
vendors.



| |                    
| | -------------------
| | Revenue Recognition

The Company recognizes revenue from products sold
when persuasive evidence of an arrangement exists, the price is
fixed or determinable, shipment is made and collectibility is
reasonably assured. The Company accrues for estimated sales
returns, and other allowances at the time of shipment. Certain
of the Companys product sales are made to distributors
under agreements allowing for price protection and/or right of
return on unsold products. The Company defers recognition of
revenue on these sales until the distributors sell the products.
The Company may also sell certain products with End of
Life status to its distributors under special arrangements
without price protection or return privileges for which revenue
is recognized upon transfer of title, typically shipment.



| |                            
| | ---------------------------
| | Shipping and Handling Costs

Shipping and handling costs are expensed as
incurred and included in cost of revenue in the Companys
results of operations.



| |                            
| | ---------------------------
| | Comprehensive Income/(Loss)

Net comprehensive loss includes the
Companys net loss, as well as accumulated comprehensive
income/(loss) on available-for-sale investments. Net
comprehensive loss for the years ended December 31, 2002,
2001 and 2000, respectively, is as follows:

|                                                                                            |  |                          |          |      |  |      |          |   |  |   |         |  
|------------------------------------------------------------------------------------------- |  | ------------------------ | -------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                                                                            |  |                         
|                                                                                            |  | Years Ended December 31,
|                                                                                            |  |                         
|                                                                                            |  | 2002                     |          | 2001 |  | 2000
|                                                                                            |  |                          |          |      |  |     
|                                                                                            |  |                         
|                                                                                            |  | (In thousands)          
|Net loss                                                                                    |  | $                        | (109,966 | )    |  | $    | (171,251 | ) |  | $ | (97,705 | )
|Net change in other comprehensive
    income/(loss)  unrealized gain/(loss) on investments |  |                          | (586     | )    |  |      | 573      |   |  |   | 150     |  
|                                                                                            |  |                          |          |      |  |      |          |   |  |   |         |  
|Net comprehensive loss                                                                      |  | $                        | (110,552 | )    |  | $    | (170,678 | ) |  | $ | (97,555 | )
|                                                                                            |  |                          |          |      |  |      |          |   |  |   |         |  



| |                                                
| | -----------------------------------------------
| | Cash Equivalents and Short-term
    Investments

Highly liquid debt securities with insignificant
interest rate risk and original maturities of three months or
less are classified as cash equivalents. Debt securities with
maturities greater than three months and remaining maturities
less than one year are available-for-sale and are classified as
short-term investments. Securities with maturity dates greater
than one year are also classified as short-term investments as
they are considered to be available-for-sale securities.

All of Transmetas short-term investments
were classified as available-for-sale as of the balance sheet
dates presented and, accordingly, are reported at fair value
with unrealized gains and losses recorded as a component of
accumulated other comprehensive income/(loss) in
stockholders equity. Fair values of cash

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##### Table of Contents



TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

equivalents approximated original cost due to the
short period of time to maturity. The cost of securities sold is
based on the specific identification method. Realized gains or
losses and declines in value, if any, judged to be other than
temporary on available-for-sale securities are reported in
interest income or expense.



| |                                         
| | ----------------------------------------
| | Fair Values of Financial
    Instruments

The fair values of Transmetas cash
equivalents, short-term investments, accounts receivable,
prepaid expenses and other current assets, and accounts payable
and accrued liabilities approximate their carrying values due to
the short-term nature of those instruments.

The fair values of short-term and long-term
capital lease obligations are estimated based on current
interest rates available to Transmeta for debt instruments with
similar terms, degrees of risk and remaining maturities. The
carrying values of these obligations approximate their
respective fair values.



| |            
| | -----------
| | Inventories

Inventories are stated at the lower of cost
(first-in, first-out) or market. Write-downs to reduce the
carrying value of excess and obsolete, slow moving and
non-usable inventory to net realizable value are charged to cost
of revenue.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are recorded at cost.
Depreciation and amortization have been provided on the
straight-line method over the related assets estimated
useful life ranging from three to five years. Leasehold
improvements and assets recorded under capital leases are
amortized on a straight-line basis over the lesser of the
related assets estimated useful life or the remaining
lease term.



| |                                                  
| | -------------------------------------------------
| | Valuation of Long-Lived and Intangible
    Assets

Transmetas accounting policy related to the
valuation and impairment of long-lived assets is in accordance
with the Financial Accounting Standards Boards
(FASB) Statement of Financial Accounting Standards
(SFAS) 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. In accordance with our policy, at
the end of each accounting period we evaluate our long-lived and
intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of long-lived
assets may not be recoverable. Recoverability of assets to be
held and used is determined by comparing the carrying amount of
an asset to the future undiscounted cash flows expected to be
generated by the asset. If the carrying amount of an asset
exceeds the future undiscounted cash flows the asset is
considered to be impaired and the impairment charge recognized
is measured by the amount by which the carrying amount of the
asset exceeds the fair value of the asset.



| |                         
| | ------------------------
| | Research and Development

Costs to develop Transmetas products are
expensed as incurred in accordance with the FASBs
SFAS 2, Accounting for Research and Development
Costs, which establishes accounting and reporting
standards for research and development costs.

Transmeta accounts for software development costs
in accordance with the FASBs SFAS 86,
Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed, which requires
capitalization of certain software development costs once
technological feasibility for the software component is
established and research and development activities for the
hardware component are completed. Based on Transmetas
development process, the time period between the establishment
of technological feasibility and completion of the hardware
component and the release of the product is short and
capitalization of internal development costs has not been
material to date.

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##### Table of Contents



TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |             
| | ------------
| | Income Taxes

Transmeta accounts for income taxes in accordance
with the FASBs SFAS 109, Accounting for Income
Taxes, which requires the use of the liability method in
accounting for income taxes. Under SFAS 109, deferred tax
assets and liabilities are measured based on differences between
the financial reporting and tax bases of assets and liabilities
using enacted tax rates and laws that will be in effect when
differences are expected to reverse.



| |         
| | --------
| | Warranty

Transmeta typically provides a warranty that
includes factory repair services or replacement as needed for
replacement parts on its products for a period of one year from
shipment. Transmeta records a provision for estimated warranty
costs upon shipment of its products. Warranty costs have been
within managements expectations to date and have not been
material.



| |                     
| | --------------------
| | Advertising Expenses

All advertising costs are expensed as incurred.
To date, advertising costs have not been material.



| |                   
| | ------------------
| | Net Loss Per Share

Basic and diluted net loss per share is presented
in conformity with the FASBs SFAS 128, Earnings
Per Share, for all periods presented. Basic and diluted
net loss per share has been computed using the weighted-average
number of shares of common stock outstanding during each period,
less weighted-average shares subject to repurchase.

The following table presents the computation of
basic and diluted net loss per share:

|                                       |                                                                                    |                                          |       |          |   |      |       |          |   |   |       |         |  
|-------------------------------------- | ---------------------------------------------------------------------------------- | ---------------------------------------- | ----- | -------- | - | ---- | ----- | -------- | - | - | ----- | ------- | -
|                                       |                                                                                    |                                         
|                                       |                                                                                    | Years Ended December 31,                
|                                       |                                                                                    |                                         
|                                       |                                                                                    | 2002                                     |       | 2001     |   | 2000
|                                       |                                                                                    |                                          |       |          |   |     
|                                       |                                                                                    |                                         
|                                       |                                                                                    | (In thousands, except per share amounts)
|Basic and diluted:                     |                                                                                    |                                          |       |          |   |      |       |          |   |   |       |        
|                                       | Net loss                                                                           |                                          | $     | (109,966 | ) |      | $     | (171,251 | ) |   | $     | (97,705 | )
|                                       |                                                                                    |                                          |       |          |   |      |       |          |   |   |       |        
|Basic and diluted:                     |                                                                                    |                                          |       |          |   |      |       |          |   |   |       |        
|                                       | Weighted average shares outstanding                                                |                                          |       | 134,902  |   |      |       | 132,779  |   |   |       | 51,016  |  
|                                       | Less: Weighted average shares subject to
    repurchase                            |                                          |       | (183     | ) |      |       | (3,777   | ) |   |       | (6,275  | )
|                                       |                                                                                    |                                          |       |          |   |      |       |          |   |   |       |        
|                                       | Weighted average shares used in computing basic
    and diluted net loss per share |                                          |       | 134,719  |   |      |       | 129,002  |   |   |       | 44,741  |  
|                                       |                                                                                    |                                          |       |          |   |      |       |          |   |   |       |        
|Net loss per share  basic and diluted |                                                                                    | $                                        | (0.82 | )        |   | $    | (1.33 | )        |   | $ | (2.18 | )      
|                                       |                                                                                    |                                          |       |          |   |      |       |          |   |   |       |        

The Company has excluded all outstanding stock
options and shares subject to repurchase from the calculation of
basic and diluted net loss per share because these securities
are antidilutive for all periods presented. Options and warrants
to purchase 32,917,730, 22,885,437 and
18,274,614 shares of common stock in 2002, 2001 and 2000,
respectively, determined using the treasury stock method, were
not included in the computation of diluted net loss per share
because the effect would be antidilutive. These securities, had
they been dilutive, would have been included in the computation
of diluted net loss per share using the treasury stock method.

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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                         
| | ------------------------
| | Stock-Based Compensation

Transmeta has employee stock plans that are
described more fully in Note 11. The Company accounts for
its stock options and equity awards in accordance with the
provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees,
(APB 25) and related interpretations and has elected to
follow the disclosure only alternative prescribed by
the FASBs SFAS 123, Accounting for Stock-Based
Compensation. Expense associated with stock-based
compensation is amortized on an accelerated basis over the
vesting period of the individual award consistent with the
method described in FASB Interpretation 28. Accordingly,
approximately 59% of the unearned deferred compensation is
amortized in the first year, 25% in the second year, 12% in the
third year, and 4% in the fourth year following the date of
grant. Pursuant to SFAS 123, Transmeta discloses the pro
forma effect of using the fair value method of accounting for
its stock-based compensation arrangements.

For purposes of pro forma disclosures, the
estimated fair value of options is amortized to pro forma
expense over the options vesting period using an
accelerated graded method. Pro forma information follows:

|                                                                                                                                       |  |                                       |          |      |  |      |          |   |  |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | -------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                                                                                                                                       |  |                                      
|                                                                                                                                       |  | Years Ended December 31,             
|                                                                                                                                       |  |                                      
|                                                                                                                                       |  | 2002                                  |          | 2001 |  | 2000
|                                                                                                                                       |  |                                       |          |      |  |     
|                                                                                                                                       |  |                                      
|                                                                                                                                       |  | (In thousands, except per share data)
|Net loss, as reported                                                                                                                  |  | $                                     | (109,966 | )    |  | $    | (171,251 | ) |  | $ | (97,705  | )
|Add: Stock-based employee compensation expense
    included in reported net loss, net of related tax effects                           |  | $                                     | 1,809    |      |  | $    | 20,954   |   |  | $ | 13,056   |  
|Less: Total stock-based employee compensation
    expense under fair value based method for all awards, net of
    related tax effects |  | $                                     | (41,377  | )    |  | $    | (39,648  | ) |  | $ | (27,757  | )
|Pro forma net loss                                                                                                                     |  | $                                     | (149,534 | )    |  | $    | (189,945 | ) |  | $ | (112,406 | )
|Basic and diluted net loss per share 
    as reported                                                                                 |  | $                                     | (0.82    | )    |  | $    | (1.33    | ) |  | $ | (2.18    | )
|Basic and diluted net loss per share 
    pro forma                                                                                   |  | $                                     | (1.11    | )    |  | $    | (1.47    | ) |  | $ | (2.51    | )

See Note 11 for a discussion of the
assumptions used in the option pricing model and estimated fair
value of employee stock options.

Options and warrants granted to consultants and
vendors are accounted for at fair value determined by using the
Black-Scholes method in accordance with Emerging Issues Task
Force (EITF) Issue No. 96-18. The assumptions used to
value stock-based awards to consultants and vendors are similar
to those used for employees except that the respective
contractual life of the warrant or option was used instead of
the estimated life.(see Note 11).

Due to the resignation in fiscal 2001 of certain
officers and the treatment of the notes they issued to the
Company in order to early exercise their options, the Company is
accounting for all remaining stockholder notes that were issued
to purchase shares of the Companys common stock as if such
notes had terms equivalent to non-recourse notes. As a result,
in fiscal 2001 the Company recorded additional stock
compensation expense to write-off all accrued interest related
to its remaining stockholder notes and recorded an adjustment to
its balance sheet to reduce common stock and reduce notes
receivable from stockholders by the remaining amounts owed under
the stockholder notes. This entry did not have a material impact
on stockholders equity.

In addition, under the terms of the outstanding
stockholder notes, interest continues to accrue until the notes
are paid. In assessing these notes as non-recourse, the
underlying purchase price for the shares is not deemed to be
fixed until the notes have been paid or otherwise settled.
Accordingly, the Company determined that variable accounting is
to be applied to these note arrangements as long as the notes
remain outstanding. Under variable accounting, the Company
records compensation expense for the vested shares for the
excess, if

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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

any, of the current market value of the shares
over the then current principle amount of the notes and accrued
interest, determined separately for each outstanding stockholder
note. This variable accounting resulted in the Company recording
a credit to stock compensation expense of $1.8 million in
fiscal 2002 resulting from a lower share price of the
Companys common stock at the end of fiscal 2002 compared
to the end of fiscal 2001. Stock compensation expense related to
variable accounting was $2.5 million in fiscal 2001 and $0
in fiscal 2000. The market value of the Companys common
stock was $1.21 and $2.22 per share at the end of fiscal
2002 and 2001, respectively. During the remaining life of these
outstanding stockholder notes, the Companys reported stock
compensation will be adjusted upward (expense) or downward
(benefit) at each period end, based on the above stated formula.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

In July 2002, the FASB issued SFAS 146
Accounting for Costs Associated with Exit or Disposal
Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). The principal difference between
SFAS 146 and EITF 94-3 relates to the timing of the
recognition of a liability for a cost associated with an exit or
disposal activity. SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized
when the liability is incurred. A liability for an exit cost as
generally defined in EITF 94-3 is to be recognized at the
date of an entitys commitment to an exit plan.
SFAS 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The Company
accounted for its restructuring activity during fiscal 2002
under EITF 94-3. The Company does not expect the adoption
of SFAS 146 to have a material impact on its financial
position or results of operations.

In November 2002, the FASB issued FASB
Interpretation No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others.
FIN 45 requires that upon issuance of a guarantee, a
guarantor must recognize a liability for the fair value of an
obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual
financial statements about the obligations associated with
guarantees issued. The recognition provisions of FIN 45 are
effective for any guarantees issued or modified after
December 31, 2002. The disclosure requirements are
effective for financial statements of interim or annual periods
ending after December 15, 2002. The Companys adoption
of FIN 45 did not have a material impact on its financial
position or results of operations.

In December 2002, the FASB issued SFAS 148
Accounting for Stock-Based Compensation 
Transition and Disclosure, which amends SFAS 123
Accounting for Stock-Based Compensation and provides
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 to require prominent disclosures
in both annual and interim financial statements about the method
of accounting for stock-based employee compensation and the
effect of the method used on reporting results. The transition
guidance and annual disclosures provisions of SFAS 148 are
effective for fiscal years ending after December 15, 2002.
The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods
beginning after December 15, 2002. The Company adopted the
disclosure provisions of SFAS 148 for this Form 10-K.
The Company will continue to account for stock-based
compensation under the provisions of APB 25
Accounting for Stock Issued to Employees using the
intrinsic value method. Accordingly, the adoption of
SFAS 148 is not anticipated to have a material effect on
the Companys financial position, results of operations, or
cash flows.

In January 2003, the FASB issued FIN No. 46
Consolidation of Variable Interest Entities.
FIN 46 requires a variable interest to be consolidated by a
company if that company is subject to a majority of the risk of
loss from the variable interest entitys activities or
entitled to a receive a majority of the entitys residual

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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

returns or both. A variable interest entity is a
corporation, partnership, trust, or any other legal structure
used for business purposes that either (a) does not have
equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for
the entity to support its activities. A variable interest entity
often holds financial assets, including loans or receivables,
real estate or other property. A variable interest entity may be
essentially passive or it may engage in research and development
or other activities on behalf of another company. The
consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the
first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply
to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established.
The Company does not expect that the adoption of this standard
will have a material impact on its financial position or results
of operations.

3.     Financial
Statement Components



| |                                                
| | -----------------------------------------------
| | Cash Equivalents and Short-Term
    Investments

All cash equivalents and short-term investments
as of December 31, 2002 and 2001 were classified as
available-for-sale securities and consisted of the following:

|                         |                                             |                |   |            |  |            |   |            |  |  |   |   |  |  |   |         |  
|------------------------ | ------------------------------------------- | -------------- | - | ---------- |  | ---------- | - | ---------- |  |  | - | - |  |  | - | ------- | -
|                         |                                             |                |   | Gross      |  | Gross      |   |           
|                         |                                             | Amortized      |   | Unrealized |  | Unrealized |   |           
|                         |                                             | Cost           |   | Gains      |  | Losses     |   | Fair Value
|                         |                                             |                |   |            |  |            |   |           
|                         |                                             |               
|                         |                                             | (In thousands)
|As of December 31, 2002: |                                             |                |   |            |  |            |   |            |  |  |   |   |  |  |   |        
|                         | Money market funds                          |                | $ | 16,613     |  |            | $ |           |  |  | $ |  |  |  | $ | 16,613  |  
|                         | Municipal obligations                       |                |   | 10,000     |  |            |   |           |  |  |   |  |  |  |   | 10,000  |  
|                         | Federal agency discount notes               |                |   | 33,000     |  |            |   | 82         |  |  |   |  |  |  |   | 33,082  |  
|                         | Commercial paper                            |                |   | 69,703     |  |            |   | 52         |  |  |   |  |  |  |   | 69,755  |  
|                         |                                             |                |   |            |  |            |   |            |  |  |   |   |  |  |   |        
|                         | Total available-for-sale securities         |                | $ | 129,316    |  |            | $ | 134        |  |  | $ |  |  |  | $ | 129,450 |  
|                         |                                             |                |   |            |  |            |   |            |  |  |   |   |  |  |   |        
|                         | Less amounts classified as cash equivalents |                |   |            |  |            |   |            |  |  |   |   |  |  |   | (16,613 | )
|                         |                                             |                |   |            |  |            |   |            |  |  |   |   |  |  |   |        
|                         | Total short-term investments                |                |   |            |  |            |   |            |  |  |   |   |  |  | $ | 112,837 |  
|                         |                                             |                |   |            |  |            |   |            |  |  |   |   |  |  |   |        
|As of December 31, 2001: |                                             |                |   |            |  |            |   |            |  |  |   |   |  |  |   |        
|                         | Money market funds                          |                | $ | 52,015     |  |            | $ |           |  |  | $ |  |  |  | $ | 52,015  |  
|                         | Federal agency discount notes               |                |   | 30,000     |  |            |   | 16         |  |  |   |  |  |  |   | 30,016  |  
|                         | Commercial paper                            |                |   | 157,014    |  |            |   | 704        |  |  |   |  |  |  |   | 157,718 |  
|                         |                                             |                |   |            |  |            |   |            |  |  |   |   |  |  |   |        
|                         | Total available-for-sale securities         |                | $ | 239,029    |  |            | $ | 720        |  |  | $ |  |  |  | $ | 239,749 |  
|                         |                                             |                |   |            |  |            |   |            |  |  |   |   |  |  |   |        
|                         | Less amounts classified as cash equivalents |                |   |            |  |            |   |            |  |  |   |   |  |  |   | (55,808 | )
|                         |                                             |                |   |            |  |            |   |            |  |  |   |   |  |  |   |        
|                         | Total short-term investments                |                |   |            |  |            |   |            |  |  |   |   |  |  | $ | 183,941 |  
|                         |                                             |                |   |            |  |            |   |            |  |  |   |   |  |  |   |        

The following is a summary of amortized costs and
estimated fair values of debt securities by contractual maturity.

|                         |                                                    |                |   |        |  |  |   |        | 
|------------------------ | -------------------------------------------------- | -------------- | - | ------ |  |  | - | ------ | 
|                         |                                                    | Amortized      |   | Fair  
|                         |                                                    | Cost           |   | Value 
|                         |                                                    |                |   |       
|                         |                                                    |               
|                         |                                                    | (In thousands)
|As of December 31, 2002: |                                                    |                |   |        |  |  |   |       
|                         | Amounts maturing within one year                   |                | $ | 79,703 |  |  | $ | 79,755 | 
|                         | Amounts maturing after one year, within five years |                | $ | 33,000 |  |  | $ | 33,082 | 

48



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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                    
| | -------------------
| | Accounts Receivable

Customers who accounted for more than 10% of
Transmetas accounts receivable balance at
December 31, 2002 and 2001 are as follows:

|          |                  |              |  |      |   |  |  |    |  
|--------- | ---------------- | ------------ |  | ---- | - |  |  | -- | -
|          |                  |             
|          |                  | December 31,
|          |                  |             
|          |                  | 2002         |  | 2001
|          |                  |              |  |     
|Customer: |                  |              |  |      |   |  |  |   
|          | Uniquest         |              |  | 52   | % |  |  | *  | %
|          | Sharp            |              |  | 15   | % |  |  | *  | %
|          | Mitac            |              |  | 11   | % |  |  | *  | %
|          | Sonic Blue       |              |  | *    | % |  |  | 44 | %
|          | Fujitsu          |              |  | *    | % |  |  | 20 | %
|          | Sony Electronics |              |  | *    | % |  |  | 16 | %
|          | Toshiba          |              |  | *    | % |  |  | 12 | %



---



|  |                                                            
|- | -----------------------------------------------------------
|* | represents less than 10% of accounts receivable
    balance

The Company maintains an allowance for doubtful
accounts receivable based upon the expected collectibility of
accounts receivable. During fiscal 2002 we increased our
allowance for doubtful accounts from $0 at December 31,
2001 to $90,000 at December 31, 2002, which resulted in a
charge to bad debt expense of $90,000. There were no other
adjustments to the allowance for bad doubtful accounts during
fiscal 2002. Additionally, net accounts receivable at
December 31, 2002 and 2001 included a revenue reserve of
$65,000 and $34,000, respectively.



| |            
| | -----------
| | Inventories

The components of inventories as of
December 31, 2002 and 2001 are as follows:

|                 |  |                |        |      |  |   |       | 
|---------------- |  | -------------- | ------ | ---- |  | - | ----- | 
|                 |  |               
|                 |  | December 31,  
|                 |  |               
|                 |  | 2002           |        | 2001
|                 |  |                |        |     
|                 |  |               
|                 |  | (In thousands)
|Work in progress |  | $              | 8,545  |      |  | $ | 838   | 
|Finished goods   |  |                | 2,392  |      |  |   | 550   | 
|                 |  |                |        |      |  |   |       | 
|                 |  | $              | 10,937 |      |  | $ | 1,388 | 
|                 |  |                |        |      |  |   |       | 

During the second quarter of fiscal 2001,
Transmeta recorded a charge to cost of revenue totaling
$28.1 million primarily related to the write-off of excess
inventory and related non-cancelable purchase commitments.
Inventory purchases and commitments are based upon product
demand forecasts. The Company built inventory levels for certain
components with long lead times and entered into commitments for
certain components. Due to a sudden and significant decrease in
demand for our products in fiscal 2001, inventory levels and
purchase commitments exceeded the Companys estimated
requirements based on demand forecasts. The inventory charge was
calculated based on inventory levels in excess of forecasted
demand for each specific product. Subsequently, the Company
recognized 100% gross margin of $0.7 million and
$1.7 million in fiscal 2002 and 2001, respectively, related
to the sale of previously written-off inventory. Additionally,
the Company recognized 100% gross profit of $1.2 million
and $0.8 million in fiscal 2002 and 2001, respectively,
related to the reversal of previously accrued inventory related
purchase commitments due to favorable settlements of such
purchase commitments.

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##### Table of Contents



TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment consisted of the following:

|                                               |                             |                |         |       |  |   |         |        | 
|---------------------------------------------- | --------------------------- | -------------- | ------- | ----- |  | - | ------- | ------ | 
|                                               |                             |               
|                                               |                             | December 31,  
|                                               |                             |               
|                                               |                             | 2002           |         | 2001 
|                                               |                             |                |         |      
|                                               |                             |               
|                                               |                             | (In thousands)
|Furniture and fixtures                         |                             | $              | 2,018   |       |  | $ | 2,466   |       
|Computer equipment                             |                             |                | 22,417  |       |  |   | 18,683  |       
|Computer software                              |                             |                | 9,246   |       |  |   | 9,746   |       
|Leasehold improvements                         |                             |                | 2,657   |       |  |   | 2,857   |       
|                                               |                             |                |         |       |  |   |         |       
|                                               |                             |                | 36,338  |       |  |   | 33,752  |       
|Less accumulated depreciation and amortization |                             |                | (26,764 | )     |  |   | (22,130 | )     
|                                               |                             |                |         |       |  |   |         |       
|                                               | Property and equipment, net |                | $       | 9,574 |  |   | $       | 11,622 | 
|                                               |                             |                |         |       |  |   |         |       

The original cost of equipment recorded under
capital lease arrangements included in property and equipment
aggregated $1.0 million at 2002 and $4.4 million at
2001. Related accumulated depreciation was $1.0 million and
$3.7 million in 2002 and 2001, respectively. Amortization
expense related to assets under capital leases is included with
depreciation expense.



| |                          
| | -------------------------
| | Patents and Patent Rights

Patents and patent rights, net consisted of the
following:

|                              |                                |                |         |        |  |   |        |        | 
|----------------------------- | ------------------------------ | -------------- | ------- | ------ |  | - | ------ | ------ | 
|                              |                                |               
|                              |                                | December 31,  
|                              |                                |               
|                              |                                | 2002           |         | 2001  
|                              |                                |                |         |       
|                              |                                |               
|                              |                                | (In thousands)
|Patents and patent rights     |                                | $              | 47,920  |        |  | $ | 47,920 |       
|Less accumulated amortization |                                |                | (11,297 | )      |  |   | (4,451 | )     
|                              |                                |                |         |        |  |   |        |       
|                              | Patents and patent rights, net |                | $       | 36,623 |  |   | $      | 43,469 | 
|                              |                                |                |         |        |  |   |        |       

Amortization expense of $6.8 million and
$4.5 million was recorded in fiscal 2002 and 2001,
respectively, related to patents and patent rights. Future
amortization expense related to patents and patent rights is as
follows:

|     |                           |                |       |        | 
|---- | ------------------------- | -------------- | ----- | ------ | 
|     |                           | (In thousands)
|2003 |                           | $              | 6,846 |       
|2004 |                           |                | 6,846 |       
|2005 |                           |                | 6,846 |       
|2006 |                           |                | 6,846 |       
|2007 |                           |                | 6,846 |       
|2008 |                           |                | 2,393 |       
|     |                           |                |       |       
|     | Total future amortization |                | $     | 36,623 | 
|     |                           |                |       |       

4.     Technology
License Agreements

In December 1997, Transmeta entered into a
technology license agreement with IBM Corporation (IBM), which
was amended in 1999 and again in 2000. The term of the original
agreement was five years. In the first amendment, in November
1999, IBM relinquished certain of the worldwide license rights
previously

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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

obtained in exchange for commitments by
Transmeta. These commitments included a payment of
$33.0 million to IBM in various installments beginning in
fiscal 2001 through fiscal 2004.

The then net present value of the
$33.0 million commitment (approximately $18.9 million)
was recorded on the balance sheet as an element of deferred
charges under license agreements with a corresponding liability.
The liability is being accreted to its future value using the
effective interest method at a rate of approximately
15% per annum and is being recorded as part of amortization
of deferred charges, patents and patent rights. During 2001,
Transmeta fulfilled its obligation to pay IBM the
$4.0 million payment due on or before December 15,
2001 by negotiating a $3.5 million payment in June 2001. A
scheduled payment of $6.0 million was made to IBM in
December 2002 in accordance with the terms of the agreement. The
future cash commitment to IBM at December 31, 2002 was as
follows:

|                                               |                |                |        |        | 
|---------------------------------------------- | -------------- | -------------- | ------ | ------ | 
|                                               |                | (In thousands)
|2003                                           |                | $              | 7,000  |       
|2004                                           |                |                | 16,000 |       
|                                               |                |                |        |       
|                                               | Total payments |                |        | 23,000 | 
|Less unamortized discounts                     |                |                | (4,815 | )     
|                                               |                |                |        |       
|Present value as recorded on the balance sheet |                | $              | 18,185 |       
|                                               |                |                |        |       

The convertibility of IBMs convertible
promissory note, issued with the original agreement entered into
in December 1997, was fixed at 1,200,000 shares of
Transmetas common stock as part of the amended agreement.
The fair value of the embedded beneficial conversion feature of
the amended convertible promissory note was estimated to be
$3.2 million based on the Black-Scholes method using a
dividend yield of 0%, a risk-free interest rate of 6.35%, an
expected life of four years and a volatility factor of 0.8. The
fair value was recorded as a deferred charge under license
agreements and was credited to common stock.

On September 28, 2000, Transmeta and IBM
agreed to a further amendment to the technology license
agreement. IBM relinquished the right to receive certain
contingent payments in exchange for a fixed commitment to pay
$5.0 million, which was paid in two installments during the
fourth quarter of 2000. This charge was recorded as a deferred
charge under license agreements.

In February 1998, Transmeta also entered into a
similar technology license agreement with Toshiba Corporation
(Toshiba). In February 2000, Transmeta and Toshiba amended their
technology license agreement and Toshiba relinquished certain of
their worldwide license rights previously obtained from
Transmeta in exchange for 1,200,000 shares of Transmeta
common stock. The then current value of the common stock,
$6.8 million, was recorded on the balance sheet as a
deferred charge under license agreements.

Through the fourth quarter of 2001, the deferred
charges under license agreements have been amortized on a
straight-line basis over the remaining period of the original
license agreements. During the fourth quarter of 2001, as part
of the Companys routine procedures and due to the
emergence of indicators of impairment, Transmeta performed an
assessment of the carrying value its long-lived assets to be
held and used. The assessment was performed in connection with
the Companys internal policies and pursuant to
SFAS 121 because of the significant negative industry and
economic trends and particularly because of the Companys
delayed shipments due to difficulties in bringing our new
products into high volume distribution, which significantly
affected the Companys operations and expected future
operating cash flows. The conclusion of that assessment was that
future cash flows did not exceed the carrying value of all
long-lived assets. As a result, during the fourth quarter of
2001, the Company recorded a charge of $16.6 million to
write-off such deferred charges under license agreements based
on the amount by which the carrying amount of these assets
exceeded their fair value. Fair value was determined to be zero,
and was based on future cash flows for the company as a whole.
The assumptions supporting the estimated future cash flows
reflect managements best

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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

estimates. Although the asset was impaired, the
associated liability is in effect and will continue to accrete
interest until the final payment is made, which is due in 2004.

5.     Patents and
Patent Rights

Patents and patent rights for microprocessor
technology were acquired from Seiko Epson (Epson) in May 2001.
Under the patent and patent rights agreement with Epson,
Transmeta agreed to pay Epson a combination of $30 million
cash and shares of the Companys common stock valued at
$10 million based upon the average of the closing stock
price over a defined period. The Company recorded total
consideration of $38.1 million consisting of
$10.8 million of Transmeta common stock, $26.8 million
as the net present value of cash payments and $0.5 million
of acquisition costs on the balance sheet as an element of
patents and patent rights. The Company paid Epson
$7.5 million in cash and 766,930 shares of the
Companys unregistered common stock in May 2001. The
Company paid Epson $7.5 million in cash in May 2002 in
accordance with the terms of the agreement. The number of shares
issued to Epson was calculated in accordance with the agreement;
however for accounting purposes the value of the shares was
determined using the closing price on the issuance date, or
$14.10, resulting in a recorded value of $10.8 million. In
2003, the Company will issue additional shares of unregistered
common stock with a market value of $1.0 million calculated
in accordance with the terms of the agreement.

Additional patent and patents rights for
microprocessor technology were acquired from another third party
in February 2001. In exchange for the acquired patent and patent
rights, Transmeta agreed to pay a combination of
$7.0 million cash and shares of the Companys common
stock valued at $3.0 million over a three year period. The
Company recorded total consideration of $9.7 million
consisting of the net present value of cash payments of
$6.7 million and $3.0 million of Transmeta common
stock. The Company paid $1.5 million and $4.0 million
in cash in February 2002 and 2001, respectively. The Company
issued 340,483 shares of the Companys unregistered
common stock in February 2002 with a market value of
$1.0 million calculated in accordance with the terms of the
agreement. The Company issued 31,719 shares of the
Companys unregistered common stock in February 2001 with a
market value of $1.0 million calculated in accordance with
the terms of the agreement.

Patent and patent rights are amortized on a
straight-line basis over their expected life of seven years. The
present value of future cash payments due Epson and others in
2004 accrete interest using an effective interest methodology at
10% per annum. Total amortization for patents and patent
rights during fiscal 2002 and 2001 was approximately
$11.4 million and $4.5 million, respectively. Total
commitments for patents and patent rights to Epson and others
are as follows:

|                                               |                |                |        |        | 
|---------------------------------------------- | -------------- | -------------- | ------ | ------ | 
|                                               |                | (In thousands)
|2003                                           |                | $              | 9,000  |       
|2004                                           |                |                | 7,500  |       
|                                               |                |                |        |       
|                                               | Total payments |                |        | 16,500 | 
|Less unamortized discounts                     |                |                | (1,236 | )     
|                                               |                |                |        |       
|Present value as recorded on the balance sheet |                | $              | 15,264 |       
|                                               |                |                |        |       

6.     Purchased
In-process Research and Development

In April 2001, Transmeta licensed certain
computing technologies and intellectual property from Advanced
Micro Devices, Inc. (AMD), including AMDs HyperTransport
interconnect technology for its future products and technology
initiatives. As consideration for the technology rights licensed
under the agreement, the Company issued 1,000,000 unregistered
shares of its common stock valued at $15.0 million based
upon the average closing price of the Companys stock prior
to issuance; however, for accounting

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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

purposes the value of the shares was determined
using the closing price of the stock at the date of issuance, or
$13.60, resulting in a recorded value of $13.6 million. The
entire $13.6 million was expensed as purchased in-process
research and development during the second quarter of 2001
because the HyperTransport technology is designed for use in
products that were under development at the time of acquisition.

7.     Restructuring
Charges

In the second quarter of fiscal 2002, Transmeta
recorded a $10.6 million restructuring charge as a result
of the Companys decision to cease development and
productization of the TM6000 microprocessor. The restructuring
charge consisted primarily of lease costs, equipment write-offs
and other costs as the Company identified a number of leased
facilities as well as leased and owned equipment that were no
longer required.

On July 18, 2002 and in connection with
Transmetas decision to cease the development and
productization of the TM6000 microprocessor, the Company
terminated approximately 195 employees and contractors. As a
result, the Company recorded severance and termination charges
of $4.1 million in the third quarter of fiscal 2002, which
excludes a credit of $1.7 million to deferred compensation
expense related to stock option cancellations for terminated
employees. Additionally, the Company paid approximately $531,000
for previously accrued compensation in the third quarter of
fiscal 2002 in connection with the employee terminations. Of the
approximately 195 employees and contractors that were terminated
on July 18, 2002, approximately 44 were sales, marketing,
and administrative employees and approximately 151 were research
and development personnel. The Companys workforce
reduction was completed in the third quarter of fiscal 2002.
Additionally, the Company vacated all excess facilities as of
September 30, 2002.

Accrued restructuring charges consist of the
following at December 31, 2002 (in thousands):

|                                                              |  |               |        |                      |  |              |       |      |  |   |       |  |  |   |       | 
|------------------------------------------------------------- |  | ------------- | ------ | -------------------- |  | ------------ | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                                                              |  |               |        |                      |  | Provision   
|                                                              |  |               |        | Cumulative Drawdowns |  | Balance at  
|                                                              |  | Restructuring |        |                      |  | December 31,
|                                                              |  | Charges       |        | Cash                 |  | Non-Cash     |       | 2002
|                                                              |  |               |        |                      |  |              |       |     
|Charges recorded in the quarter ended
    June 30, 2002:      |  |               |        |                      |  |              |       |      |  |   |       |  |  |   |       | 
|Building leasehold costs                                      |  | $             | 8,854  |                      |  | $            | 667   |      |  | $ | 284   |  |  | $ | 7,903 | 
|Property and equipment and software costs                     |  |               | 1,629  |                      |  |              | 187   |      |  |   | 1,442 |  |  |   |      | 
|Other                                                         |  |               | 141    |                      |  |              | 141   |      |  |   |      |  |  |   |      | 
|                                                              |  |               |        |                      |  |              |       |      |  |   |       |  |  |   |       | 
|                                                              |  |               | 10,624 |                      |  |              | 995   |      |  |   | 1,726 |  |  |   | 7,903 | 
|                                                              |  |               |        |                      |  |              |       |      |  |   |       |  |  |   |       | 
|Charges recorded in the quarter ended
    September 30, 2002: |  |               |        |                      |  |              |       |      |  |   |       |  |  |   |       | 
|Workforce reduction                                           |  |               | 4,102  |                      |  |              | 4,000 |      |  |   |      |  |  |   | 102   | 
|                                                              |  |               |        |                      |  |              |       |      |  |   |       |  |  |   |       | 
|                                                              |  | $             | 14,726 |                      |  | $            | 4,995 |      |  | $ | 1,726 |  |  | $ | 8,005 | 
|                                                              |  |               |        |                      |  |              |       |      |  |   |       |  |  |   |       | 

8.     Commitments
and Contingencies

Transmeta leases its facilities and certain
equipment under noncancelable operating leases expiring through
2008. Gross operating lease and rental expenses were
$3.9 million in 2002, $4.9 million in 2001 and
$5.6 million in 2000. The facility leases provide for a 4%
annual base rent increase. During fiscal 2002, 2001 and 2000,
Transmeta subleased a portion of its facilities. Sublease income
was $122,000 in 2002, $547,000 in 2001 and $1.2 million in
2000. All sublease agreements expired during 2002.

Additionally, Transmeta finances certain
equipment and software under noncancelable lease agreements that
are accounted for as capital leases. Under the terms of our
current capital lease agreements, at the end of

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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the lease term, the Company has the option to
purchase the leased equipment at a purchase price of
approximately 10% of the original equipment value.

At December 31, 2002, future minimum
payments for capital and operating lease obligations are as
follows:

|                                           |            |                              |       |           |       |  |   |       |        | 
|------------------------------------------ | ---------- | ---------------------------- | ----- | --------- | ----- |  | - | ----- | ------ | 
|                                           |            | Capital                      |       | Operating
|                                           |            | Leases                       |       | Leases   
|                                           |            |                              |       |          
|                                           |            |                             
|                                           |            | (In thousands)              
|Years ending December 31,                  |            |                              |       |           |       |  |   |      
|                                           | 2003       |                              | $     | 888       |       |  | $ | 4,216 |       
|                                           | 2004       |                              |       | 371       |       |  |   | 4,241 |       
|                                           | 2005       |                              |       | 371       |       |  |   | 4,393 |       
|                                           | 2006       |                              |       |          |       |  |   | 4,544 |       
|                                           | 2007       |                              |       |          |       |  |   | 4,696 |       
|                                           | Thereafter |                              |       |          |       |  |   | 2,385 |       
|                                           |            |                              |       |           |       |  |   |      
|                                           |            | Total minimum lease payments |       |           | 1,630 |  |   | $     | 24,475 | 
|                                           |            |                              |       |           |       |  |   |      
|Less amount representing interest          |            |                              | (129  | )         |       |  |   |      
|                                           |            |                              |       |           |       |  |   |      
|Present value of capital lease obligations |            |                              | 1,501 |           |       |  |   |      
|Less current portion                       |            |                              | 834   |           |       |  |   |      
|                                           |            |                              |       |           |       |  |   |      
|Non-current portion                        |            | $                            | 667   |           |       |  |   |      
|                                           |            |                              |       |           |       |  |   |      

Transmetas foundry relationship with TSMC
allows the Company to cancel all outstanding purchase orders,
but requires Transmeta to pay the foundry for expenses it has
incurred in connection with the purchase orders through the date
of cancellation. As of December 31, 2002, TSMC had incurred
approximately $2.0 million of manufacturing expenses on the
Companys outstanding purchase orders.

9.     Debt

Transmeta issued promissory notes to financing
companies in the principal amounts of $1.4 million in 1999,
which mature through January 2003. These notes bear interest at
10.5% and are secured by certain tangible assets with an
aggregate net book value of approximately $78,000 as of
December 31, 2002. No notes were issued during 2002, 2001
or 2000. In connection with the notes, Transmeta issued to the
note holders warrants to purchase 735,032 shares of
common stock. Warrants to purchase 685,032 shares of
common stock were issued with an exercise price of $1.25 and
expire between March 2004 and April 2008. Warrants to
purchase 50,000 shares of common stock were issued
with an exercise price of $3.00 and expire in May 2005. These
warrants were assigned an aggregate value of $78,000 on the
basis of Black-Scholes valuation models using the contractual
lives ranging from six to ten years and a volatility of 0.80.
The value of the warrants was recorded as a discount against the
respective borrowings and is being amortized over the respective
terms of the notes. The amount of discount accreted and recorded
as interest expense for the years ended December 31, 2002,
2001 and 2000 was $0, $7,000 and $26,000, respectively.

At December 31, 2002, aggregate future
minimum principal payments on the obligations described above
were $31,000 and are due in fiscal 2003.

10.     Stockholders
Equity

In November 2000, the Company completed its
initial public offering (the offering) of
14,950,000 shares (including 1,950,000 shares in
connection with the exercise of the underwriters
over-allotment option) at a price to the public of
$21.00 per share. Upon consummation of the offering, all

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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

outstanding shares of the Companys
non-cumulative convertible preferred stock were automatically
converted into an aggregate of 73,174,342 shares of common
stock. As of December 31, 2002 and 2001 there were no
preferred shares outstanding.



| |                                       
| | --------------------------------------
| | Common Stock Reserved for
    Issuance

Shares reserved for future issuance are as
follows:

|                             |  |              |            |      |  |  |            | 
|---------------------------- |  | ------------ | ---------- | ---- |  |  | ---------- | 
|                             |  |             
|                             |  | December 31,
|                             |  |             
|                             |  | 2002         |            | 2001
|                             |  |              |            |     
|Warrants outstanding         |  |              | 1,046,228  |      |  |  | 1,046,228  | 
|Options outstanding          |  |              | 31,871,502 |      |  |  | 21,839,209 | 
|Employee Stock Purchase Plan |  |              | 5,972,977  |      |  |  | 2,979,321  | 
|Future option grants         |  |              | 1,100,358  |      |  |  | 6,696,841  | 
|                             |  |              |            |      |  |  |            | 
|                             |  |              | 39,991,065 |      |  |  | 32,561,599 | 
|                             |  |              |            |      |  |  |            | 
|Shares subject to repurchase |  |              | 590,507    |      |  |  | 1,484,747  | 
|                             |  |              |            |      |  |  |            | 



| |                      
| | ---------------------
| | Common Stock Warrants

Transmeta has periodically granted warrants in
connection with certain lease and bank agreements and consulting
services. The Company had the following warrants outstanding to
purchase common stock at December 31, 2002:

|              |                        |           |         |           |  |                 |      |  |  |  |               |  | 
|------------- | ---------------------- | --------- | ------- | --------- |  | --------------- | ---- |  |  |  | ------------- |  | 
|              |                        |           |         | Exercise  |  |                
|              |                        | Number of |         | Price per |  |                
|Issuance Date |                        | Shares    |         | Share     |  | Expiration Date
|              |                        |           |         |           |  |                
|October 1995  |                        |           | 60,196  |           |  | $               | 0.41 |  |  |  | October 2005  | 
|April 1997    |                        |           | 160,000 |           |  | $               | 1.25 |  |  |  | March 2003    | 
|January 1998  |                        |           | 125,032 |           |  | $               | 1.25 |  |  |  | December 2007 | 
|April 1998    |                        |           | 240,000 |           |  | $               | 1.25 |  |  |  | April 2008    | 
|April 1998    |                        |           | 320,000 |           |  | $               | 1.25 |  |  |  | March 2004    | 
|May 1998      |                        |           | 50,000  |           |  | $               | 3.00 |  |  |  | May 2005      | 
|March 1999    |                        |           | 68,000  |           |  | $               | 3.00 |  |  |  | March 2004    | 
|February 2000 |                        |           | 8,000   |           |  | $               | 5.00 |  |  |  | February 2005 | 
|March 2001    |                        |           | 15,000  |           |  | $               | 5.00 |  |  |  | March 2005    | 
|              |                        |           |         |           |  |                 |      |  |  |  |               | 
|              | Total number of shares |           |         | 1,046,228 |  |                 |      |  |  |  |               |  | 
|              |                        |           |         |           |  |                 |      |  |  |  |               | 

All warrants have been valued using the
Black-Scholes valuation model based on the assumptions used for
stock-based awards to employees (see Note 11) except
that a volatility of 0.80 was used was used through fiscal 2000.
Assigned values of $30,000 and $17,000 associated with these
warrant issuances were recorded as common stock in 2000 and
1999, respectively, and are being amortized as interest expense
over the term of the agreement or the period the services are
rendered. Costs associated with warrants issued during 2001 were
deemed immaterial.



| |               
| | --------------
| | Treasury Stock

In connection with the resignation of two
officers in the fourth quarter of fiscal 2001, the Company
purchased 796,875 mature vested shares with a market value of
approximately $2.4 million held by the two officers in
exchange for cancellations of a portion of shareholder notes
held by the officers (see Note 11).

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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Mature vested shares are shares that have been
both vested and outstanding for over six months. As a result of
this transaction, the Company has recorded $2.4 million as
a contra-equity balance representing the market value of the
treasury stock at the date the shares were acquired and the
notes were cancelled.



| |                
| | ---------------
| | Preferred Stock

The Company is authorized, subject to limitations
imposed by Delaware law, to issue up to a total of
5,000,000 shares of preferred stock in one or more series,
without stockholder approval. The Board of Directors is
authorized to establish from time to time the number of shares
to be included in each series, and to fix the rights,
preferences and privileges of the shares of each wholly unissued
series and any of its qualifications, limitations or
restrictions. The Board of Directors can also increase or
decrease the number of shares of a series, but not below the
number of shares of that series then outstanding, without any
further vote or action by the stockholders.

The Board of Directors may authorize the issuance
of preferred stock with voting or conversion rights that could
harm the voting power or other rights of the holders of the
common stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, have the effect
of delaying, deferring or preventing a change in control of
Transmeta and might harm the market price of its common stock
and the voting and other rights of the holders of common stock.
As of December 31, 2002 and 2001, there were no shares of
preferred stock outstanding.



| |                                   
| | ----------------------------------
| | Stockholders Rights
    Agreement

On January 10, 2002, the Company entered
into a Rights Agreement, pursuant to which the Companys
Board of Directors declared a dividend of one stock purchase
right (a Right) for each outstanding share of the
Companys common stock. The dividend was issued to
stockholders of record on January 18, 2002. In addition,
one Right shall be issued with each share of the Companys
common stock that becomes outstanding (i) between the
record date and the earliest of the Distribution Date, the
Redemption Date and the Final Expiration Date (as such terms are
defined in the Rights Agreement) or (ii) following the
Distribution Date and prior to the Redemption Date or Final
Expiration Date, pursuant to the exercise of stock options or
under any employee plan or arrangement or upon the exercise,
conversion or exchange of other securities of the Company, which
options or securities were outstanding prior to the Distribution
Date. The Rights will become exercisable only upon the
occurrence of certain events specified in the Rights Agreement,
including the acquisition of 15% of the Companys
outstanding common stock by a person or group. Each Right
entitles the registered holder, other than an acquiring
person, under specified circumstances, to purchase from
the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $0.00001 per
share, of the Company, at a price of $21.00 per one
one-hundredth of a share of that preferred stock, subject to
adjustment. In addition, each Right entitles the registered
holder, other than an acquiring person, under
specified circumstances, to purchase from the Company that
number of shares of the Companys Common Stock having a
market value of two times the exercise price of the Right.

11.     Stock-Based
Compensation



| |                           
| | --------------------------
| | 2000 Equity Incentive Plan

The 2000 Equity Incentive Plan (the
Plan) was adopted in September 2000 and became effective
November 6, 2000. The Plan serves as the successor to the
1997 Equity Incentive Plan, and authorizes the award of options,
restricted stock and stock bonuses and provides for the grant of
both incentive stock options (ISOs) that
qualify under Section 422 of the Internal Revenue Code and
nonqualified stock options. The exercise price of the incentive
stock options must be at least equal to the fair market value of
the common stock on the date of grant. The exercise price of
incentive stock options granted to 10% stockholders must be at
least equal to 110% of the fair market value of the common stock
on the date of grant. The maximum term of

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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the options granted is ten years. During any
calendar year, no person will be eligible to receive more than
4,000,000 shares, or 6,000,000 shares in the case of a
new employee.

Transmeta initially reserved
7,000,000 shares of common stock under the Plan. The
aggregate number of shares reserved for issuance under the Plan
is increased automatically on January 1 of each year starting on
January 1, 2001 by an amount equal to 5% of the total
outstanding shares of the Company on the immediately preceding
December 31. As a result of this provision, 6,611,728 and
6,520,946 shares were added to the Plan in 2002 and 2001,
respectively. In addition, the Plan allows for canceled shares
from the 1995 and 1997 Equity Incentive Plans to be transferred
into the 2000 Plan. As a result of this provision, 3,116,323 and
1,508,882 shares were also added to the Plan in 2002 and
2001, respectively.



| |                             
| | ----------------------------
| | Non-Plan Stock Option Grants

Transmeta has from time to time granted options
outside of its plans (non-plan stock options).
Non-plan stock options to purchase shares of common stock
authorized and granted were 7,046,000 in 2000 and 2,500,000 in
1999. No non-plan stock options were granted in 2002 and 2001.



| |                             
| | ----------------------------
| | Prior Equity Incentive Plans

The 1995 Equity Incentive Plan and the 1997
Equity Incentive Plan (the Prior Plans) provided for
the grant to employees of ISOs and the grant to employees,
directors and consultants of nonstatutory stock options. Options
granted under the Prior Plans were designated as
ISO, or nonstatutory stock options at
the discretion of Transmeta, with exercise prices not less than
the fair market value at the date of grant. Options granted
under the Prior Plans generally vest 25% on the first
anniversary of the vesting start date and then monthly over the
next three years and expire ten years from the grant date.

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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                     
| | --------------------
| | Stock Option Summary

The following is a summary of the Companys
stock option activity under the Plan, the Prior Plans and
outside the plans, and related information:

|                             |                            |                     |           |             |   |          |            |             |   |   |      |      |  |  |   |      | 
|---------------------------- | -------------------------- | ------------------- | --------- | ----------- | - | -------- | ---------- | ----------- | - | - | ---- | ---- |  |  | - | ---- | 
|                             |                            |                    
|                             |                            | Options Outstanding
|                             |                            |                    
|                             |                            |                     |           | Weighted    |   | Weighted
|                             |                            | Shares              |           |             |   | Average  |            | Average    
|                             |                            | Available for       |           | Number of   |   | Exercise |            | Grant Date 
|                             |                            | Grant               |           | Shares      |   | Price    |            | Fair Value 
|                             |                            |                     |           |             |   |          |            |            
|Balance at December 31, 1999 |                            |                     | 6,094,136 |             |   |          | 8,694,960  |             |   | $ | 0.79 |      |  |  |   |     
|                             | Additional shares reserved |                     |           | 16,046,000  |   |          |            |            |   |   |      |      |  |  |   |      | 
|                             | Options granted            |                     |           | (15,579,600 | ) |          |            | 15,579,600  |   |   | $    | 5.96 |  |  | $ | 6.06 | 
|                             | Options exercised          |                     |           |            |   |          |            | (6,028,857  | ) |   | $    | 2.60 |  |  |   |      | 
|                             | Options canceled           |                     |           | 413,464     |   |          |            | (1,659,157  | ) |   | $    | 3.36 |  |  |   |      | 
|                             |                            |                     |           |             |   |          |            |             |   |   |      |      |  |  |   |     
|Balance at December 31, 2000 |                            |                     | 6,974,000 |             |   |          | 16,586,546 |             |   | $ | 4.72 |      |  |  |   |     
|                             | Additional shares reserved |                     |           | 8,029,828   |   |          |            |            |   |   |      |      |  |  |   |      | 
|                             | Options granted            |                     |           | (8,791,821  | ) |          |            | 8,791,821   |   |   | $    | 3.62 |  |  | $ | 2.70 | 
|                             | Options exercised          |                     |           |            |   |          |            | (1,670,589  | ) |   | $    | 0.94 |  |  |   |      | 
|                             | Options canceled           |                     |           | 484,834     |   |          |            | (1,868,569  | ) |   | $    | 5.15 |  |  |   |      | 
|                             |                            |                     |           |             |   |          |            |             |   |   |      |      |  |  |   |     
|Balance at December 31, 2001 |                            |                     | 6,696,841 |             |   |          | 21,839,209 |             |   | $ | 4.53 |      |  |  |   |     
|                             | Additional shares reserved |                     |           | 9,728,051   |   |          |            |            |   |   |      |      |  |  |   |      | 
|                             | Options granted            |                     |           | (22,278,100 | ) |          |            | 22,278,100  |   |   | $    | 1.94 |  |  | $ | 1.59 | 
|                             | Options exercised          |                     |           |            |   |          |            | (1,187,191  | ) |   | $    | 0.68 |  |  |   |      | 
|                             | Options canceled           |                     |           | 6,953,566   |   |          |            | (11,058,616 | ) |   | $    | 4.35 |  |  |   |      | 
|                             |                            |                     |           |             |   |          |            |             |   |   |      |      |  |  |   |     
|Balance at December 31, 2002 |                            |                     | 1,100,358 |             |   |          | 31,871,502 |             |   | $ | 2.93 |      |  |  |   |     
|                             |                            |                     |           |             |   |          |            |             |   |   |      |      |  |  |   |     

The exercise prices for options outstanding and
exercisable as of December 31, 2002 and their weighted
average remaining contractual lives were as follows:

|                         |               |             |  |             |  |          |  |             |  |          |   |       |  |  |  |           |  |  |   |       | 
|------------------------ | ------------- | ----------- |  | ----------- |  | -------- |  | ----------- |  | -------- | - | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |               |             |  |             |  |         
|                         |               | Outstanding |  |            
|                         |               |             |  | Exercisable
|                         |               |             |  | Weighted    |  |          |  |            
|                         |               |             |  | Average     |  | Weighted |  |             |  | Weighted
|                         |               |             |  | Remaining   |  | Average  |  |             |  | Average 
|                         |               | Shares      |  | Contractual |  | Exercise |  | Shares      |  | Exercise
|Range of Exercise Prices |               | Outstanding |  | Life Years  |  | Price    |  | Exercisable |  | Price   
|                         |               |             |  |             |  |          |  |             |  |         
|As of December 31, 2002: |               |             |  |             |  |          |  |             |  |          |   |       |  |  |  |           |  |  |   |      
|                         | $0.13-$0.95   |             |  | 6,781,925   |  |          |  | 8.8         |  |          | $ | 0.86  |  |  |  | 1,715,235 |  |  | $ | 0.61  | 
|                         | $0.97-$2.35   |             |  | 5,109,209   |  |          |  | 9.4         |  |          | $ | 1.28  |  |  |  | 489,686   |  |  | $ | 1.37  | 
|                         | $2.38-$2.46   |             |  | 7,624,676   |  |          |  | 9.2         |  |          | $ | 2.42  |  |  |  | 1,213,661 |  |  | $ | 2.38  | 
|                         | $2.48-$3.25   |             |  | 6,067,020   |  |          |  | 8.7         |  |          | $ | 2.88  |  |  |  | 1,757,044 |  |  | $ | 3.07  | 
|                         | $3.49-$5.30   |             |  | 2,091,356   |  |          |  | 7.5         |  |          | $ | 5.02  |  |  |  | 1,188,137 |  |  | $ | 5.09  | 
|                         | $6.00-$8.25   |             |  | 2,642,812   |  |          |  | 7.6         |  |          | $ | 6.81  |  |  |  | 1,389,800 |  |  | $ | 6.79  | 
|                         | $9.50-$11.17  |             |  | 1,260,833   |  |          |  | 7.8         |  |          | $ | 9.54  |  |  |  | 614,753   |  |  | $ | 9.53  | 
|                         | $12.03-$27.88 |             |  | 293,671     |  |          |  | 8.3         |  |          | $ | 15.39 |  |  |  | 125,392   |  |  | $ | 15.62 | 
|                         |               |             |  |             |  |          |  |             |  |          |   |       |  |  |  |           |  |  |   |      
|                         | $0.13-$27.88  |             |  | 31,871,502  |  |          |  | 8.7         |  |          | $ | 2.93  |  |  |  | 8,493,708 |  |  | $ | 3.92  | 
|                         |               |             |  |             |  |          |  |             |  |          |   |       |  |  |  |           |  |  |   |      

58



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##### Table of Contents



TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                      
| | -------------------------------------
| | 2000 Employee Stock Purchase
    Plan

Transmeta effected the 2000 Employee Stock
Purchase Plan (the Purchase Plan) in November 2000.
The Purchase Plan allows employees to designate up to 15% of
their total compensation to purchase shares of the
Companys common stock at 85% of fair market value. Upon
effectiveness of the Purchase Plan, the Company reserved
2,000,000 shares of common stock under the Purchase Plan.
In addition, the aggregate number of shares reserved for
issuance under the Purchase Plan will be increased automatically
on January 1 of each year starting on January 1, 2001 by an
amount equal to 1% of the total outstanding shares of the
Company on the immediately preceding December 31. As a
result of this provision, 1,322,346 and 1,304,189 shares
were added to the Purchase Plan in 2002 and 2001, respectively.
In May 2002, the Companys stockholders authorized an
additional 4,000,000 shares to be available under the
Purchase Plan. As of December 31, 2002,
2,833,558 shares had been issued under the Purchase Plan.



| |                            
| | ---------------------------
| | Deferred Stock Compensation

Transmeta recorded deferred stock compensation of
$46.0 million during 2000, representing the aggregate
difference between the exercise prices of the options and the
deemed fair values of common stock subject to the options as of
the respective measurement dates. This amount is being amortized
by charges to operations, using the accelerated graded method,
over the four year vesting periods of the individual stock
options. During 2002, 2001 and 2000, the Company recorded
$3.6 million, $16.6 million and $13.1 million,
respectively, of net amortization expense related to deferred
stock compensation. The net amortization expense recorded during
fiscal 2002 included a credit of $1.7 million for stock
option cancellations resulting from the Companys workforce
reduction in the third quarter.



| |                                            
| | -------------------------------------------
| | Accounting for Stock-Based
    Compensation

The Company has elected to follow APB Opinion 25
and related interpretations in accounting for its employee and
director stock-based awards because, as discussed below, the
alternative fair value accounting provided for under
SFAS 123 requires use of option valuation models that were
not developed for use in valuing employee stock-based awards.
Under APB Opinion 25, the Company recognizes no compensation
expense with respect to awards if the exercise price equals or
exceeds the fair value of the underlying security on the date of
grant and other terms are fixed.

Officer notes.In
the fourth quarter of fiscal 2001, the employment of two
officers terminated. In connection with the termination of their
employment, the Company repurchased a total of 796,875 vested
shares and 1,753,125 unvested shares held by these officers.
These shares were originally issued in return for an aggregate
of $8.0 million in recourse notes. As a result of the
repurchase of these shares and the cancellation of the
outstanding recourse notes and accrued interest, Transmeta
recorded additional stock compensation expense of
$1.2 million primarily to write-off accrued interest on the
notes and an offsetting entry of $1.9 million to reverse
stock compensation expense previously recognized on the unvested
shares.

Notes Receivable from Stockholders.Transmetas equity incentive
plans permit, subject to approval by the Board of Directors,
holders of options granted prior to March 1999 and certain
holders of non-plan grants to exercise stock options before they
are vested. Shares of common stock issued in connection with
these exercises are subject to repurchase at the exercise price.
Notes issued by employees to exercise stock options bear
interest at rates ranging from 4.47% to 6.60% and have original
terms of five years. Prior to the fourth quarter of fiscal 2001,
all notes were full recourse and were recorded as a reduction of
stockholders equity when issued.

Recourse notes held by other officers and
employees.At the time the above two
officer notes were cancelled, other recourse notes for a total
of $8.2 million, including $0.7 million of accrued
interest, were outstanding. Because the Company did not enforce
the recourse provisions of the notes for the officers that

59



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##### Table of Contents



TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

resigned, which would have recouped all principal
and interest, in the fourth quarter of 2001, the Company began
to account for these remaining notes as if they had terms
equivalent to non-recourse notes, even though the terms of these
notes were not in fact changed from recourse to non-recourse.

Transmeta will continue to record stock
compensation expense on these stock awards until the notes are
paid based on the current market value of its stock at the end
of each accounting period. This variable stock compensation will
be based on the excess, if any, of the current market price of
its stock as of period-end over the purchase price of the stock
award, adjusted for vesting and prior stock compensation expense
recognized on the stock award. At December 31, 2002, the
Company had 1,489,000 shares that are subject to variable
stock compensation at prices ranging from $0.13 to
$1.25 per share. During fiscal 2002, stock compensation
included a credit of $1.8 million recorded to stock
compensation expense due to a lower market price of our common
stock at the end of fiscal 2002 compared to the end of fiscal
2001. During fiscal 2001, Transmeta recorded $2.5 million
of variable stock compensation expense relating to these stock
awards. In addition, the Company recorded additional stock
compensation expense of $0.7 million to write-off all
interest that had accrued under the other recourse notes. In the
future, if the price of the Companys stock increases
$1 per share it will result in approximately
$1.5 million of additional stock compensation expense, or
if the stock decreases $1 per share it will result in a
benefit (reduction) in stock compensation expense of
approximately the same amount. Because variable stock
compensation expense is calculated based on the current market
value of the Companys common stock at the end of each
accounting period, future stock compensation expense for these
variable stock awards could increase significantly in periods
when the Companys stock price rises, and could reverse and
become a benefit in periods when the Companys stock price
falls. The Company also has an additional 1,100,000 shares
that are subject to variable accounting if its stock price
increases above approximately $11.50 per share. However,
the Company has a call option on these shares that it intends to
exercise before the stock price exceeds $11.50 per share
and does not believe it will incur variable stock compensation
on these shares.

Fair value accounting for stock-based awards.The fair value for the Companys
stock-based awards is estimated at the date of grant using a
Black-Scholes option-pricing model. The Black-Scholes
option-pricing model was developed for use in estimating the
fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, the Black-Scholes
option-pricing model requires the input of highly subjective
assumptions, including expected stock price volatility. Because
the Companys stock-based awards have characteristics
significantly different from those of traded options and because
changes in the subjective input assumptions can materially
affect the fair value estimate, in managements opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards. The fair
value of options granted in 2000 was determined based on
estimated stock price volatility. The weighted average
assumptions used to determine fair value were as follows:

|                        |  |              |     |              |  |      |     |      |  |      |     |      |  |  |     |   |  |  |     |   |  |  |     | 
|----------------------- |  | ------------ | --- | ------------ |  | ---- | --- | ---- |  | ---- | --- | ---- |  |  | --- | - |  |  | --- | - |  |  | --- | 
|                        |  |              |     |             
|                        |  | Options      |     | ESPP        
|                        |  |              |     |             
|                        |  |              |     |             
|                        |  | Years Ended  |     | Years Ended 
|                        |  | December 31, |     | December 31,
|                        |  |              |     |             
|                        |  | 2002         |     | 2001         |  | 2000 |     | 2002 |  | 2001 |     | 2000
|                        |  |              |     |              |  |      |     |      |  |      |     |     
|Expected volatility     |  |              | 1.3 |              |  |      | 1.1 |      |  |      | 0.8 |      |  |  | 1.2 |   |  |  | 1.3 |   |  |  | N/A | 
|Expected life in years  |  |              | 4   |              |  |      | 4   |      |  |      | 4   |      |  |  | .5  |   |  |  | .5  |   |  |  | N/A | 
|Risk-free interest rate |  |              | 3.7 | %            |  |      | 4.4 | %    |  |      | 6.5 | %    |  |  | 2.5 | % |  |  | 4.0 | % |  |  | N/A | 
|Expected dividend yield |  |              | 0   |              |  |      | 0   |      |  |      | 0   |      |  |  | 0   |   |  |  | 0   |   |  |  | N/A | 

In connection with a severance agreement, the
Company extended repayment terms of a note receivable secured by
shares exercised from options previously granted. The Company
remeasured the value of the options based upon the then fair
value of the stock as determined by the Board of Directors. The
resulting additional charge of $0.9 million was expensed as
compensation in 2000.

60



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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

12.     Employee
Benefit Plan

Transmeta has an Employee Savings and Retirement
Plan (the Benefit Plan) under Section 401(k) of
the Internal Revenue Code for its eligible employees. The
Benefit Plan is available to all of Transmetas employees
who meet minimum age requirements, and provides employees with
tax deferred salary deductions and alternative investment
options. Employees may contribute up to 15% of their eligible
earnings, subject to certain limitations. There have been no
matching contributions by the Company under the Benefit Plan.

13.     Income
Taxes

Transmeta has not recorded a provision for
federal, state or foreign taxes during for fiscal years 2002,
2001 and 2000 as the Company has incurred operating losses in
all periods that have not been tax benefited.

Deferred income taxes reflect the net tax effect
of operating losses and tax credit carryforwards and temporary
differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys deferred tax assets are as follows:

|                                                 |  |                          |          |      |  |      |          |   |  |   |         |  
|------------------------------------------------ |  | ------------------------ | -------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                                 |  |                         
|                                                 |  | Years Ended December 31,
|                                                 |  |                         
|                                                 |  | 2002                     |          | 2001 |  | 2000
|                                                 |  |                          |          |      |  |     
|                                                 |  |                         
|                                                 |  | (in thousands)          
|Federal operating loss carryforwards             |  | $                        | 99,000   |      |  | $    | 67,400   |   |  | $ | 43,600  |  
|State operating loss carryforwards               |  |                          | 5,000    |      |  |      | 5,400    |   |  |   | 5,400   |  
|Federal tax credit carryforwards                 |  |                          | 8,000    |      |  |      | 6,500    |   |  |   | 3,700   |  
|State tax credit carryforwards                   |  |                          | 6,000    |      |  |      | 3,300    |   |  |   | 2,000   |  
|Non-deductible reserves and capitalized expenses |  |                          | 35,000   |      |  |      | 29,600   |   |  |   | 4,040   |  
|                                                 |  |                          |          |      |  |      |          |   |  |   |         |  
|                                                 |  |                          | 153,000  |      |  |      | 112,200  |   |  |   | 58,740  |  
|Less: Valuation allowance                        |  |                          | (153,000 | )    |  |      | (112,200 | ) |  |   | (58,740 | )
|                                                 |  |                          |          |      |  |      |          |   |  |   |         |  
|Net deferred taxes                               |  | $                        |         |      |  | $    |         |   |  | $ |        |  
|                                                 |  |                          |          |      |  |      |          |   |  |   |         |  

Based upon the weight of available evidence,
which includes the Companys historical operating
performance, the Company has always provided a full valuation
allowance against its net deferred tax assets as it is not more
likely than not that the deferred tax assets will be realized.
The valuation allowance increased by $40.8 million in 2002,
$53.5 million in 2001, and $33.0 million in 2000.

The federal operating loss and tax credit
carryforwards listed above will expire between 2010 and 2022, if
not previously utilized. The state operating loss and tax credit
carryforwards will expire beginning in 2004, if not previously
utilized. Utilization of the Companys net operating loss
may be subject to substantial annual limitations due to the
ownership change limitations provided by the Internal Revenue
Code and similar state provisions. Such annual limitation could
result in the expiration of the net operating loss being
utilized.

The Company incurred pre-tax losses from foreign
operations of $20.7 million, $14.0 million and
$16.7 million in years 2002, 2001, and 2000, respectively.

14.     Segment
Information

Transmeta has adopted the FASBs
SFAS 131, Disclosure About Segments of an Enterprise
and Related Information. Transmeta operates and is
evaluated by management on a single segment basis; the
development, marketing and sale of hardware and software
technologies for the mobile computing market.

61



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##### Table of Contents



TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Sales by geographic area are categorized based on
the customers billing address. The following is a summary of the
Companys net product revenue by major geographic area:

|                    |  |              |    |      |  |      |    |   |  |  |    |  
|------------------- |  | ------------ | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                    |  |             
|                    |  | Years Ended 
|                    |  | December 31,
|                    |  |             
|                    |  | 2002         |    | 2001 |  | 2000
|                    |  |              |    |      |  |     
|Japan               |  |              | 79 | %    |  |      | 67 | % |  |  | 83 | %
|Asia (except Japan) |  |              | 20 | %    |  |      | 24 | % |  |  | 12 | %
|North America       |  |              | 1  | %    |  |      | 9  | % |  |  | 5  | %

The following customers accounted for more than
10% of total revenue:

|          |                         |              |  |      |   |      |  |    |   |  |  |    |  
|--------- | ----------------------- | ------------ |  | ---- | - | ---- |  | -- | - |  |  | -- | -
|          |                         |             
|          |                         | Years Ended 
|          |                         | December 31,
|          |                         |             
|          |                         | 2002         |  | 2001 |   | 2000
|          |                         |              |  |      |   |     
|Customer: |                         |              |  |      |   |      |  |    |   |  |  |   
|          | Sony Electronics        |              |  | 37   | % |      |  | 30 | % |  |  | 60 | %
|          | Fujitsu                 |              |  | 26   | % |      |  | 12 | % |  |  | 28 | %
|          | Toshiba                 |              |  | *    | % |      |  | 18 | % |  |  | *  | %
|          | Siltrontech Electronics |              |  | *    | % |      |  | 11 | % |  |  | *  | %



---



|  |                                          
|- | -----------------------------------------
|* | represents less than 10% of total revenue

15.     Legal
Proceedings

Beginning in June 2001, Transmeta, its directors,
and certain of its officers were named as defendants in several
putative shareholder class actions filed in the United States
District Court for the Northern District of California.(1) The
Court consolidated those complaints into a single action
entitled In re Transmeta Corporation Securities Litigation, Case
No. C 01-02450 WHA. In December 2001, plaintiffs filed
their consolidated amended complaint. The consolidated amended
complaints purported to allege a class action on behalf of all
persons, other than the individual defendants and the other
officers of Transmeta, who purchased or acquired common stock of
Transmeta during the period from November 7, 2000 to
July 19, 2001. The consolidated amended complaints alleged
violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended, and Rule 10b-5
promulgated thereunder, and Sections 11 and 15 of the
Securities Act of 1933, as amended. In March 2002, the Court
granted in part and denied in part defendants motions to
dismiss the consolidated amended complaint. In May 2002, the
Court granted in part and denied in part defendants motion
to dismiss the second amended complaint, and denied
plaintiffs motion for leave to file a third amended
complaint. In June 2002, defendants answered the second amended
complaint as to the only surviving claim. In July 2002,
defendants filed a motion for summary judgment relating to that
claim. Plaintiffs moved for class certification, and the Court
was scheduled to hear defendants motion for summary
judgment and plaintiffs motion for class certification in
December 2002. The Company believes that the



---

1Hertzfeld, et al. v. Transmeta
Corp., et al. (Case No. C-01-2450-JL, N.D. Cal.);
Pond Equities v. Transmeta Corp., et al. (Case
No. C-01-2463-JL, N.D. Cal.); McCarvill v.
Transmeta Corp., et al. (Case No. C-01-2534-BZ,
N.D. Cal.); Puente v. Transmeta Corp., et al.
(Case No. C-01-2464-EDL, N.D. Cal.); Koroluk v.
Transmeta Corp., et al. (Case No. C-01-2587-EDL,
N.D. Cal.); Gammino v. Transmeta Corp., et al.
(Case No. C-01-2614- EDL, N.D. Cal.); Dunnavant v.
Transmeta Corp., et al. (Case No. C-01-20647-EDL,
N.D. Cal.); LaFleur v. Transmeta Corp., et al.
(Case No. C-01-03263 WHA, N.D. Cal.); Bernstein v.
Transmeta Corp., et al. (Case No. C-01-03264 WHA,
N.D. Cal.); and Shekleton v. Transmeta Corp.,
et al. (Case No. C-01-03291 WHA, N.D. Cal.).


62



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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

allegations in the second amended complaint and
the antecedent complaints are without merit and have defended
the consolidated action vigorously. Notwithstanding this belief,
and in order to avoid any additional waste of management time
and expense, the Company and the individual defendants entered
into a memorandum of understanding with plaintiffs counsel
to settle all claims that might have been brought in this action
for approximately $5.5 million, all of which monies have
been paid by the defendants Directors and Officer
(D&O) liability insurance. In December 2002, the
court granted preliminary approval to the proposed settlement
agreement. In March 2003, the Court granted final approval of
the settlement agreement.

Beginning June 2001, the directors and certain
officers of Transmeta were sued in four purported shareholder
derivative actions.(2) In October 2001, those cases were
consolidated in and by the Superior Court for Santa Clara
County in a single action entitled In re Transmeta Corporation
Derivative Litigation, Master File No. CV 799491. In April
2002, plaintiffs filed a consolidated amended complaint. Like
its antecedents, the consolidated amended complaint is based
upon the same general allegations set out in the purported
shareholder class actions described above. In May and June 2002,
Transmeta and the individual defendants filed two demurrers to
the second amended complaint. In July 2002, the Court sustained
Transmetas demurrer based on plaintiffs lack of
standing, gave plaintiffs 90 days to file an amended
complaint, and deferred consideration of the individual
defendants demurrer as moot. The Company believes that the
allegations in the second amended complaint and its antecedents
are without merit and have defended the action vigorously.
Notwithstanding this belief, and in order to avoid any
additional waste of management time and expense, the Company and
the individual defendants agreed to settle all claims that might
have been brought in this action for a sum of money to be paid
entirely by defendants D&O liability insurance,
similar to the proposed agreement to settle all of the claims in
the federal class action. In December 2002, the parties executed
a memorandum of understanding dated October 3, 2002 (the
MOU). The MOU provides for a settlement of the
consolidated derivative action pursuant to a definitive
agreement and subject to judicial approval. The proposed
settlement includes a dismissal with prejudice of all asserted
claims, a release in favor of all defendants, and a payment to
fees to counsel for the derivative plaintiffs in an amount to be
approved by the Court but not to exceed $300,000. The court has
scheduled a hearing on the proposed settlement for
April 29, 2003.

Beginning in June 2001, the Company, certain of
its directors and officers, and certain of the underwriters for
its initial public offering were named as defendants in three
putative shareholder class actions filed in the United States
District Court for the Southern District of New York. In January
2002, the Court ordered that all matters in the Southern
District of New York be consolidated under In re Transmeta
Corporation Initial Public Offering Securities Litigation,
No. 01 CV 6492. On April 19, 2002, plaintiffs filed a
consolidated amended complaint. The consolidated amended
complaint alleges that the prospectus from Transmetas
November 7, 2000 initial public offering failed to disclose
certain alleged actions by the underwriters for the offering.
The consolidated amended complaint alleges claims against
Transmeta and several of its officers and directors under
Sections 11 and 15 of the Securities Act of 1933, as
amended, and under Sections 10(b) and Section 20(a) of
the Securities Exchange Act of 1934, as amended. Other actions
have been filed making similar allegations regarding the initial
public offerings of more than 300 other companies. All of these
consolidated cases have been coordinated for pretrial purposes
as In re Initial Public Offering Securities Litigation, Master
File No. 21 MC 92 (SAS). The Company believes that the
allegations in the consolidated amended complaint and its
antecedents are without merit and intend to defend the action
vigorously. In November 2002, Transmeta joined a coordinated
motion to dismiss filed on behalf of all issuers and individual



---

2Pereira v. David Ditzel, et al.
(Case No. CV 799491), Sweeney v. Mark Allen,
et al. (Case No. CV 799667), and
Scotter v. David Ditzel, et al. (Case No. CV
808264), all filed in Superior Court for Santa Clara
County, California, and Krim v. David R. Ditzel,
et al. (Case No. CV 418524), filed in Superior
Court for San Mateo County, California, and later
transferred to Santa Clara County pursuant to stipulated
consolidation order.


63



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##### Table of Contents



TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

defendants. In March 2003, the Court granted in
part and denied in part that coordinated motion to dismiss, and
issued an order regarding pleading of amended complaints.

16.     Quarterly
Results of Operations (Unaudited)

The following table presents Transmetas
unaudited quarterly statement of operations data for the four
quarters of fiscal 2002 and fiscal 2001. The Company believes
that this information has been prepared on the same basis as its
audited consolidated financial statements and that all necessary
adjustments, consisting only of normal recurring adjustments,
have been included to present fairly the selected quarterly
information. Transmetas quarterly results of operations
for these periods are not necessarily indicative of future
results of operations.

|                                                            |                                                                |                          |         |           |        |          |         |          |        |          |         |           |        |          |         |          |        |   |         |        |        |   |         |       |        |   |         |        |        |   |         |       |        | 
|----------------------------------------------------------- | -------------------------------------------------------------- | ------------------------ | ------- | --------- | ------ | -------- | ------- | -------- | ------ | -------- | ------- | --------- | ------ | -------- | ------- | -------- | ------ | - | ------- | ------ | ------ | - | ------- | ----- | ------ | - | ------- | ------ | ------ | - | ------- | ----- | ------ | 
|                                                            |                                                                |                         
|                                                            |                                                                | Quarters Ended          
|                                                            |                                                                |                         
|                                                            |                                                                | Dec. 31,                 |         | Sept. 30, |        | Jun. 30, |         | Mar. 31, |        | Dec. 31, |         | Sept. 30, |        | Jun. 30, |         | Mar. 31,
|                                                            |                                                                | 2002                     |         | 2002      |        | 2002     |         | 2002     |        | 2001     |         | 2001      |        | 2001     |         | 2001    
|                                                            |                                                                |                          |         |           |        |          |         |          |        |          |         |           |        |          |         |         
|                                                            |                                                                |                         
|                                                            |                                                                | (In thousands)          
|Net product revenue                                         |                                                                | $                        | 6,118   |           |        | $        | 6,443   |          |        | $        | 7,539   |           |        | $        | 4,147   |          |        | $ | 1,462   |        |        | $ | 5,027   |       |        | $ | 10,531  |        |        | $ | 18,570  |      
|Cost of revenue                                             |                                                                |                          | 4,680   |           |        |          | 3,994   |          |        |          | 5,617   |           |        |          | 2,836   |          |        |   | 1,451   |        |        |   | 2,837   |       |        |   | 34,026  |        |        |   | 10,381  |      
|                                                            |                                                                |                          |         |           |        |          |         |          |        |          |         |           |        |          |         |          |        |   |         |        |        |   |         |       |        |   |         |        |        |   |         |      
|Gross profit (loss)                                         |                                                                |                          | 1,438   |           |        |          | 2,449   |          |        |          | 1,922   |           |        |          | 1,311   |          |        |   | 11      |        |        |   | 2,190   |       |        |   | (23,495 | )      |        |   | 8,189   |      
|                                                            |                                                                |                          |         |           |        |          |         |          |        |          |         |           |        |          |         |          |        |   |         |        |        |   |         |       |        |   |         |        |        |   |         |      
|Operating expenses Research and development                 |                                                                |                          | 12,632  |           |        |          | 13,707  |          |        |          | 19,184  |           |        |          | 18,080  |          |        |   | 16,251  |        |        |   | 17,029  |       |        |   | 17,233  |        |        |   | 17,126  |      
|                                                            | In-process research and development                            |                          |         |          |        |          |         |         |        |          |         |          |        |          |         |         |        |   |         |       |        |   |         |      |        |   |         | 13,600 |        |   |         |      |       
|                                                            | Selling, general and administrative                            |                          |         | 6,991     |        |          |         | 6,255    |        |          |         | 8,737     |        |          |         | 7,934    |        |   |         | 8,835  |        |   |         | 8,776 |        |   |         | 8,861  |        |   |         | 8,990 |       
|                                                            | Restructuring charges                                          |                          |         |          |        |          |         | 4,102    |        |          |         | 10,624    |        |          |         |         |        |   |         |       |        |   |         |      |        |   |         |       |        |   |         |      |       
|                                                            | Amortization of deferred charges, patent and
    patent rights |                          |         | 2,848     |        |          |         | 2,848    |        |          |         | 2,848     |        |          |         | 2,848    |        |   |         | 5,044  |        |   |         | 5,024 |        |   |         | 4,109  |        |   |         | 3,379 |       
|                                                            | Impairment write-off of deferred charges                       |                          |         |          |        |          |         |         |        |          |         |          |        |          |         |         |        |   |         | 16,564 |        |   |         |      |        |   |         |       |        |   |         |      |       
|                                                            | Stock compensation                                             |                          |         | 1,214     |        |          |         | (1,651   | )      |          |         | (2,558    | )      |          |         | 4,804    |        |   |         | 5,131  |        |   |         | 4,046 |        |   |         | 5,650  |        |   |         | 6,127 |       
|                                                            |                                                                |                          |         |           |        |          |         |          |        |          |         |           |        |          |         |          |        |   |         |        |        |   |         |       |        |   |         |        |        |   |         |      
|                                                            |                                                                | Total operating expenses |         |           | 23,685 |          |         |          | 25,261 |          |         |           | 38,835 |          |         |          | 33,666 |   |         |        | 51,825 |   |         |       | 34,875 |   |         |        | 49,453 |   |         |       | 35,622 | 
|                                                            |                                                                |                          |         |           |        |          |         |          |        |          |         |           |        |          |         |          |        |   |         |        |        |   |         |       |        |   |         |        |        |   |         |      
|Operating loss                                              |                                                                |                          | (22,247 | )         |        |          | (22,812 | )        |        |          | (36,913 | )         |        |          | (32,355 | )        |        |   | (51,814 | )      |        |   | (32,685 | )     |        |   | (72,948 | )      |        |   | (27,433 | )    
|                                                            | Interest and other income                                      |                          |         | 628       |        |          |         | 1,137    |        |          |         | 1,425     |        |          |         | 1,772    |        |   |         | 2,324  |        |   |         | 3,332 |        |   |         | 3,959  |        |   |         | 5,072 |       
|                                                            | Interest expense                                               |                          |         | (67       | )      |          |         | (90      | )      |          |         | (140      | )      |          |         | (304     | )      |   |         | (218   | )      |   |         | (232  | )      |   |         | (265   | )      |   |         | (345  | )     
|                                                            |                                                                |                          |         |           |        |          |         |          |        |          |         |           |        |          |         |          |        |   |         |        |        |   |         |       |        |   |         |        |        |   |         |      
|Net loss                                                    |                                                                | $                        | (21,686 | )         |        | $        | (21,765 | )        |        | $        | (35,628 | )         |        | $        | (30,887 | )        |        | $ | (49,708 | )      |        | $ | (29,585 | )     |        | $ | (69,254 | )      |        | $ | (22,706 | )    
|                                                            |                                                                |                          |         |           |        |          |         |          |        |          |         |           |        |          |         |          |        |   |         |        |        |   |         |       |        |   |         |        |        |   |         |      
|Net loss per share  basic and diluted                      |                                                                | $                        | (0.16   | )         |        | $        | (0.16   | )        |        | $        | (0.27   | )         |        | $        | (0.23   | )        |        | $ | (0.38   | )      |        | $ | (0.22   | )     |        | $ | (0.54   | )      |        | $ | (0.18   | )    
|                                                            |                                                                |                          |         |           |        |          |         |          |        |          |         |           |        |          |         |          |        |   |         |        |        |   |         |       |        |   |         |        |        |   |         |      
|Weighted average shares outstanding 
    basic and diluted |                                                                |                          | 136,850 |           |        |          | 135,561 |          |        |          | 133,868 |           |        |          | 132,997 |          |        |   | 130,874 |        |        |   | 131,560 |       |        |   | 128,478 |        |        |   | 125,970 |      
|                                                            |                                                                |                          |         |           |        |          |         |          |        |          |         |           |        |          |         |          |        |   |         |        |        |   |         |       |        |   |         |        |        |   |         |      

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

Not applicable.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The information required by this Item is
incorporated by reference to the captions Election of
Directors, Executive Officers and
Compliance under Section 16(a) of the Securities and
Exchange Act of 1934 in our Proxy Statement for our May
2003 Annual Meeting.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this Item is
incorporated by reference to the captions Director
Compensation, Executive Compensation and
Compensation Committee Interlocks and Insider
Participation in our Proxy Statement for our May 2003
Annual Meeting.






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

This information required by this item is
incorporated by reference to the caption Principal
Stockholders in our Proxy Statement for our May 2003
Annual Meeting.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

This information required by this item is
incorporated by reference to the caption Related Party
Transactions in our Proxy Statement for our May 2003
Annual Meeting.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

Evaluation of Disclosure Controls and
Procedures.Our Chief Executive
Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures (as such
term is defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, as amended (the Exchange
Act)) as of a date within 90 days prior to the filing
date of this annual report (the Evaluation Date).
Based on such evaluation, such officers have concluded that, as
of the Evaluation Date, our disclosure controls and procedures
are effective for recording, processing, summarizing and
reporting information that we (including our consolidated
subsidiaries) are required to disclose in our reports filed or
submitted under the Exchange Act.

Changes in Internal Controls.Since the Evaluation Date, there have
not been any significant changes in our internal controls or, to
our knowledge, in other factors that could significantly affect
such controls. Our Chief Executive Officer and Chief Financial
Officer evaluated our internal controls as of the Evaluation
Date. Those officers have indicated that, since the Evaluation
Date, there have not been any significant changes in our
internal controls or, to their knowledge, in other factors that
could significantly affect those controls.

65



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PART IV






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

(a) The following documents are filed as
part of this report:



| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | 1. Financial Statements 
    See Index to Consolidated Financial Statements in Part II,
    Item 8.
|
| | 2. Financial Statement
    Schedules                                                               

All financial statement schedules have been
omitted because the information required is not applicable or is
shown in the Consolidated Financial Statements or notes thereto.



| |            
| | -----------
| | 3. Exhibits

The following exhibits are filed herewith or
incorporated by reference herein:

|        |       |               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------- | ----- | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |              
|Number  |       | Exhibit Title
|        |       |              
|        | 3.01  |               |  | Second Amended and Restated Certificate of
    Incorporation. Incorporated by reference to Exhibit 3.01 to
    Transmetas Form 10-K for the year ended
    December 31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 3.02  |               |  | Restated Bylaws. Incorporated by reference to
    Exhibit 3.06 to Transmetas Form S-1 Registration
    Statement (File No. 333-44030) (the IPO S-1).                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 3.03  |               |  | Certificate of Designations specifying the terms
    of the Series A Junior Participating Preferred Stock of
    Transmeta as filed with the Secretary of State of the State of
    Delaware on January 15, 2002. Incorporated by reference to
    Exhibit 3.02 to Transmetas Form 8-A Registration
    Statement filed on January 16, 2002.                                                                                                                                                                                                                                                                                 
|        | 4.01  |               |  | Specimen common stock certificate. Incorporated
    by reference to Exhibit 4.01 to the IPO S-1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 4.02  |               |  | Fifth Restated Investors Rights Agreement
    dated March 31, 2000, between Transmeta, certain
    stockholders of Transmeta and a convertible note holder named
    therein. Incorporated by reference to Exhibit 4.02 to the
    IPO S-1.                                                                                                                                                                                                                                                                                                                                                                                  
|        | 4.03  |               |  | Form of Piggyback Registration Rights Agreement.
    Incorporated by reference to Exhibit 4.03 to the
    IPO S-1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 4.04  |               |  | Rights Agreement dated January 15, 2002
    between Transmeta and Mellon Investor Services LLC as Rights
    Agent, which includes as Exhibit A the form of Certificate
    of Designations of Series A Junior Participating Preferred
    Stock, as Exhibit B the Summary of Stock Purchase Rights
    and as Exhibit C the Form of Rights Certificate.
    Incorporated by reference to Exhibit 4.01 to
    Transmetas Form 8-A Registration Statement filed on
    January 16, 2002.                                                                                                                                      
|        | 10.01 |               |  | Form of Indemnity Agreement. Incorporated by
    reference to Exhibit 10.01 to the IPO S-1.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.02 |               |  | 1995 Equity Incentive Plan. Incorporated by
    reference to Exhibit 10.02 to the IPO S-1.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10.03 |               |  | 1997 Equity Incentive Plan. Incorporated by
    reference to Exhibit 10.03 to the IPO S-1.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10.04 |               |  | 2000 Equity Incentive Plan. Incorporated by
    reference to Exhibit 4.06 to Transmetas Form S-8
    Registration Statement filed January 18, 2002.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10.05 |               |  | 2000 Employee Stock Purchase Plan. Incorporated
    by reference to Exhibit 4.07 to Transmetas Form S-8
    Registration Statement filed May 28, 2002.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10.06 |               |  | Form of Option granted to Mark K. Allen and
    related documents. Incorporated by reference to
    Exhibit 10.06 to the IPO S-1.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10.07 |               |  | Lease Agreement, dated November 1, 1995,
    between John Arrillaga, as trustee of John Arrillaga Family
    Trust, Richard T. Peery, as trustee of Richard T.
    Peery Separate Property Trust, and Transmeta, as amended by
    Amendment No. 1, dated January 29, 1997, and Amendment
    No. 2, dated April 2, 1998, between John Arrillaga, as
    trustee of John Arrillaga Survivors Trust (successor in
    interest to the Arrillaga Family Trust), Richard T. Peery,
    as trustee of Richard T. Peery Separate Property Trust, and
    Transmeta. Incorporated by reference to Exhibit 10.08 to
    the IPO S-1.

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|        |       |               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- | ----- | ------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |              
|Number  |       | Exhibit Title
|        |       |              
|        | 10.08 |               |  | Lease Agreement, dated January 29, 1997,
    between John Arrillaga, as trustee of John Arrillaga Family
    Trust, Richard T. Peery, as trustee of Richard T.
    Peery Separate Property Trust, and Transmeta, as amended by
    Amendment No. 1, dated April 2, 1998, between John
    Arrillaga, as trustee of John Arrillaga Survivors Trust
    (successor in interest to the Arrillaga Family Trust),
    Richard T. Peery, as trustee of Richard T. Peery
    Separate Property Trust, and Transmeta. Incorporated by
    reference to Exhibit 10.09 to the IPO S-1.
|        | 10.09 |               |  | Lease Agreement, dated April 2, 1998,
    between John Arrillaga, as trustee of John Arrillaga
    Survivors Trust, Richard T. Peery, as trustee of
    Richard T. Peery Separate Property Trust, and Transmeta.
    Incorporated by reference to Exhibit 10.10 to the
    IPO S-1.                                                                                                                                                                                                                                                                                         
|        | 10.10 |               |  | Lease Agreement, dated April 2, 1998,
    between John Arrillaga, as trustee of John Arrillaga
    Survivors Trust, Richard T. Peery, as trustee of
    Richard T. Peery Separate Property Trust, and Transmeta.
    Incorporated by reference to Exhibit 10.11 to the
    IPO S-1.                                                                                                                                                                                                                                                                                         
|        | 10.11 |               |  | Sublease Agreement, dated as of April 28,
    1999, between Transmeta and Xuan Nguyen dba World Marketing
    Alliance. Incorporated by reference to Exhibit 10.13 to the
    IPO S-1.                                                                                                                                                                                                                                                                                                                                                                                       
|        | 10.12 |               |  | Form of Stock Option Agreement under
    Transmetas 2000 Equity Incentive Plan. Incorporated by
    reference to Exhibit 10.17 to the IPO S-1.**                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10.13 |               |  | Form of Stock Option Agreement (for Non-Employee
    Directors) under Transmetas 2000 Equity Incentive Plan.
    Incorporated by reference to Exhibit 10.18 to the
    IPO S-1.**                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10.14 |               |  | Form of Stock Option Agreement. Incorporated by
    reference to Exhibit 10.18 to Transmetas Form 10-K
    for the year ended December 31, 2000.**                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10.15 |               |  | Authorized Exclusive Distributor Agreement, dated
    September 12, 2000, between Transmeta and Siltrontech
    Electronics Corporation. Incorporated by reference to
    Exhibit 10.15 to Transmetas Form 10-K for the
    year ended December 31, 2001 (the 2001 10-K).                                                                                                                                                                                                                                                                                                 
|        | 10.16 |               |  | Full Recourse, Unsecured Promissory Note, dated
    April 10, 2001, between Transmeta and James Chapman.
    Incorporated by reference to Exhibit 10.16 to the
    2001 10-K.**                                                                                                                                                                                                                                                                                                                                                                                              
|        | 10.17 |               |  | Option Amendment and Termination Agreement, dated
    November 16, 2001, between Transmeta and Merle McClendon.
    Incorporated by reference to Exhibit 10.17 to the 2001
    10-K.**                                                                                                                                                                                                                                                                                                                                                                                       
|        | 10.18 |               |  | Stock Repurchase Agreement, dated
    November 27, 2001, between Transmeta, Mark Allen and
    Mark K. Allen and Valerie Allen as Trustees of the Allen
    Living Trust Dated 9/29/92. Incorporated by reference to
    Exhibit 10.18 to the 2001 10-K.**                                                                                                                                                                                                                                                                                                                   
|        | 10.19 |               |  | Stock Repurchase Agreement, dated
    November 27, 2001, between Transmeta, David Jensen and
    David P. Jensen and Debra A. Jensen as Trustees of the
    Jensen Family U/ D/ T Dated 4/23/97. Incorporated by reference
    to Exhibit 10.19 to the 2001 10-K.**                                                                                                                                                                                                                                                                                                          
|        | 10.20 |               |  | Separation Agreement, dated as of
    December 11, 2001, between Transmeta and Mark Allen.
    Incorporated by reference to Exhibit 10.20 to the 2001 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10.21 |               |  | Separation Agreement, dated as of
    December 14, 2001, between Transmeta and David Jensen.
    Incorporated by reference to Exhibit 10.21 to the 2001 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10.22 |               |  | Offer of Employment from Transmeta Corporation to
    Matthew R. Perry dated March 21, 2002. Incorporated by
    reference to Exhibit 10.22 to Transmetas
    Form 10-Q for the quarterly period ended June 30,
    2002.**                                                                                                                                                                                                                                                                                                                                                 
|        | 21.01 |               |  | Subsidiaries. Incorporated by reference to
    Exhibit 21.01 to the IPO S-1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 23.01 | *             |  | Consent of Ernst & Young LLP,
    Independent Auditors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 24.01 | *             |  | Power of Attorney. See Signature Page.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 99.01 | *             |  | Certification by Matthew R. Perry pursuant
    to 18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 99.02 | *             |  | Certification by Svend-Olav Carlsen pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                        

67



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---



|  |                
|- | ---------------
|* | Filed herewith.



|   |                                                 
|-- | ------------------------------------------------
|** | Management contract or compensatory arrangement.

(b) Reports on Form 8-K



| |                
| | ---------------
| | Not applicable.

(c) Exhibits



| |                         
| | ------------------------
| | See Item 15(a)(3) above.

(d) Financial Statement Schedules



| |                         
| | ------------------------
| | See Item 15(a)(2) above.

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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                      
| | ---------------------
| | TRANSMETA CORPORATION



| |     |                       
| | --- | ----------------------
| | By: | /s/ SVEND-OLAV CARLSEN

| |                                 
| | --------------------------------
| |                                 
| | Svend-Olav Carlsen              
| | Chief Financial Officer         
| | (Principal Financial Officer and
| | Duly Authorized Officer)        

Dated: March 27, 2003




POWER OF ATTORNEY

By signing this Form 10-K below, I hereby
appoint each of Matthew R. Perry and Svend-Olav Carlsen, as my
attorney-in-fact to sign all amendments to this Form 10-K
on my behalf, and to file this Form 10-K (including all
exhibits and other documents related to the Form 10-K) with
the Securities and Exchange Commission. I authorize each of my
attorneys-in-fact to (1) appoint a substitute
attorney-in-fact for himself and (2) perform any actions
that he or she believes are necessary or appropriate to carry
out the intention and purpose of this Power of Attorney. I
ratify and confirm all lawful actions taken directly or
indirectly by my attorneys-in-fact and by any properly appointed
substitute attorneys-in-fact.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

|                                         |  |                                                                                           |  |                |  | 
|---------------------------------------- |  | ----------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                         |  |                                                                                           |  |               
|Signature                                |  | Title                                                                                     |  | Date          
|                                         |  |                                                                                           |  |               
|                                        
|/s/ MATTHEW R. PERRYMatthew R. Perry     |  | Chief Executive Officer
    [Principal Executive Officer]                                 |  | March 27, 2003
|                                        
|/s/ SVEND-OLAV CARLSENSvend-Olav Carlsen |  | Chief Financial Officer
    [Principal Financial Officer and
    Duly Authorized Officer] |  | March 27, 2003
|                                        
|/s/ MURRAY A. GOLDMANMurray A. Goldman   |  | Director                                                                                  |  | March 27, 2003
|                                        
|/s/ R. HUGH BARNESR. Hugh Barnes         |  | Director                                                                                  |  | March 27, 2003
|                                        
|Larry R. Carter                          |  | Director                                                                                  |  |               
|                                        
|/s/ DAVID R. DITZELDavid R. Ditzel       |  | Director                                                                                  |  | March 27, 2003

69



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|                                   |  |          |  |                |  | 
|---------------------------------- |  | -------- |  | -------------- |  | 
|                                   |  |          |  |               
|Signature                          |  | Title    |  | Date          
|                                   |  |          |  |               
|                                  
|/s/ WILLIAM P. TAIWilliam P. Tai   |  | Director |  | March 27, 2003
|                                  
|/s/ T. PETER THOMAST. Peter Thomas |  | Director |  | March 27, 2003

70



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CERTIFICATIONS

I, Matthew R. Perry, certify that:

1. I have reviewed this annual report on
Form 10-K of Transmeta Corporation;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |     |                     
| | --- | --------------------
| | By: | /s/ MATTHEW R. PERRY

| |                              
| | -----------------------------
| |                              
| | Matthew R. Perry             
| | Chief Executive Officer      
| | (Principal Executive Officer)

Date: March 27, 2003

71



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##### Table of Contents






CERTIFICATIONS

I, Svend-Olav Carlsen, certify that:

1. I have reviewed this annual report on
Form 10-K of Transmeta Corporation;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |     |                       
| | --- | ----------------------
| | By: | /s/ SVEND-OLAV CARLSEN

| |                              
| | -----------------------------
| |                              
| | Svend-Olav Carlsen           
| | Chief Financial Officer      
| | (Principal Financial Officer)

Date: March 27, 2003

72



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##### Table of Contents



EXHIBIT INDEX

|        |       |               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------- | ----- | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |              
|Number  |       | Exhibit Title
|        |       |              
|        | 3.01  |               |  | Second Amended and Restated Certificate of
    Incorporation. Incorporated by reference to Exhibit 3.01 to
    Transmetas Form 10-K for the year ended
    December 31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 3.02  |               |  | Restated Bylaws. Incorporated by reference to
    Exhibit 3.06 to Transmetas Form S-1 Registration
    Statement (File No. 333-44030) (the IPO S-1).                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 3.03  |               |  | Certificate of Designations specifying the terms
    of the Series A Junior Participating Preferred Stock of
    Transmeta as filed with the Secretary of State of the State of
    Delaware on January 15, 2002. Incorporated by reference to
    Exhibit 3.02 to Transmetas Form 8-A Registration
    Statement filed on January 16, 2002.                                                                                                                                                                                                                                                                                 
|        | 4.01  |               |  | Specimen common stock certificate. Incorporated
    by reference to Exhibit 4.01 to the IPO S-1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 4.02  |               |  | Fifth Restated Investors Rights Agreement
    dated March 31, 2000, between Transmeta, certain
    stockholders of Transmeta and a convertible note holder named
    therein. Incorporated by reference to Exhibit 4.02 to the
    IPO S-1.                                                                                                                                                                                                                                                                                                                                                                                  
|        | 4.03  |               |  | Form of Piggyback Registration Rights Agreement.
    Incorporated by reference to Exhibit 4.03 to the
    IPO S-1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 4.04  |               |  | Rights Agreement dated January 15, 2002
    between Transmeta and Mellon Investor Services LLC as Rights
    Agent, which includes as Exhibit A the form of Certificate
    of Designations of Series A Junior Participating Preferred
    Stock, as Exhibit B the Summary of Stock Purchase Rights
    and as Exhibit C the Form of Rights Certificate.
    Incorporated by reference to Exhibit 4.01 to
    Transmetas Form 8-A Registration Statement filed on
    January 16, 2002.                                                                                                                                      
|        | 10.01 |               |  | Form of Indemnity Agreement. Incorporated by
    reference to Exhibit 10.01 to the IPO S-1.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.02 |               |  | 1995 Equity Incentive Plan. Incorporated by
    reference to Exhibit 10.02 to the IPO S-1.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10.03 |               |  | 1997 Equity Incentive Plan. Incorporated by
    reference to Exhibit 10.03 to the IPO S-1.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10.04 |               |  | 2000 Equity Incentive Plan. Incorporated by
    reference to Exhibit 4.06 to Transmetas Form S-8
    Registration Statement filed January 18, 2002.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10.05 |               |  | 2000 Employee Stock Purchase Plan. Incorporated
    by reference to Exhibit 4.07 to Transmetas Form S-8
    Registration Statement filed May 28, 2002.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10.06 |               |  | Form of Option granted to Mark K. Allen and
    related documents. Incorporated by reference to
    Exhibit 10.06 to the IPO S-1.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10.07 |               |  | Lease Agreement, dated November 1, 1995,
    between John Arrillaga, as trustee of John Arrillaga Family
    Trust, Richard T. Peery, as trustee of Richard T.
    Peery Separate Property Trust, and Transmeta, as amended by
    Amendment No. 1, dated January 29, 1997, and Amendment
    No. 2, dated April 2, 1998, between John Arrillaga, as
    trustee of John Arrillaga Survivors Trust (successor in
    interest to the Arrillaga Family Trust), Richard T. Peery,
    as trustee of Richard T. Peery Separate Property Trust, and
    Transmeta. Incorporated by reference to Exhibit 10.08 to
    the IPO S-1.
|        | 10.08 |               |  | Lease Agreement, dated January 29, 1997,
    between John Arrillaga, as trustee of John Arrillaga Family
    Trust, Richard T. Peery, as trustee of Richard T.
    Peery Separate Property Trust, and Transmeta, as amended by
    Amendment No. 1, dated April 2, 1998, between John
    Arrillaga, as trustee of John Arrillaga Survivors Trust
    (successor in interest to the Arrillaga Family Trust),
    Richard T. Peery, as trustee of Richard T. Peery
    Separate Property Trust, and Transmeta. Incorporated by
    reference to Exhibit 10.09 to the IPO S-1.                                                 
|        | 10.09 |               |  | Lease Agreement, dated April 2, 1998,
    between John Arrillaga, as trustee of John Arrillaga
    Survivors Trust, Richard T. Peery, as trustee of
    Richard T. Peery Separate Property Trust, and Transmeta.
    Incorporated by reference to Exhibit 10.10 to the
    IPO S-1.                                                                                                                                                                                                                                                                                                                                          
|        | 10.10 |               |  | Lease Agreement, dated April 2, 1998,
    between John Arrillaga, as trustee of John Arrillaga
    Survivors Trust, Richard T. Peery, as trustee of
    Richard T. Peery Separate Property Trust, and Transmeta.
    Incorporated by reference to Exhibit 10.11 to the
    IPO S-1.                                                                                                                                                                                                                                                                                                                                          
|        | 10.11 |               |  | Sublease Agreement, dated as of April 28,
    1999, between Transmeta and Xuan Nguyen dba World Marketing
    Alliance. Incorporated by reference to Exhibit 10.13 to the
    IPO S-1.                                                                                                                                                                                                                                                                                                                                                                                                                                        



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##### Table of Contents



|        |       |               |  |                                                                                                                                                                                                                                                                             
|------- | ----- | ------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |              
|Number  |       | Exhibit Title
|        |       |              
|        | 10.12 |               |  | Form of Stock Option Agreement under
    Transmetas 2000 Equity Incentive Plan. Incorporated by
    reference to Exhibit 10.17 to the IPO S-1.**                                                                                                                           
|        | 10.13 |               |  | Form of Stock Option Agreement (for Non-Employee
    Directors) under Transmetas 2000 Equity Incentive Plan.
    Incorporated by reference to Exhibit 10.18 to the
    IPO S-1.**                                                                                          
|        | 10.14 |               |  | Form of Stock Option Agreement. Incorporated by
    reference to Exhibit 10.18 to Transmetas Form 10-K
    for the year ended December 31, 2000.**                                                                                                                         
|        | 10.15 |               |  | Authorized Exclusive Distributor Agreement, dated
    September 12, 2000, between Transmeta and Siltrontech
    Electronics Corporation. Incorporated by reference to
    Exhibit 10.15 to Transmetas Form 10-K for the
    year ended December 31, 2001 (the 2001 10-K).
|        | 10.16 |               |  | Full Recourse, Unsecured Promissory Note, dated
    April 10, 2001, between Transmeta and James Chapman.
    Incorporated by reference to Exhibit 10.16 to the
    2001 10-K.**                                                                                             
|        | 10.17 |               |  | Option Amendment and Termination Agreement, dated
    November 16, 2001, between Transmeta and Merle McClendon.
    Incorporated by reference to Exhibit 10.17 to the 2001
    10-K.**                                                                                      
|        | 10.18 |               |  | Stock Repurchase Agreement, dated
    November 27, 2001, between Transmeta, Mark Allen and
    Mark K. Allen and Valerie Allen as Trustees of the Allen
    Living Trust Dated 9/29/92. Incorporated by reference to
    Exhibit 10.18 to the 2001 10-K.**                  
|        | 10.19 |               |  | Stock Repurchase Agreement, dated
    November 27, 2001, between Transmeta, David Jensen and
    David P. Jensen and Debra A. Jensen as Trustees of the
    Jensen Family U/ D/ T Dated 4/23/97. Incorporated by reference
    to Exhibit 10.19 to the 2001 10-K.**         
|        | 10.20 |               |  | Separation Agreement, dated as of
    December 11, 2001, between Transmeta and Mark Allen.
    Incorporated by reference to Exhibit 10.20 to the 2001 10-K.                                                                                                                 
|        | 10.21 |               |  | Separation Agreement, dated as of
    December 14, 2001, between Transmeta and David Jensen.
    Incorporated by reference to Exhibit 10.21 to the 2001 10-K.                                                                                                               
|        | 10.22 |               |  | Offer of Employment from Transmeta Corporation to
    Matthew R. Perry dated March 21, 2002. Incorporated by
    reference to Exhibit 10.22 to Transmetas
    Form 10-Q for the quarterly period ended June 30,
    2002.**                                                
|        | 21.01 |               |  | Subsidiaries. Incorporated by reference to
    Exhibit 21.01 to the IPO S-1.                                                                                                                                                                                                
|        | 23.01 | *             |  | Consent of Ernst & Young LLP,
    Independent Auditors.                                                                                                                                                                                                                     
|        | 24.01 | *             |  | Power of Attorney. See Signature Page.                                                                                                                                                                                                                                      
|        | 99.01 | *             |  | Certification by Matthew R. Perry pursuant
    to 18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                         
|        | 99.02 | *             |  | Certification by Svend-Olav Carlsen pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                       



---



|  |                
|- | ---------------
|* | Filed herewith.



|   |                                                 
|-- | ------------------------------------------------
|** | Management contract or compensatory arrangement.