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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,
	2001                                                     
|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.)

3940 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

As of February 22, 2002, there were
133,500,094 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. As of that
date, 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 $3.28 for the common stock as
quoted by the Nasdaq National Market on that date,) was
approximately $313 million.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants definitive
Proxy Statement for its Annual Meeting of Stockholders to be
held in May 2002 are incorporated by reference into Part 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                                          
|                  | 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                      
|                  | Item 13. Certain Relationships and Related Transactions                                      
|PART IV          
|                  | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES       
|POWER OF ATTORNEY
|EXHIBIT INDEX    
|EXHIBIT 10.15    
|EXHIBIT 10.16    
|EXHIBIT 10.17    
|EXHIBIT 10.18    
|EXHIBIT 10.19    
|EXHIBIT 10.20    
|EXHIBIT 10.21    
|EXHIBIT 23.01    



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TRANSMETA CORPORATION

FISCAL YEAR 2001 FORM 10-K

INDEX

|           |  |                                                                                        |    |      |    | 
|---------- |  | -------------------------------------------------------------------------------------- | -- | ---- | -- | 
|Item       |  |                                                                                        |    | Page
|           |  |                                                                                        |    |     
|PART I    
|Item 1.    |  | Business                                                                               |    |      | 1  | 
|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                                                                |    |      | 13 | 
|Item 7.    |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |    |      | 15 | 
|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  |    |      | 63 | 
|PART III  
|Item 10.   |  | Directors and Executive Officers of the Registrant                                     |    |      | 63 | 
|Item 11.   |  | Executive Compensation                                                                 |    |      | 63 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
	and Management                        |    |      | 63 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                         |    |      | 63 | 
|PART IV   
|Item 14.   |  | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K                       |    |      | 63 | 
|Signatures |  |                                                                                        | 66 |     

We were incorporated in California in March 1995
and reincorporated in Delaware in October 2000. Our principal
executive offices are located at 3940 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
and software technologies that enable computer manufacturers to
build mobile Internet computers, which are portable computing
and communication devices that are compatible with PC software
and deliver the high performance required to run standard PC and
Internet applications while also offering long battery life. We
have developed our family of Crusoe microprocessors for
lightweight notebook computers and wireless Internet access
devices and other Internet appliances. We also offer and are
developing Crusoe microprocessors suitable for a broad set of
existing and emerging end markets where energy efficiency and
x86 software compatibility are desirable.

Industry Background



| |                                                           
| | ----------------------------------------------------------
| | The Evolution of the Market for Mobile
	Internet Computers

The desktop personal computer, or PC, is widely
used for business and personal activities and is commonly found
in both the workplace and the home. Although the PC was
originally developed to run software applications on a
standalone basis, the emergence of the Internet has dramatically
changed how people use the PC. The PC is now commonly used for
communication and collaboration over the Internet in addition to
computation and word processing functions. Many PC users spend a
significant portion of their PC usage time browsing the
worldwide Web or communicating using email. The Internet has
also become an efficient means of conducting personal and
business transactions, primarily through business-oriented
websites and online business exchanges.

People are becoming increasingly mobile in their
business and personal activities, and are using the Internet to
connect remotely to their businesses, family and friends.
Notebook computers enable people to bring the PC experience with
them when they are away from their homes and offices. The
notebook computer market is expected to grow as people use the
Internet for web access, email and other forms of communication,
in addition to running business and personal software
applications.

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As users seek access to the Internet anytime and
anywhere, we believe they will want the same sort of portable
convenience that they currently enjoy from cellular phones.
Until recently, most users have accessed the Internet through a
wired Internet connection in office environments or through
dial-up modems in home environments. However, consumer demand
has caused the proliferation of Internet connections to many
locations, such as airports and hotels, where a mobile Internet
user may need them. Wireless modem technologies currently exist
to help mobile users reach the Internet when these land-based
connections are unavailable. We believe that the emergence of
new wireless technologies will further increase demand for
Internet access from battery-powered mobile computing devices.
We believe that this ability to access the entire Internet,
anywhere and anytime, with mobile computing devices will change
peoples view of communication in the same ways that
cellular telephones changed how people use the telephone. We
refer to these devices, which include notebook computers and
newly emerging devices such as tablet PCs, wireless
Internet access devices and Internet appliances, as mobile
Internet computers.

We also believe that mobile Internet computer
users will want devices that are compatible with x86 PC and
Internet software. Personal computers that retained software
compatibility with the x86 computer instruction language have
thrived, while those that tried to use other microprocessors
incompatible with the x86 PC have not sustained significant
market share. Beyond compatibility with standalone x86 PC
software, the ability to access the entire Internet and obtain
the full Internet experience usually requires
x86 compatibility. Software developers and developers of
websites often presume that users will be accessing the Internet
through an x86 compatible PC. These developers will often
use new multimedia and animation techniques in order to attract
people to their websites. Often these new techniques are
delivered through small software programs, called plug-ins, that
extend the functionality of a web browser. Most plug-ins are
composed of small x86 compatible software programs
downloaded over the Internet. This means that an
x86 plug-in will not run unless the web browser is running
on an x86 compatible microprocessor. Without plug-in
functionality, sections of a website dependent on a plug-in are
inaccessible, denying the user the full Internet experience.
Full compatibility with the Internet demands x86 software
compatibility.

Transmetas Solution

Transmeta develops and sells software-based
microprocessors and develops additional hardware and software
technologies that enable computer manufacturers to build
computers that offer long battery life, x86 compatibility,
and the high performance required to run standard PC software
and Internet applications. Our Crusoe microprocessors are unique
because, unlike traditional microprocessors that are built
entirely with silicon hardware, they are composed of both a
software and a hardware component.

The software component is called Code Morphing
software. Code Morphing software provides a compatibility bridge
between standard x86 PC software and our hardware chip with
its own proprietary instruction set. Code Morphing software
dynamically translates the ones and 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. In addition, Code Morphing software
continuously re-optimizes the operation of those programs in
order to maximize the energy efficiency and performance of the
Crusoe microprocessor. The hardware component of our current
Crusoe microprocessors is a silicon chip using a Very Long
Instruction Word, or VLIW, architecture. It has a proprietary
instruction set with instructions up to 128-bits long. This chip
provides the basic processing units, registers and cache memory.
Our VLIW architecture features a relatively simple internal
design primarily optimized for speed and low power consumption.
Responsibility for complex control and instruction scheduling
functions, which is normally found in hardware, is transferred
to the Code Morphing software. Moving these functions from
hardware into software results in a design with fewer logic
transistors, and hence a smaller die size, to achieve a given
level of performance.

Our innovative software-based microprocessor
technologies can enable mobile Internet computers engineered
with Crusoe microprocessors to achieve the following benefits:



| |   |                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Longer Battery Life.Crusoe microprocessors consume
	significantly less power than most other
	x86 microprocessors. Since the microprocessor is often the
	largest user of overall system power, Crusoes energy
	efficiency and LongRun technology, which dynamically adjusts MHz
	and voltage,

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | generally result in longer battery life for a
	given battery size. Improved battery life benefits consumers by
	reducing their need to plug their computers into electrical
	sockets, thereby increasing the utility and portability of
	mobile Internet computers.                                                                                                                                                                                                                                                                 
|
| |  | Lighter Weight.The
	battery is often the heaviest single component in a mobile
	computer. Because Crusoe microprocessors use less power than
	typical hardware-based microprocessors, they give OEM computer
	system designers the option to build lighter weight computers
	with smaller batteries. Crusoes reduced power consumption
	also enables OEMs to design systems without heavy components
	used to eliminate heat, such as a fan or heat pipe, which add
	additional weight and thickness to typical notebook computers.
|
| |  | Competitive Performance.Crusoe microprocessors provide
	performance comparable to that of rival low power
	x86 mobile microprocessors. For example, Crusoe
	microprocessors deliver performance sufficient for standard
	mobile computing applications, including Internet browsing and
	multimedia tasks such as playing a DVD movie, downloading
	an MPEG-4 streaming video movie, or running a Macromedia Flash
	plug-in.                                                                                                        
|
| |  | Full x86 and Internet Software Compatibility.Crusoe microprocessors are compatible
	with software written for the x86 PC and the Internet.
	Crusoe microprocessors run x86-based Internet software such as
	browser plug-ins, as well as the wide range of software
	applications familiar to users of desktop PCs. Crusoe
	microprocessors are compatible with operating systems, basic
	input/output systems and applications software that normally run
	on x86 PCs.                                                             
|
| |  | Cost-Effective Approach.By moving functionality from hardware
	into software, Crusoes hardware uses fewer logic
	transistors than most other x86 PC microprocessors,
	resulting in a chip with a less complex and smaller die. Smaller
	chips cost less to manufacture than larger chips. Our small die
	size has also allowed us to integrate additional functionality,
	which can save space on the motherboard and provide OEMs with
	the cost advantages of a one-chip solution compared to a
	two-chip solution.              
|
| |  | Cool and Quiet Operation.Because Crusoe microprocessors consume
	less power, computers using Crusoe mircoprocessors generally do
	not require a cooling fan. This eliminates fan noise, fan
	weight, fan cost and additional power consumption needed to
	operate the fan.                                                                                                                                                                                                                                                          

Strategy

Our objective is to provide 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. 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 the Notebook Computer and Internet
Appliance Markets.Our initial goal is
to target our Crusoe 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
the evolving Internet access device market, where energy
efficiency and low cost are important.

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Developing Additional Markets Beyond Mobile
Computing.We believe that there are
new market opportunities for our Crusoe 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. As people acquire multiple computers or Internet
appliances in the home, they will need a facility for connecting
them to each other and to the Internet. These devices are often
called home network servers and residential gateways. We also
see a type of high-density web server, where the critical factor
is the number of transactions processed per watt per cubic foot.
This is an application for which Crusoes energy efficiency
features are particularly attractive.

Developing Relationships With Other Companies
That Enhance Our Business.We are
working aggressively to develop relationships with others that
enhance our respective businesses and allow us to focus on our
core competencies. 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
Crusoe 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 believe that these
relationships will help us to better enable computer
manufacturers to bring Crusoe-based computers to market quickly.

Developing Expertise Across the Entire
Computer System.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
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.

Core Competencies and Technologies

We are involved 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. Our
understanding of the complete 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.

Crusoe Microprocessor Development.Our approach to microprocessor design
implements substantial portions of the microprocessor
functionality in software. Each of our Crusoe microprocessors
consists of both a software component and a hardware component.
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
business 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 developing the following components
in our microprocessor.



| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Code Morphing Software.The software component of our Crusoe
	microprocessors is called Code Morphing software, because it
	dynamically translates, or morphs, x86 instructions into
	instructions for

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | our very long instruction word processors. Code
	Morphing software dynamically translates from the ones and 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 the
	Crusoe processor.
|
| |  | Very Long Instruction Word
	(VLIW) Processor Hardware.The
	hardware component of our Crusoe microprocessors is a VLIW
	processor chip. Our VLIW chip is responsible for basic
	arithmetic computation, and the control and caching functions.
	It currently supports both 128-bit and 64-bit wide instructions.
	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. Crusoe
	microprocessors have relatively large Level 1 instruction
	caches and large Level 1 data caches. Our high-end Crusoe
	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.                       
|
| |  | 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. Crusoe 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.                                                                                                                                                                                                                                    
|
| |  | 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 the Crusoe microprocessor, which in turn leads to
	longer battery life.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

PC Design Expertise.We design and build PC-compatible
computer systems based on our Crusoe microprocessors. We build
these systems for internal engineering use in order to test our
Crusoe microprocessors in a real system environment. We do not
build these systems for commercial sale, but 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 manufactures reference designs suitable for use
in notebook computers, mobile Internet access devices and home
electronic devices connected to the Internet. 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.

BIOS Development.The BIOS software, or basic
input/output system software, is usually the lowest level of
software and the first software to execute x86 instructions in a
PC. The BIOS controls low-level hardware functions, set-up of
peripheral devices, some power management functions and a host
of miscellane-

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ous system housekeeping operations. Different
BIOS code is needed for each unique motherboard and
microprocessor combination, for Crusoe and other microprocessors
as well, in order to make each of the components in the computer
system work properly together. Knowing how to make changes to
the BIOS requires detailed expertise about the individual
motherboard and microprocessor characteristics. Our team of BIOS
experts works with BIOS providers and customers to customize
their BIOS code to the Crusoe microprocessor, Crusoe power
management features and particular motherboard features. We then
provide these changes back to the BIOS providers, so that they
can provide Crusoe-supported BIOS ports to the computer
manufacturers. This enables the computer manufacturer to save
many months of time and substantial expense compared to doing a
BIOS port on its own. In addition, our BIOS staff also assists
our customers in the power-on and bring-up of new products.


Power Management Expertise.Power management in a computer system
requires substantial technical expertise. We have developed
tools, methodologies and techniques that allow us to provide
power management expertise to our customers. This expertise in
power management is used to help our customers tune their
computer systems for optimal battery life.

Thermal Management Expertise.Electronic devices operating in a
closed box can generate excessive heat if not managed carefully.
We use our expertise in thermal management to advise our
customers about thermal solutions for their notebook and other
Crusoe-based computers. Our chips incorporate thermal sensors,
which can be used in conjunction with a Crusoe port for basic
input/output system software and Code Morphing software to allow
the Crusoe microprocessor to operate at the peak performance
allowed by the thermal solution of the computer system. We use
advanced computer aided design tools to do thermal modeling of
individual computer systems to assure our customers that Crusoe
will work reliably in their systems. Our goal is to help our
customers avoid the use of fans. Eliminating fans can reduce
noise and, by decreasing power usage, increase battery life.

Microsoft Windows Support.We expect most notebook computers
using Crusoe to run a version of the Microsoft Windows operating
system. We work with Microsoft to ensure that our products are
compatible with products of Microsoft and our mutual customers.
Microsoft meets most of the operating system needs of computer
manufacturers directly. Transmeta occasionally provides
expertise for special software, such as device
drivers, that allow Windows or the basic input/output
system to communicate with Crusoe. For example, we have provided
our customers with a special device driver that allows them to
use a graphical user interface to control our LongRun power
management. We also work with Microsoft and computer
manufacturers in testing Crusoe and customer platforms using
Microsofts Windows Hardware Quality Lab tests. We do not
expect our relationship with Microsoft to be a direct source of
revenue for us.

Compatibility Testing.We have 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. To test Crusoe
microprocessors for compatibility with the x86 instruction
set, we have purchased substantial microprocessor test suites,
and had teams of programmers write individual compatibility test
programs. We have also purchased and built computer programs
that automatically generate further compatibility tests. For
hardware interface compatibility, we test Crusoes PCI bus
interface for compatibility with the industry-standard
definitions for the PCI bus. A PCI bus connects a processor to
user input/output devices such as a graphics controller or
modem. We test Crusoes ability to communicate with
standard components, such as graphics chips, southbridge chips
and other controller chips, that communicate with the PCI bus.
We test a variety of synchronous DRAMs, or SDRAMs, and double
data rate SDRAMs, or DDR SDRAMs, for compatibility with Crusoe
hardware. We also test other components on the motherboard, such
as power supply chips and clock generator chips, to make sure
that they work with Crusoe. We have established a systems
compatibility test laboratory that tests approximately 30
different PC operating systems and hundreds of different PC
applications with Crusoe.

Internal Microprocessor Development Software
Tools.We have developed a set of
software tools including a C Compiler, a C++ Compiler, an
assembler, a linker, a loader and various advanced debugging
tools that give us a unique view into the execution of both Code
Morphing software and translated user programs. This capability
allows us to isolate bugs quickly in x86 code and watch the
real-time operation of

6



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programs so that we can tune them for better
performance and lower power characteristics. These tools also
have proven valuable in bringing up new hardware systems with
our customers because, even before the first
x86 instruction is executed, Code Morphing software has
already executed millions of instructions that can assist in
probing different sections of the system.


Products

In January 2000, we introduced our Crusoe family
of microprocessors. We expect to use the name Crusoe to
represent current and future products. 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 TM5400 and TM5600 processors are manufactured
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
800 MHz, and we expect to produce processors with maximum
operating frequencies up to 1000 MHz in the second half of
2002.

We introduced the TM5500/ TM5800 in June 2001 and
began to derive product revenue from TM5500/ TM5800 sales during
the fourth quarter of 2001.

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, Toshiba, NEC, Hitachi, Sharp,
Casio and Siltrontech Electronics. Our server customers include
RLX Technologies and NEC. Sony Electronics accounted for 30% of
product revenue in 2001; Toshiba accounted for 18% of product
revenue in 2001; Fujitsu accounted for 12% of product revenue in
2001; and Siltrontech Electronics accounted for 11% of product
revenue in 2001.

Sales and Marketing

We sell our products through a variety of
channels, including a direct sales force, sales representatives
and distributors. A marketing staff supports our sales effort.
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 also expect
to sell our products in Asia through distributors. In August
2000, we entered into a distributor agreement to support our
sales and marketing activities in the Far East market. Under
this agreement, we appointed Siltrontech Electronics as the
exclusive distributor of our products in Taiwan, Hong Kong and
China until December 31, 2002, other than the right to sell
products to certain OEMs and major notebook computer
manufacturers. In September 2000, we appointed All American
Semiconductor as the exclusive distributor of our products in
North America until December 31, 2002, other than the right
to sell products to certain OEMs and major notebook computer
manufacturers.

We dedicate sales managers to principal customers
to promote close cooperation and communication. 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

7



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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 Crusoe
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 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. Our products are now fabricated
using .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.

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 Advanced Micro Devices and Intel. 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                                                                                             

8



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| |   |                   
| | - | ------------------
| |  | 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, 2001, we employed 442 people
in the United States, Japan and Taiwan. Of these employees, 322
were engaged in research and development, 42 were engaged in
sales and marketing and 78 were engaged in general and
administrative functions.

Thirteen of our employees are located within
Asia. None of our employees is subject to any collective
bargaining agreements. We believe that our employee relations
are good.




Item 2.     Properties

We lease a total of approximately 105,975 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. 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 sublease a total of approximately 8,280 square
feet of office space in one of the buildings in Santa Clara to a
single subtenant. This sublease expires in July 2002. We also
lease office space in Taiwan to support our sales and marketing
personnel worldwide. We believe our existing facilities are
adequate to meet our needs for the foreseeable future.




Item 3.     Legal
Proceedings

Between June 25, 2001 and the effective
date, 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

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the Northern District of California.(1) These
actions were consolidated into a single action by a court order
dated October 3, 2001. Plaintiffs filed their Consolidated
Amended Complaint on December 20, 2001. The Consolidated
Amended Complaint purports to be a class action on behalf of all
persons, other than the individual defendants and the other
officers of Transmeta, who purchased or otherwise acquired
common stock of Transmeta during the period from
November 7, 2000 to July 19, 2001. The Consolidated
Amended Complaint alleges various violations of federal
securities law, including violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder, and Sections 11 and 15 of the
Securities Act of 1933. The Consolidated Amended Complaint
further alleges that the Company and certain defendants made
materially misleading statements or material omissions in
various contexts, including the registration statement and
prospectus for the initial public offering of the Companys
common stock on November 7, 2000. Plaintiffs seek
unspecified damages, unspecified injunctive relief, interest,
attorney and expert fees, and other litigation costs.


On January 17, 2002, we timely filed a
motion to dismiss all claims of the Consolidated Amended
Complaint as to all defendants. On March 5, 2002, the court
granted in part and denied in part our motion to dismiss the
Consolidated Amended Complaint, and directed plaintiffs to file
an amended pleading by March 22, 2002. Plaintiffs filed
their Second Amended Complaint on March 22, 2002. We
believe that the allegations in the Second Amended Complaint and
the antecedent complaints are without merit and intend to defend
the consolidated action vigorously. We intend to file a motion
to dismiss the Second Amended Complaint in April 2002. Based
upon information presently known to management, we do not
believe that the ultimate resolution of these lawsuits will have
a material adverse effect on our business, including our
financial position, results of operations or cash flows.

In addition, the Company and certain of its
directors and officers have been named as defendants in two
shareholder class actions filed in the United States District
Court for the Southern District of New York: Schwarz v.
Transmeta Corp., et al.(Case No. 01 CV 6492, S.D.N.Y.)
and Robin v. Transmeta Corp., et al.(Case No. 01 CV
10060, S.D.N.Y.). By an order dated October 18, 2001, the
court dismissed all claims against the Company and its directors
and officers in the Schwarzcase without prejudice to
plaintiffs right to pursue such claims in the consolidated
class action pending in the Northern District of California. By
an order dated January 15, 2002, the court in New York
ordered that all matters in the Southern District of New York be
consolidated in the Schwarz case. We believe that the
allegations in the Schwarz and Robin complaints
are without merit and intend to defend any consolidated action
vigorously. Based upon information presently known to
management, we do not believe that the ultimate resolution of
these lawsuits will have a material adverse effect on our
business, including our financial position, results of
operations or cash flows.

Between June 28, 2001 and the effective
date, the directors and certain officers of Transmeta were sued
in three purported shareholder derivative actions.(2) The three
cases have been effectively consolidated in Santa Clara Superior
Court by an order dated October 10, 2001. All three
complaints are based upon the same general allegations set out
in the purported shareholder class actions described above. The
complaints allege that certain of the individual defendants sold
shares of Transmeta Corporation common stock while in



---

(1)Hertzfeld, 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.).


(2) Pereira v. David Ditzel, et al.(Case No. CV 799491) and Sweeney v. Mark Allen, et
al.(Case No. CV 799667), both 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



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##### Table of Contents



possession of material inside information,
purportedly in breach of their fiduciary duties to the Company,
and that the so-called Selling Defendants were aided and abetted
by the other individual defendants. The complaints also allege
gross mismanagement, waste of corporate
assets and abuse of control, all based upon
the same general allegations.


By a stipulated order dated January 8, 2002,
the Court ordered plaintiffs to file a consolidated amended
complaint by April 29, 2002, and ordered that the
defendants will have 45 days from the date of any such
filing to answer or otherwise respond. Plaintiffs have
propounded some limited discovery, which has been stayed by the
same January 8 stipulated order until April 15, 2002. We
believe that the allegations in these purported derivative
actions are also without merit and intend to challenge the
complaints and defend the actions vigorously. Based upon
information presently known to management, we do not believe
that the ultimate resolution of these lawsuits will have a
material adverse effect on our business, including our financial
position, results of operations or cash flows.




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 February 22,
2002, the closing price of our common stock was $3.28.

|                                        |      |                       |   |           |  |          |   |          |  |          |   |       |  |  |   |       |  |  |   |       | 
|--------------------------------------- | ---- | --------------------- | - | --------- |  | -------- | - | -------- |  | -------- | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                        |      |                      
|                                        |      | For the Quarter Ended
|                                        |      |                      
|                                        |      | Dec. 31,              |   | Sept. 30, |  | June 30, |   | Mar. 31, |  | Dec. 31,
|                                        |      | 2001                  |   | 2001      |  | 2001     |   | 2001     |  | 2000(1) 
|                                        |      |                       |   |           |  |          |   |          |  |         
|Market price range of our common
	stock |      |                       |   |           |  |          |   |          |  |          |   |       |  |  |   |       |  |  |   |      
|                                        | High |                       | $ | 3.22      |  |          | $ | 5.55     |  |          | $ | 25.00 |  |  | $ | 37.25 |  |  | $ | 50.88 | 
|                                        | Low  |                       | $ | 1.17      |  |          | $ | 1.25     |  |          | $ | 5.12  |  |  | $ | 12.00 |  |  | $ | 18.75 | 



---



|    |                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------
|(1) | The fourth quarter ended December 31, 2000
	started on November 6, 2000 upon the completion of our IPO.

Stockholders

As of February 22, 2002, we had
approximately 548 record holders of our common stock.

Dividends

Transmeta has never declared or paid cash
dividends on its common stock. We currently anticipate that we
will retain all available funds and any future earnings for use
in our business. Therefore, we do not anticipate declaring or
paying any cash dividends in the foreseeable future.

Recent Sales of Unregistered
Securities

During the year ended December 31, 2001, we
issued and sold the following unregistered securities:

In January 2001, we issued 351,912 shares of
common stock to Comdisco, Inc. upon the exercise of warrants
that were granted in October 1995 and April 1997. The exercise
price of $0.41 per share for 214,039 shares associated with the
October 1995 warrant and the exercise price of $1.25 for 137,873
shares associated

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with the April 1997 warrant was paid by a net
exercise of the warrants through the surrender of shares
issuable under the warrants.


In February 2001, we issued 31,719 shares of
common stock, and agreed to issue in each of January 2002 and
January 2003 an additional $1.0 million in common stock to
an intellectual property owner in partial consideration for the
acquisition of certain intellectual property and related assets.

In February 2001, we issued 153,061 shares of
common stock to Phoenix Technologies upon exercise of a warrant
that was granted in August 1997. The exercise price of $1.25 per
share was paid by a net exercise of the warrant through the
surrender of shares issuable under the warrant.

In March 2001, we issued a warrant to Twinhead
Corp. to purchase up to 15,000 shares of common stock at a price
of $5.00 per share, exercisable upon the performance of services
as specified in the warrant. The warrant expires on
February 1, 2005.

In March 2001, we issued a warrant to InSync,
Inc. to purchase up to 2,500 shares of common stock at a price
of $16.81 per share, exercisable upon the performance of
services as specified in the warrant. The warrant expired on
December 31, 2001.

In May 2001, we issued 766,930 shares of common
stock, valued at $10.0 million, based upon the average
closing price of our stock before issuance, to Seiko Epson
Corporation in partial consideration for the acquisition of
certain patents and patent rights. For accounting purposes, the
value of the shares was determined using the closing price of
the stock on the date the shares were issued, or $14.10,
resulting in a recorded value of $10.8 million.

In June 2001, we issued 1,000,000 shares of
common stock, valued at $15.0 million, based upon the
average closing price of our stock before issuance, to AMD in
partial consideration for the license to certain computing
technologies and intellectual property. For accounting purposes,
the value of the shares was determined using the closing price
of the stock on the date the shares were issued, or $13.60,
resulting in a recorded value of $13.6 million.

In December 2001, we issued 113,844 shares of
common stock to Venture Leasing, Inc. upon the exercise of
warrants that were granted in May 1996 and September 1996. The
exercise price of $0.41 per share was paid by a net exercise of
the warrants through the surrender of shares issuable under the
warrants.

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.

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, 2001, we had paid
$5.0 million of the net proceeds to IBM under the terms of
our amended license agreement, $3.5 million to IBM under
the terms of our original license agreement, $1.1 million
to Quickturn Design Systems to repay indebtedness incurred in
conjunction with equipment purchases in 1998, and
$11.5 million for the purchase of intellectual property and
related assets from Seiko Epson and other intellectual property
owners. We have also paid approximately $96.7 million in
ordinary operating expenses. The remaining net proceeds have
been invested in short-term interest bearing, investment-grade
securities.

12



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##### Table of Contents






Item 6.     Selected
Financial Data

In the table below, we provide you with selected
historical consolidated financial data of Transmeta Corporation.
We have prepared this information using the historical audited
consolidated financial statements of Transmeta Corporation for
the five years ended December 31, 2001.

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,              
|                                                         |                                                              |                                      
|                                                         |                                                              | 2001                                  |          | 2000   |         | 1999 |          | 1998   |         | 1997
|                                                         |                                                              |                                       |          |        |         |      |          |        |         |     
|                                                         |                                                              |                                      
|                                                         |                                                              | (In thousands, except per share data)
|Consolidated Statement of Operations
	Data:              |                                                              |                                       |          |        |         |      |          |        |         |      |         |        |        |   |         |        |        |   |         |       
|Revenue:                                                 |                                                              |                                       |          |        |         |      |          |        |         |      |         |        |        |   |         |        |        |   |         |       
|                                                         | Product                                                      |                                       | $        | 35,590 |         |      | $        | 16,180 |         |      | $       | 76     |        |   | $       | 326    |        |   | $       |       |       
|                                                         | License                                                      |                                       |          |       |         |      |          |       |         |      |         | 5,000  |        |   |         | 28,000 |        |   |         | 1,400  |       
|                                                         |                                                              |                                       |          |        |         |      |          |        |         |      |         |        |        |   |         |        |        |   |         |       
|                                                         |                                                              | Total revenue                         |          |        | 35,590  |      |          |        | 16,180  |      |         |        | 5,076  |   |         |        | 28,326 |   |         |        | 1,400  | 
|Cost of product revenue                                  |                                                              |                                       | 48,694   | (1)    |         |      | 9,461    |        |         |      | 18      |        |        |   | 71      |        |        |   |        |       
|                                                         |                                                              |                                       |          |        |         |      |          |        |         |      |         |        |        |   |         |        |        |   |         |       
|Gross profit                                             |                                                              |                                       | (13,104  | )      |         |      | 6,719    |        |         |      | 5,058   |        |        |   | 28,255  |        |        |   | 1,400   |       
|Operating expenses:                                      |                                                              |                                       |          |        |         |      |          |        |         |      |         |        |        |   |         |        |        |   |         |       
|                                                         | Research and development                                     |                                       |          | 67,639 |         |      |          | 61,415 |         |      |         | 33,122 |        |   |         | 23,467 |        |   |         | 12,828 |       
|                                                         | Purchased in-process research and development                |                                       |          | 13,600 |         |      |          |       |         |      |         |       |        |   |         |       |        |   |         |       |       
|                                                         | Selling, general and administrative                          |                                       |          | 35,460 |         |      |          | 27,045 |         |      |         | 12,811 |        |   |         | 12,616 |        |   |         | 4,584  |       
|                                                         | Amortization of deferred charges, patents and
	patent rights |                                       |          | 17,556 |         |      |          | 10,416 |         |      |         | 218    |        |   |         |       |        |   |         |       |       
|                                                         | Impairment write-off of deferred charges                     |                                       |          | 16,564 | (2)     |      |          |       |         |      |         |       |        |   |         |       |        |   |         |       |       
|                                                         | Stock compensation                                           |                                       |          | 20,954 | (3)     |      |          | 13,056 |         |      |         |       |        |   |         |       |        |   |         |       |       
|                                                         |                                                              |                                       |          |        |         |      |          |        |         |      |         |        |        |   |         |        |        |   |         |       
|                                                         |                                                              | Total operating expenses              |          |        | 171,773 |      |          |        | 111,932 |      |         |        | 46,151 |   |         |        | 36,083 |   |         |        | 17,412 | 
|                                                         |                                                              |                                       |          |        |         |      |          |        |         |      |         |        |        |   |         |        |        |   |         |       
|Operating loss                                           |                                                              |                                       | (184,877 | )      |         |      | (105,213 | )      |         |      | (41,093 | )      |        |   | (7,828  | )      |        |   | (16,012 | )     
|                                                         | Interest and other income                                    |                                       |          | 14,686 |         |      |          | 9,174  |         |      |         | 2,456  |        |   |         | 892    |        |   |         | 96     |       
|                                                         | Interest expense                                             |                                       |          | (1,060 | )       |      |          | (1,666 | )       |      |         | (1,952 | )      |   |         | (1,154 | )      |   |         | (271   | )     
|                                                         |                                                              |                                       |          |        |         |      |          |        |         |      |         |        |        |   |         |        |        |   |         |       
|Loss before income taxes                                 |                                                              |                                       | (171,251 | )      |         |      | (97,705  | )      |         |      | (40,589 | )      |        |   | (8,090  | )      |        |   | (16,187 | )     
|                                                         | Provision for income taxes                                   |                                       |          |       |         |      |          |       |         |      |         | 500    |        |   |         | 2,000  |        |   |         |       |       
|                                                         |                                                              |                                       |          |        |         |      |          |        |         |      |         |        |        |   |         |        |        |   |         |       
|Net loss                                                 |                                                              | $                                     | (171,251 | )      |         | $    | (97,705  | )      |         | $    | (41,089 | )      |        | $ | (10,090 | )      |        | $ | (16,187 | )     
|                                                         |                                                              |                                       |          |        |         |      |          |        |         |      |         |        |        |   |         |        |        |   |         |       
|Net loss per share  basic and diluted                   |                                                              | $                                     | (1.33    | )      |         | $    | (2.18    | )      |         | $    | (1.51   | )      |        | $ | (0.44   | )      |        | $ | (0.79   | )     
|                                                         |                                                              |                                       |          |        |         |      |          |        |         |      |         |        |        |   |         |        |        |   |         |       
|Weighted average shares outstanding 
	basic and diluted |                                                              |                                       | 129,002  |        |         |      | 44,741   |        |         |      | 27,236  |        |        |   | 23,074  |        |        |   | 20,576  |       
|                                                         |                                                              |                                       |          |        |         |      |          |        |         |      |         |        |        |   |         |        |        |   |         |       

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|                                              |  |                |         |      |  |      |         |      |  |      |        |  |  |   |        |  |  |   |       | 
|--------------------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ----- | 
|                                              |  |               
|                                              |  | December 31,  
|                                              |  |               
|                                              |  | 2001           |         | 2000 |  | 1999 |         | 1998 |  | 1997
|                                              |  |                |         |      |  |      |         |      |  |     
|                                              |  |               
|                                              |  | (In thousands)
|Consolidated Balance Sheet Data:              |  |                |         |      |  |      |         |      |  |      |        |  |  |   |        |  |  |   |       | 
|Cash and cash equivalents                     |  | $              | 57,747  |      |  | $    | 259,744 |      |  | $    | 46,645 |  |  | $ | 27,809 |  |  | $ | 5,342 | 
|Short-term investments                        |  |                | 183,941 |      |  |      | 83,358  |      |  |      | 19,799 |  |  |   |       |  |  |   |      | 
|Working capital                               |  |                | 217,152 |      |  |      | 343,004 |      |  |      | 58,912 |  |  |   | 21,909 |  |  |   | 2,732 | 
|Total assets                                  |  |                | 309,024 |      |  |      | 412,536 |      |  |      | 99,443 |  |  |   | 43,497 |  |  |   | 8,740 | 
|Long-term obligations, net of current portion |  |                | 29,295  |      |  |      | 20,950  |      |  |      | 27,020 |  |  |   | 10,798 |  |  |   | 1,823 | 
|Total stockholders equity                    |  |                | 244,965 |      |  |      | 364,916 |      |  |      | 63,083 |  |  |   | 24,032 |  |  |   | 3,764 | 



---



|    |                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Cost of product 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 during the third
	quarter of 2001.                                      
|   
|(2) | During the fourth quarter of 2001, we wrote-off
	$16.6 million of long-lived asset balances related to IBM
	and Toshiba deferred charges.                                                                                                                                                 
|   
|(3) | Stock compensation includes variable stock
	compensation charges of $2.5 million, $16.7 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.

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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 and software
technologies that enable computer manufacturers to build mobile
Internet computers, which are portable computing and
communication devices that are compatible with PC software and
deliver the high performance required to run standard PC and
Internet applications while also offering long battery life. 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 products.

From our inception in March 1995 through
September 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 currently sell our products directly to OEMs
and, to a lesser extent, through distributors. The following
customers accounted for more than 10% of our product revenue for
the years indicated: Sony Electronics accounted for 30% of
product revenue in 2001 and 60% of product revenue in 2000;
Toshiba accounted for 18% of product revenue in 2001; Fujitsu
accounted for 12% of product revenue in 2001 and 28% of product
revenue in 2000; and Siltrontech Electronics accounted for 11%
of product revenue in 2001. Revenue from Toshiba and Siltrontech
accounted for less than 10% of product revenue in 2000. None of
these customers accounted for more than 10% of our product
revenue in 1999. The loss of a major customer, or the delay of
significant orders from these customers could reduce or delay
our recognition of revenue.

Siltrontech Electronics is our exclusive
distributor in Taiwan, Hong Kong and China and All American
Semiconductor is our exclusive distributor in North America.
Both Siltrontech and All American 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.

We derive a significant portion of our product
revenues from Asia. All of our 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.
Our product sales in 2001 and 2000 were primarily made to the
notebook computer market. Substantially all of our revenue in
1999 was comprised of license revenue earned in conjunction with
our Toshiba technology license agreement. 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 product 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. In addition,
cost of product revenue for 2001 includes a net charge of $25.6
million related to the write-off of excess inventory recorded
during the second quarter. 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. Purchased in-process research and
development reflects costs to license certain technologies and
technology rights that will not be used in products under
development at the time of purchase. Selling, general and
administrative expenses consist of salaries and related overhead
costs for

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sales, marketing and administrative personnel and
legal and accounting services. They also will include
commissions paid to external sales representatives, once volume
shipments increase. We have not incurred external sales
commission costs to date.


In connection with the grant of stock options to
our employees in 2000, we recorded deferred stock compensation
of approximately $46.0 million, 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. We have reduced the deferred stock compensation
balance otherwise recordable by $1.2 million for options
that were granted in 2000 but subsequently cancelled during
2001. As of December 31, 2001 approximately
$11.8 million was recorded on our balance sheet, which will
be amortized through 2004 using the graded method.

Historically we have incurred significant losses.
As of December 31, 2001, we had an accumulated deficit of
$345.0 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. A significant downturn in
the semiconductor industry and in the global economy occurred
during 2001 and as a result, our operating results have
fluctuated in part due to the downturn. If economic conditions
do not improve, or worsen, we would continue to experience
adverse impacts on our 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 2001, 2000 and 1999 consisted
of 52 weeks and ended on December 28, December 29 and
December 31, respectively.

Critical Accounting Policies

We believe that our most critical accounting
policies are as follows:



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

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) 121,
Accounting for the Impairment of Long-lived Assets and for
Long-Lived Assets to be Disposed of. 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 whenever events or changes in circumstances indicate
that the carrying value of a particular asset or class of assets
may not be fully recoverable.

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

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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. 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
write-down or write-off of inventory.


Revenue Recognition.In accordance with several accounting
pronouncements, including Securities and Exchange Commission
Staff Accounting Bulletin 101, our revenue recognition
policy stipulates that we recognize revenue from product sales
no sooner than transfer of title, which is typically upon
shipment, and that we provide for expected returns and warranty
costs at that time. Prior to 2000, we primarily generated
license revenue. Such license revenue was recognized when
earned, which occurred when agreed-upon deliverables were
provided, or milestones were met and confirmed by our licensees.
Also, we recognized license revenue only if payments received
were non-refundable and not subject to any future performance
obligation. Our revenue policy also incorporates FASBs
SFAS 48, which governs revenue recognition when the right
of return exists, such as the case with most products shipped to
our distributors. With respect to products shipped to
distributors, we generally defer recognition of product revenue
until the distributors sell our products to their customers. On
occasion, however, we will sell products with End of
Life status to our distributors under special arrangements
without any price protection or return privileges for which we
recognize revenue upon transfer of title, typically upon
shipment.

At the end of each accounting period, we make a
determination of certain factors including sales returns and
allowances, which could affect the amount of revenue recorded
for the period. Sales returns provisions include considerations
for known but unprocessed sales returns and estimation for
unknown returns. For the year ended December 31, 2001,
consistent with this policy, we recorded a $34,300 provision for
sales returns. Revenue in earlier periods did not include
material provisions for sales returns or allowances. We do not
expect sales returns or allowances to be significant in the
future; however, if our recorded provisions are not adequate,
our revenues could be negatively impacted.

Results of Operations

Revenue.Product
revenue was $35.6 million in 2001, $16.2 million in
2000 and $76,000 in 1999. The increase from 2000 to 2001 is a
result of a full year of volume shipments of products during
2001 compared to only two quarters of volume shipments in 2000.
Product revenue in 1999 is primarily related to small volume
prototypes and development systems.

Product revenue declined quarter over quarter
during 2001 as follows: $18.6 million in the first quarter,
$10.5 million in the second quarter, $5.0 million in
the third quarter and $1.5 million in the fourth quarter.
The declining quarterly product revenue was due in part to the
weakening economy. Additionally, in part during the third
quarter and more significantly during the fourth quarter, our
product revenue declined due to our difficulties in bringing our
new products into high volume production and distribution.

Substantially all of the revenue recognized in
1999 consisted of license revenue, which was earned in
connection with the technology license agreement with Toshiba
executed in 1998 and was based upon fulfilling certain
milestones. We do not expect to recognize any future license
revenue in connection with this license agreement.

Gross Margin.Product gross margin percentage was
(36.8)%, in 2001, 41.5% in 2000 and 76.3% in 1999. Product gross
margin in 2001 reflects a significant increase in the volume of
product shipments including prototypes and development systems
compared to 2000. Product gross margin in 1999 reflects small
volume prototypes and development systems. Product gross margin
is influenced by many factors, including lower shipment volumes
and related manufacturing overhead, higher production-related
costs, and pricing pressure due to an unanticipated product mix.

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Product gross margin for each quarter during 2001
was as follows: 44% in the first quarter, (223.1)% in the second
quarter, 43.6% in the third quarter and 0.75% in the fourth
quarter. Product gross margin during the second quarter
decreased due to an inventory charge to write-off excess
inventory during that quarter. 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, inventory
levels and purchase commitments exceeded our estimated
requirements based on demand forecasts. We believe the decrease
in demand was primarily due to the slowing economy, particularly
in Japan. The inventory charge in the second quarter of 2001 was
calculated based on inventory levels in excess of forecasted
demand for each specific product. Based on our current demand
forecast, we anticipate that inventory included in this charge
will not be used at a later date. As a result of this inventory
charge, product gross margin during the second quarter of 2001
was negatively impacted by $28.1 million, primarily related
to excess inventory and related purchase commitments.
Subsequently, we recognized 100% gross profit on sales of
$1.7 million relating to inventories that had been
previously written-off. In addition, we subsequently settled
certain accrued purchase commitments at amounts less than
originally accrued, resulting in $0.8 million of reduced
cost to product revenues. The $2.5 million benefit to our
product gross margin was recorded during the third quarter.
During each of the third, and particularly the fourth quarters
of 2001, our product gross margins decreased due in part to
lower than expected product revenue, which did not allow for
adequate overhead absorption and the scrapping of older
inventory. We expect that product gross margins during the first
two quarters of 2002 will be negatively impacted as a result of
additional expenses associated with the commencement of volume
production of new products.

Research and Development.Research and development (R&D)
expenses were $67.6 million in 2001, $61.4 million in
2000 and $33.1 million in 1999. The increases year to year
were principally due to increased expenses related to recruiting
and retaining development personnel of $10.6 million in
2001 and $10.5 million in 2000. Increased R&D personnel
costs in 2001 were partially offset by a $3.0 million
reduction in prototype wafers and related costs compared to
2000. Conversely, in preparing for volume shipment of our
initial products during 2000 we incurred $15.9 million of
additional prototype wafer and related costs compared to 1999.
The majority of our R&D personnel are working on
recently announced future products.

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 and not anticipated to
be commercially available before late 2002.

Selling, General and Administrative.Selling, general and administrative
expenses were $35.5 million in 2001, $27.0 million in
2000 and $12.8 million in 1999. The increase year to year
was largely due to additional costs related to recruiting and
retaining personnel of $6.5 million in 2001 and
$12.6 million in 2000.

Amortization of Deferred Charges, Patents and
Patent Rights.We negotiated
technology license agreements with IBM in December 1997 and
Toshiba in February 1998. The IBM agreement was amended in
November 1999 and the Toshiba agreement was amended in February
2000 to revoke their rights to manufacture, market and sell
x86 compatible products incorporating our technology. In
connection with the amendment of our agreement with IBM to
reacquire these license rights, we agreed to pay IBM a total of
$33.0 million over a four-year period and we fixed the
conversion rate of a convertible promissory note issued to IBM
at 1,200,000 shares of our common stock. At that time, we
recorded the present value of these payments,
$18.9 million, as a liability with a corresponding deferred
charge. We recorded the fair value of the embedded beneficial
conversion feature of the amended convertible promissory note,
$3.2 million, as common stock with a corresponding deferred
charge. In November 2000, IBM converted the note into
1,200,000 shares

18



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of common stock and the present value of the
note, $433,000 was reclassified as additional paid in capital.
In September 2000, we agreed to a further amendment of our
technology license agreement with IBM. IBM relinquished the
right to receive future contingent payments in exchange for our
fixed commitment to pay $5.0 million, which was paid during
the fourth quarter of 2000. This liability was recorded in the
quarter ended September 30, 2000, also with a corresponding
deferred charge. In connection with the renegotiation of our
technology license agreement with Toshiba in February 2000, we
issued 1,200,000 shares of common stock to Toshiba. The
deemed fair value of the shares issued, $6.8 million, was
recorded on the balance sheet as a deferred charge.


Amortization of deferred charges, patents and
patent rights includes amortization of patents and patent rights
relating to microprocessor and computing technologies that were
purchased during 2001 primarily from Seiko Epson (Epson). We
acquired certain patents and patent rights from Epson in
exchange for $30 million of cash and $10 million of
stock. We recorded the net present value of these payments,
$26.8 million, as an element of patents and patent rights
and are amortizing this asset on a straight-line basis over the
expected seven-year life of the asset as an element of
amortization of deferred charges, patents and patent rights.

We recorded amortization expense related to IBM,
Toshiba and patent and patent rights of $17.6 million in
2001, $10.4 million in 2000 and $218,000 in 1999. We expect
to record future amortization expense related to these assets of
$11.4 million in 2002, $10.5 million in 2003,
$10.5 million in 2004 and the remaining $30.1 million
in future periods.

Impairment Write-off of Deferred Charges.Deferred charges related to IBM and
Toshiba 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. 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 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 $29.0 million
are still required and will continue to accrete interest until
the final payment is made.

Stock Compensation.Amortization of deferred stock
compensation associated with options granted prior to November
2000, net of cancellation, was $16.6 million in 2001 and
$13.1 million in 2000. In connection with stock options
grants through November 2000, we expect to record
$8.0 million in 2002, $3.5 million in 2003 and
$587,000 in 2004. Stock compensation for 2001 also included
$2.5 million in variable stock compensation and
$1.7 million in forgiveness of interest in connection with
officer resignations. Total stock compensation was
$20.9 million in 2001 and $13.1 million in 2000.

Our 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 6.69% and have original terms of five years. Prior to the
fourth quarter of fiscal 2001, all notes were recourse and were
recorded as a reduction of stockholders equity when issued.

In the fourth quarter of fiscal 2001, the
employment of two officers terminated. In connection with the
termination of their employment, we 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, we 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.

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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 we did not enforce the
recourse provisions of the notes for the officers that resigned,
which would have recouped all principal and interest, in the
fourth quarter of 2001, we 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.

We will continue to record stock compensation
expense on these stock awards until the notes are paid based on
the current market value of our 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 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. At December 31, 2001, we had
1,682,368 shares that are subject to variable stock
compensation at prices ranging from $0.13 to $1.25 per share. In
the fourth quarter of fiscal 2001, we recorded $2.5 million
of variable stock compensation expense relating to these stock
awards. In addition, we 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 our stock increases $1 per share it will result in
approximately $1.6 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 our common stock at the end of each accounting period,
future stock compensation expense for these variable stock
awards could increase significantly in periods when our stock
price rises, and could reverse and become a benefit in periods
when our stock price falls. We also have an additional
1,100,000 shares that are subject to variable accounting if
our stock price increases above approximately $11.50 per share.
However, we have a call option on these shares that we intend to
exercise before the stock price exceeds $11.50 per share and we
do not believe we will incur variable stock compensation on
these shares.

Interest and Other Income.Interest income was $14.7 million
in 2001, $9.2 million in 2000 and $2.5 million in
1999. The increases year over year are 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. As we continue to use cash to fund our operations
our investment balances will decrease and as a result our
interest income is expected to decrease over time.

Interest Expense.Interest expense was $1.0 million
in 2001, $1.7 million in 2000 and $2.0 million in
1999. The decreases year over year are due to lower average debt
balances due to several lease-financing arrangements expiring
during 2001 and 2000.

Provision for Income Taxes.The $500,000 tax provision recorded in
1999 relates to foreign taxes in Japan withheld on license
revenue from Toshiba. We did not record a tax provision in 2001
or 2000.

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 and license revenue and lease
financing.

Net cash used in operating activities was
$80.6 million in 2001, $78.6 million in 2000 and
$36.4 million in 1999. In each year, net cash used in
operating activities was attributable to our net losses and was
partially offset by non-cash depreciation charges of
$6.5 million in 2001, $6.1 million in 2000 and
$5.3 million in 1999 and amortization and write off charges
of deferred charges, patents and patent rights of
$34.3 million in 2001, $10.4 million in 2000 and
$218,000 in 1999. Significant account balance changes between
2000 and 2001 include a reduction of inventory and accounts
receivable of $15.6 million in 2001 compared to an increase
of the same account balances of $18.8 million in 2000.
Additionally, our use of cash was offset by our non-cash
purchase of in-process research and development of
$13.6 million and our reduction in inventory balances in
2001. During 2000 our use of cash was offset by increases in
accounts payable and accrued liabilities of $13.5 million.
Increases in accounts payable and accrued liabilities were due
to the rapid growth in business activity from 1999 to 2000. The
increase in accounts payable during 2000 was also due to
inventory-related purchases.

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Net cash used in investing activities was
$118.2 million in 2001, $82.0 million in 2000 and
$19.2 million in 1999. Net cash used in investing
activities consisted of capital expenditures on property and
equipment and net purchases of investments. Capital expenditures
were $8.1 million in 2001, $8.4 million in 2000 and
$1.4 million in 1999 and consisted primarily of the
acquisition of property, equipment and software. Net purchases
of investments were $100.0 million in 2001 and
$63.4 million in 2000. In addition, during 2001 we paid
$12.0 million for patent and patent rights primarily
related to the purchase of technologies from Epson. We also
loaned a total of $5.3 million to our founders in May 2000,
which was repaid with interest in full during 2001.

Net cash used in financing activities was
$3.2 million in 2001 compared to net cash provided by
financing activities of $373.8 million in 2000 and
$74.4 million in 1999. Net cash used in 2001 is primarily
the result of repayment of debt and lease obligations of
$5.3 million, partially offset by stock option exercises
and employee stock purchase plan purchases of $2.4 million.
Net cash provided during 2000 and 1999 is the result of net
proceeds from the sale of common and preferred stock in 2000 and
preferred stock in 1999 as well as the issuance of promissory
notes to financing companies in both years. Cash used for the
repayment of debt and lease obligations was $5.7 million in
2000 and $3.7 million in 1999.

At December 31, 2001, we had
$57.7 million in cash and cash equivalents and
$183.9 million in short-term investments. We lease our
facilities under non-cancelable operating leases expiring in
2008, and we lease equipment and software under non-cancelable
leases with terms ranging from 36 to 48 months. At
December 31, 2001, 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)        
|Long Term Debt                     |  | $                      | 981    |                  |  | $         | 950    |               |  | $ | 31     |  |  |   |       | 
|Capital Lease Obligations          |  | $                      | 2,266  |                  |  | $         | 1,878  |               |  | $ | 387    |  |  |   |       | 
|Operating Leases                   |  | $                      | 28,444 |                  |  | $         | 3,970  |               |  | $ | 12,850 |  |  | $ | 11,624 | 
|Unconditional Purchase Obligations |  | $                      | 1,154  |                  |  | $         | 1,154  |               |  |   |       |  |  |   |       | 
|Other Long Term Obligations        |  | $                      | 54,500 |                  |  | $         | 15,000 |               |  | $ | 39,500 |  |  |   |       | 

We believe that existing cash and cash
equivalents and short-term investments balances will be
sufficient to fund our operations for at least the next twelve
months as we expand our business and increase commercial
production and sales of our products. After this period, capital
requirements will depend on many factors, including 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 and increases in
our operating expenses. 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 strategic arrangement, we may enter
into acquisitions or strategic arrangements 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 2001, the FASB issued SFAS 141
Business Combinations and SFAS 142
Goodwill and Other Intangible Assets. SFAS 141
eliminates the pooling-of-interests method of accounting for
business combinations except for qualifying business
combinations that were initiated prior to July 1, 2001.
SFAS 141 further clarifies the criteria to recognize
intangible assets separately from goodwill. The requirements of
SFAS 141 are effective for any business combination
accounted for by the purchase method that is completed after
June 30, 2001 (i.e., the acquisition date is
July 1, 2001 or after). Under SFAS 142, goodwill and
indefinite lived intangible assets are no longer amortized but
are reviewed annually (or more frequently if impairment
indicators arise) for impairment. Separable intangible assets
that are not deemed to have an indefinite life will continue to
be amortized over their useful lives. We will adopt
SFAS 141 and SFAS 142 on

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January 1, 2002. The adoption is not
expected to have any material impact on our financial position
or results of our operations.


In December 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards 144, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. SFAS 144 supersedes SFAS 121 and provides a
single accounting model for long-lived assets to be disposed of.
We are required to adopt SFAS 144 effective January 1,
2002. We do not believe the adoption of SFAS 144 will have
a significant impact on our consolidated 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, expect
to incur further significant losses, and do not expect to
achieve profitability in the near future. We incurred net losses
of $171.3 million in 2001, $97.7 million in 2000 and
$41.1 million in 1999. As of December 31, 2001, we had
an accumulated deficit of $345.0 million. Further, our
product revenue declined quarter over quarter during 2001, as
follows: $18.6 million in the first quarter,
$10.5 million in the second quarter, $5.0 million in
the third quarter and $1.5 million in the fourth quarter.
We intend to increase our research and development, sales and
marketing, and administrative expenses over time. We also expect
to incur substantial non-cash charges relating to the
amortization of deferred charges, intellectual property and
deferred stock compensation, which will serve to increase our
net losses further. Our net revenue must increase substantially
if we are to achieve profitability. We cannot assure you that
our revenue will begin to increase, or that we may ever achieve
profitability. Even if we achieve profitability, we might not be
able to sustain or increase profitability on a quarterly or an
annual basis.

Our Business Is Difficult to Evaluate 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 evaluate our business. Until 2000,
we derived substantially all of our revenue from license fees,
but we do not expect any 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 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

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for our products may fail to increase, or may
diminish such was the case in the third and fourth quarters of
2001 where revenues declined quarter over quarter as a result of
manufacturing difficulties which delayed us from shipping our
new products in high volumes. 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
substantially.


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, our operating results were
adversely affected by unfavorable global economic conditions and
reduced capital 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.

We are currently producing our products using a
new .13 micron manufacturing process, rather than the
established .18 micron process. This transition involved
redesigning the product and modifying the manufacturing
processes for the product. 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, we experienced difficulties in bringing
our products into high volume production and distribution. As a
result, in part, of these delays, our 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 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 and Internet appliance markets. 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

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introduce and promote their products
successfully. The market for high-density servers depends in
part upon the success of our target customers and development
partners to successfully incorporate recent technologies into
their servers. In addition, the infancy of these recent
technologies will require additional development and marketing
before widespread acceptance is achieved. The market for
Internet appliances depends in part upon the deployment of
wireless technologies that enable the delivery of Internet
content at a speed comparable to that of a desktop computer. The
wireless technologies currently under development might not
fully address the needs of mobile Internet users. If the use of
high-density servers and Internet appliances does 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, the high-density server and Internet appliance markets
are new and evolving slowly. Internet appliance manufacturers
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. A downturn
of this type occurred in 1997 and 1998. A general downturn in
the semiconductor industry has occurred in 2001 and is expected
to continue through at least a significant portion of 2002. Our
net 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 after
our preliminary announcement of our results for the second
quarter of fiscal 2001. 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;                                                        
|
| |  | 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.                                                                                                                

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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 micro processors;                                       
|
| |  | 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.

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. During 2001,
we had significant turnover in senior management. In October
2001, our chairman, Murray A. Goldman, assumed management
duties as chief executive officer, and R. Hugh Barnes
assumed management duties as president and chief operating
officer. Although Dr. Goldman and Mr. Barnes have
served on our Board of Directors since 1998, they have only
recently assumed these

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management roles. Also in October 2001, Fred
Brown joined us as senior vice president of worldwide sales. 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.

In addition, the stock market generally and the
market for semiconductor and other technology-related stocks in
particular has experienced a decline during 2000 and 2001 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 have recently been sued in
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
have not yet succeeded in selling our products to companies
based in the U.S., where we face particularly strong competitive
pressure. We believe that such pressure is increasing worldwide.
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 our prices of our products in order to
increase or maintain market share, which would likely increase
our losses. Significant competitors that offer microprocessors
for the notebook computer market include Advanced Micro Devices
and Intel. Significant competitors that offer microprocessors
for the Internet appliance market include

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licensees of technology from ARM Holdings and
MIPS Technologies. We also face competition from providers of
x86 compatible microprocessors from Intel for the high-density
server market.


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 contains further 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 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 four customers in the aggregate
accounted for 71% of net revenue in 2001. These customers are
located in Japan and Taiwan, which subjects us to economic
cycles in those countries. 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.                          

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We have entered into two distributor agreements,
both of which are exclusive in large territories, one in Taiwan,
Hong Kong and China and the other in North America. These
agreements do not contain minimum purchase commitments. Any
distributor 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 product
revenue.

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. We
expect that the demand for our products will depend upon many
factors and be 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 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 product 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 may
decrease. If demand exceeds our expectations, TSMC, might not be
able to fabricate wafers as quickly as we need them. Also, ASE
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.

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 or a guaranteed level of
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

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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;                                                         
|
| |  | 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.                  

TSMC May Not Achieve Acceptable Manufacturing
Yields, Which 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 of
slower products 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.

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

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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 semiconductor industry has experienced shortages of
some materials and devices, including TFT screens. 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 Product
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.

Our Growth Could Place a Significant Strain on
Our Management Systems, Infrastructure and Other Resources, and
Our Business May Not Succeed if We Fail to Manage Our Growth
Effectively.

Our ability to implement our business plan in a
rapidly evolving market requires an effective planning and
management process. Until 2000, we focused primarily on the
development of our products. During 2001, we focused on wafer
fabrication and volume production of our products. We plan to
continue to increase the scope

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of our operations and the size of our direct
sales force domestically and internationally. We expect to
expand our facilities in proportion to any expansion in the
number of our employees. Any such growth could place a
significant strain on our management systems, infrastructure and
other resources. In addition, we expect that we will need to
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 our growth effectively, our employee-related
costs and employee turnover could increase.


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 introduce new products or product enhancements that meet
evolving customer demands. 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 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.

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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 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 Additional 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 additional highly skilled sales, marketing,
engineering and finance personnel. We will need

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to expand 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 additional
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 ore 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.


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
amortization expenses 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 and in
Japan, who provide sales and customer support. In addition, we
have appointed a distributor to sell products in Taiwan, Hong
Kong and China. 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.

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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;                                                                    
|
| |  | 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 more rapid expansion;                                          
|
| |  | fund additional 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.

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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, 2001, 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 3.5%. 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, 2001 (in
thousands):

|                       |              |      |         |      |   |            |        |       |   |            |   |   |  |   |         |      |   |   |         |  | 
|---------------------- | ------------ | ---- | ------- | ---- | - | ---------- | ------ | ----- | - | ---------- | - | - |  | - | ------- | ---- | - | - | ------- |  | 
|                       |              | 2002 |         | 2003 |   | Thereafter |        | Total |   | Fair Value
|                       |              |      |         |      |   |            |        |       |   |           
|Cash equivalents       |              | $    | 55,808  |      |   |            |       |       |   |            |  |   |  | $ | 55,808  |      |   | $ | 55,808  | 
|                       | Average rate |      |         | 2.4  | % |            |        |      |   |            |   |  |  |   |         | 2.4  | % |   |         |  | 
|Short term investments |              | $    | 124,171 |      |   | $          | 59,050 |       |   |            |  |   |  | $ | 183,221 |      |   | $ | 183,941 | 
|                       | Average rate |      |         | 4.35 | % |            |        | 4.51  | % |            |   |  |  |   |         | 4.42 | % |   |         |  | 

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 | 

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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,
2001 and 2000, and the related consolidated statements of
operations, stockholders equity, and cash flows for each
of the three years in the period ended December 31, 2001.
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, 2001 and 2000, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.



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

San Jose, California

January 14, 2002


except for Note 14, as to which


the date is March 25, 2002


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TRANSMETA CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                                                      |                                                                                                                                     |                                                                               |                                            |         |         |         |          |         |         |         | 
|--------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------- | ------- | -------- | ------- | ------- | ------- | 
|                                                                      |                                                                                                                                     |                                                                              
|                                                                      |                                                                                                                                     | December 31,                                                                 
|                                                                      |                                                                                                                                     |                                                                              
|                                                                      |                                                                                                                                     | 2001                                                                          |                                            | 2000   
|                                                                      |                                                                                                                                     |                                                                               |                                            |        
|                                                                      |                                                                                                                                     |                                                                              
|                                                                      |                                                                                                                                     | (In thousands, except for                                                    
|                                                                      |                                                                                                                                     | share and per share data)                                                    
|ASSETS                                                               
|Current assets:                                                       |                                                                                                                                     |                                                                               |                                            |         |         |         |          |        
|                                                                      | Cash and cash equivalents                                                                                                           |                                                                               | $                                          | 57,747  |         |         | $        | 259,744 |        
|                                                                      | Short-term investments                                                                                                              |                                                                               |                                            | 183,941 |         |         |          | 83,358  |        
|                                                                      | Accounts receivable, net                                                                                                            |                                                                               |                                            | 1,749   |         |         |          | 3,298   |        
|                                                                      | Inventories                                                                                                                         |                                                                               |                                            | 1,388   |         |         |          | 15,453  |        
|                                                                      | Prepaid expenses and other current assets                                                                                           |                                                                               |                                            | 7,091   |         |         |          | 7,821   |        
|                                                                      |                                                                                                                                     |                                                                               |                                            |         |         |         |          |        
|                                                                      |                                                                                                                                     |                                                                               | Total current assets                       |         |         | 251,916 |          |         |         | 369,674 | 
|Property and equipment, net                                           |                                                                                                                                     |                                                                               | 11,622                                     |         |         |         | 10,482   |        
|Deferred charges under license agreements, net                        |                                                                                                                                     |                                                                               |                                           |         |         |         | 26,097   |        
|Loans to founders                                                     |                                                                                                                                     |                                                                               |                                           |         |         |         | 5,446    |        
|Patents and patent rights, net                                        |                                                                                                                                     |                                                                               | 43,469                                     |         |         |         |         |        
|Other assets                                                          |                                                                                                                                     |                                                                               | 2,017                                      |         |         |         | 837      |        
|                                                                      |                                                                                                                                     |                                                                               |                                            |         |         |         |          |        
|                                                                      |                                                                                                                                     |                                                                               | Total assets                               |         | $       | 309,024 |          |         | $       | 412,536 | 
|                                                                      |                                                                                                                                     |                                                                               |                                            |         |         |         |          |        
|LIABILITIES AND STOCKHOLDERS
	EQUITY                                
|Current liabilities:                                                  |                                                                                                                                     |                                                                               |                                            |         |         |         |          |        
|                                                                      | Accounts payable                                                                                                                    |                                                                               | $                                          | 5,421   |         |         | $        | 7,237   |        
|                                                                      | Accrued compensation and related compensation
	liabilities                                                                          |                                                                               |                                            | 5,129   |         |         |          | 2,215   |        
|                                                                      | Other accrued liabilities                                                                                                           |                                                                               |                                            | 6,553   |         |         |          | 7,926   |        
|                                                                      | Current portion of long-term payables                                                                                               |                                                                               |                                            | 15,000  |         |         |          | 4,000   |        
|                                                                      | Current portion of long-term debt and capital
	lease obligations                                                                    |                                                                               |                                            | 2,661   |         |         |          | 5,292   |        
|                                                                      |                                                                                                                                     |                                                                               |                                            |         |         |         |          |        
|                                                                      |                                                                                                                                     |                                                                               | Total current liabilities                  |         |         | 34,764  |          |         |         | 26,670  | 
|Deposits received under subleasing agreements                         |                                                                                                                                     |                                                                               |                                           |         |         |         | 138      |        
|Long-term payables, net of current portion                            |                                                                                                                                     |                                                                               | 28,904                                     |         |         |         | 17,766   |        
|Long-term debt and capital lease obligations, net
	of current portion |                                                                                                                                     |                                                                               | 391                                        |         |         |         | 3,046    |        
|Commitments and contingencies                                         |                                                                                                                                     |                                                                               |                                            |         |         |         |          |        
|Stockholders equity:                                                 |                                                                                                                                     |                                                                               |                                            |         |         |         |          |        
|                                                                      | Convertible preferred stock, $0.00001 par value,
	at amounts paid in; Authorized shares  5,000,000.
	None issued in 2001 and 2000. |                                                                               |                                            |        |         |         |          |        |        
|                                                                      | Common stock, $0.00001 par value, at amounts paid
	in; Authorized shares  160,000,000.                                             |                                                                               |                                            |         |         |         |          |         |        
|                                                                      |                                                                                                                                     | Issued and outstanding shares 
	132,234,558 in 2001 and 130,418,928 in 2000. |                                            |         | 603,464 |         |          |         | 589,220 |        
|Treasury stock  796,875 shares in
	2001, none in 2000.               |                                                                                                                                     |                                                                               | (2,439                                     | )       |         |         |         |        
|Notes receivable from stockholders                                    |                                                                                                                                     |                                                                               |                                           |         |         |         | (17,752  | )      
|Deferred stock compensation                                           |                                                                                                                                     |                                                                               | (11,818                                    | )       |         |         | (32,988  | )      
|Accumulated other comprehensive income                                |                                                                                                                                     |                                                                               | 720                                        |         |         |         | 147      |        
|Accumulated deficit                                                   |                                                                                                                                     |                                                                               | (344,962                                   | )       |         |         | (173,711 | )      
|                                                                      |                                                                                                                                     |                                                                               |                                            |         |         |         |          |        
|                                                                      |                                                                                                                                     |                                                                               | Total stockholders equity                 |         |         | 244,965 |          |         |         | 364,916 | 
|                                                                      |                                                                                                                                     |                                                                               |                                            |         |         |         |          |        
|                                                                      |                                                                                                                                     |                                                                               | Total liabilities and stockholders equity |         | $       | 309,024 |          |         | $       | 412,536 | 
|                                                                      |                                                                                                                                     |                                                                               |                                            |         |         |         |          |        

(See accompanying notes)

38



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##### Table of Contents



TRANSMETA CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                         |                                                              |                                           |          |        |         |      |          |        |         |   |         |        |        | 
|-------------------------------------------------------- | ------------------------------------------------------------ | ----------------------------------------- | -------- | ------ | ------- | ---- | -------- | ------ | ------- | - | ------- | ------ | ------ | 
|                                                         |                                                              |                                          
|                                                         |                                                              | Years Ended December 31,                 
|                                                         |                                                              |                                          
|                                                         |                                                              | 2001                                      |          | 2000   |         | 1999
|                                                         |                                                              |                                           |          |        |         |     
|                                                         |                                                              |                                          
|                                                         |                                                              | (In thousands, except for per share data)
|Revenue:                                                 |                                                              |                                           |          |        |         |      |          |        |         |   |         |       
|                                                         | Product                                                      |                                           | $        | 35,590 |         |      | $        | 16,180 |         |   | $       | 76     |       
|                                                         | License                                                      |                                           |          |       |         |      |          |       |         |   |         | 5,000  |       
|                                                         |                                                              |                                           |          |        |         |      |          |        |         |   |         |       
|                                                         |                                                              | Total revenue                             |          |        | 35,590  |      |          |        | 16,180  |   |         |        | 5,076  | 
|Cost of product revenue                                  |                                                              |                                           | 48,694   |        |         |      | 9,461    |        |         |   | 18      |       
|                                                         |                                                              |                                           |          |        |         |      |          |        |         |   |         |       
|Gross profit                                             |                                                              |                                           | (13,104  | )      |         |      | 6,719    |        |         |   | 5,058   |       
|                                                         |                                                              |                                           |          |        |         |      |          |        |         |   |         |       
|Operating expenses:                                      |                                                              |                                           |          |        |         |      |          |        |         |   |         |       
|                                                         | Research and development(1)                                  |                                           |          | 67,639 |         |      |          | 61,415 |         |   |         | 33,122 |       
|                                                         | Purchased in-process research and development                |                                           |          | 13,600 |         |      |          |       |         |   |         |       |       
|                                                         | Selling, general and administrative(2)                       |                                           |          | 35,460 |         |      |          | 27,045 |         |   |         | 12,811 |       
|                                                         | Amortization of deferred charges, patents and
	patent rights |                                           |          | 17,556 |         |      |          | 10,416 |         |   |         | 218    |       
|                                                         | Impairment write-off of deferred charges                     |                                           |          | 16,564 |         |      |          |       |         |   |         |       |       
|                                                         | Stock compensation                                           |                                           |          | 20,954 |         |      |          | 13,056 |         |   |         |       |       
|                                                         |                                                              |                                           |          |        |         |      |          |        |         |   |         |       
|                                                         |                                                              | Total operating expenses                  |          |        | 171,773 |      |          |        | 111,932 |   |         |        | 46,151 | 
|                                                         |                                                              |                                           |          |        |         |      |          |        |         |   |         |       
|Operating loss                                           |                                                              |                                           | (184,877 | )      |         |      | (105,213 | )      |         |   | (41,093 | )     
|                                                         | Interest and other income                                    |                                           |          | 14,686 |         |      |          | 9,174  |         |   |         | 2,456  |       
|                                                         | Interest expense                                             |                                           |          | (1,060 | )       |      |          | (1,666 | )       |   |         | (1,952 | )     
|                                                         |                                                              |                                           |          |        |         |      |          |        |         |   |         |       
|Loss before income taxes                                 |                                                              |                                           | (171,251 | )      |         |      | (97,705  | )      |         |   | (40,589 | )     
|Provision for income taxes                               |                                                              |                                           |         |        |         |      |         |        |         |   | 500     |       
|                                                         |                                                              |                                           |          |        |         |      |          |        |         |   |         |       
|Net loss                                                 |                                                              | $                                         | (171,251 | )      |         | $    | (97,705  | )      |         | $ | (41,089 | )     
|                                                         |                                                              |                                           |          |        |         |      |          |        |         |   |         |       
|Net loss per share  basic and diluted                   |                                                              | $                                         | (1.33    | )      |         | $    | (2.18    | )      |         | $ | (1.51   | )     
|                                                         |                                                              |                                           |          |        |         |      |          |        |         |   |         |       
|Weighted average shares outstanding  basic
	and diluted |                                                              |                                           | 129,002  |        |         |      | 44,741   |        |         |   | 27,236  |       
|                                                         |                                                              |                                           |          |        |         |      |          |        |         |   |         |       



---



|    |                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------
|(1) | Excludes $10,298 and $5,557 of stock compensation
	for the year ended December 31, 2001 and 2000, respectively.
|   
|(2) | Excludes $10,656 and $7,499 of stock compensation
	for the year ended December 31, 2001 and 2000, respectively.

(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, 1998                                                                                                                       |  | $                                                   | 58,149   |        |  | $        | 1,761   |              |  | $            |       |               |  | $           | (961    | )             |  | $ |        |   |  | $ |    |   |  | $ | (34,917  | ) |  | $ | 24,032   |  
|Issuance of 7,692,500 shares of Series F
	convertible preferred stock to investors for cash at $10.00 per
	share, net of issuance costs of $94,000 |  |                                                     | 76,831   |        |  |          |        |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |    |   |  |   |         |   |  |   | 76,831   |  
|Issuance of 20,000 shares of common stock to
	consultants in connection with Series F financing                                                    |  |                                                     |         |        |  |          | 35      |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |    |   |  |   |         |   |  |   | 35       |  
|Embedded beneficial conversion feature of the
	amended convertible note                                                                            |  |                                                     |         |        |  |          | 3,216   |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |    |   |  |   |         |   |  |   | 3,216    |  
|Issuance of 4,276,424 shares of common stock to
	employees under option exercises, net of repurchases                                              |  |                                                     |         |        |  |          | 2,154   |              |  |              |       |               |  |             | (2,110  | )             |  |   |        |   |  |   |    |   |  |   |         |   |  |   | 44       |  
|Issuance of warrants to purchase 68,000 shares of
	common stock in connection with consulting agreement                                            |  |                                                     |         |        |  |          | 17      |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |    |   |  |   |         |   |  |   | 17       |  
|Other comprehensive (loss)  unrealized
	loss on available-for-sale investments, net                                                               |  |                                                     |         |        |  |          |        |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   | (3  | ) |  |   |         |   |  |   | (3       | )
|Net loss                                                                                                                                           |  |                                                     |         |        |  |          |        |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |    |   |  |   | (41,089  | ) |  |   | (41,089  | )
|                                                                                                                                                   |  |                                                     |          |        |  |          |         |              |  |              |        |               |  |             |         |               |  |   |         |   |  |   |     |   |  |   |          |   |  |   |          |  
|Comprehensive loss                                                                                                                                 |  |                                                     |         |        |  |          |        |              |  |              |       |               |  |             |        |               |  |   |        |   |  |   |    |   |  |   |         |   |  |   | (41,092  | )
|                                                                                                                                                   |  |                                                     |          |        |  |          |         |              |  |              |        |               |  |             |         |               |  |   |         |   |  |   |     |   |  |   |          |   |  |   |          |  
|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  |  
|                                                                                                                                                   |  |                                                     |          |        |  |          |         |              |  |              |        |               |  |             |         |               |  |   |         |   |  |   |     |   |  |   |          |   |  |   |          |  

(See accompanying notes)

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TRANSMETA CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                         |                                                                                            |                                                              |          |          |        |      |         |          |         |   |         |         |        |  
|------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------ | ------------------------------------------------------------ | -------- | -------- | ------ | ---- | ------- | -------- | ------- | - | ------- | ------- | ------ | -
|                                                                         |                                                                                            |                                                             
|                                                                         |                                                                                            | Years Ended December 31,                                    
|                                                                         |                                                                                            |                                                             
|                                                                         |                                                                                            | 2001                                                         |          | 2000     |        | 1999
|                                                                         |                                                                                            |                                                              |          |          |        |     
|                                                                         |                                                                                            |                                                             
|                                                                         |                                                                                            | (In thousands)                                              
|Cash flows from operating activities:                                    |                                                                                            |                                                              |          |          |        |      |         |          |         |   |         |        
|                                                                         | Net loss                                                                                   |                                                              | $        | (171,251 | )      |      | $       | (97,705  | )       |   | $       | (41,089 | )     
|                                                                         | Adjustments to reconcile net loss to net cash
	used in operating activities:               |                                                              |          |          |        |      |         |          |         |   |         |         |       
|                                                                         |                                                                                            | Stock compensation                                           |          |          | 20,954 |      |         |          | 13,056  |   |         |         |       |  
|                                                                         |                                                                                            | Depreciation                                                 |          |          | 6,494  |      |         |          | 6,091   |   |         |         | 5,275  |  
|                                                                         |                                                                                            | Amortization of other assets                                 |          |          | 190    |      |         |          |        |   |         |         |       |  
|                                                                         |                                                                                            | Fair value of equity instruments issued for
	services        |          |          | 170    |      |         |          | 30      |   |         |         | 52     |  
|                                                                         |                                                                                            | Stock compensation in connection with severance
	agreement   |          |          | 75     |      |         |          | 945     |   |         |         |       |  
|                                                                         |                                                                                            | Amortization of deferred charges, patents and
	patent rights |          |          | 17,556 |      |         |          | 10,416  |   |         |         | 218    |  
|                                                                         |                                                                                            | Impairment write-off of deferred charges                     |          |          | 16,564 |      |         |          |        |   |         |         |       |  
|                                                                         |                                                                                            | Accretion of interest payable to a development
	partner      |          |          |       |      |         |          | 45      |   |         |         | 45     |  
|                                                                         |                                                                                            | Write-off of purchased in-process research and
	development  |          |          | 13,600 |      |         |          |        |   |         |         |       |  
|                                                                         | Changes in operating assets and liabilities:                                               |                                                              |          |          |        |      |         |          |         |   |         |         |       
|                                                                         |                                                                                            | Accounts receivable                                          |          |          | 1,549  |      |         |          | (3,298  | ) |         |         | 114    |  
|                                                                         |                                                                                            | Inventories                                                  |          |          | 14,065 |      |         |          | (15,453 | ) |         |         |       |  
|                                                                         |                                                                                            | Prepaid expenses and other current assets                    |          |          | 730    |      |         |          | (6,209  | ) |         |         | (1,145 | )
|                                                                         |                                                                                            | Other non-current assets                                     |          |          | (904   | )    |         |          |        |   |         |         |       |  
|                                                                         |                                                                                            | Accounts payable and accrued liabilities                     |          |          | (275   | )    |         |          | 13,532  |   |         |         | 40     |  
|                                                                         |                                                                                            | Deposits received under subleasing agreements                |          |          | (138   | )    |         |          | (93     | ) |         |         | 132    |  
|                                                                         |                                                                                            |                                                              |          |          |        |      |         |          |         |   |         |        
|Net cash used in operating activities                                    |                                                                                            |                                                              | (80,621  | )        |        |      | (78,643 | )        |         |   | (36,358 | )      
|                                                                         |                                                                                            |                                                              |          |          |        |      |         |          |         |   |         |        
|Cash flows used in investing activities:                                 |                                                                                            |                                                              |          |          |        |      |         |          |         |   |         |        
|                                                                         | Purchase of available-for-sale investments                                                 |                                                              |          | (255,610 | )      |      |         | (526,218 | )       |   |         | (57,312 | )     
|                                                                         | Proceeds from sale or maturity of
	available-for-sale investments                          |                                                              |          | 155,600  |        |      |         | 462,811  |         |   |         | 37,510  |       
|                                                                         | Change in restricted cash                                                                  |                                                              |          |         |        |      |         |         |         |   |         | 1,990   |       
|                                                                         | Purchase of property and equipment                                                         |                                                              |          | (7,634   | )      |      |         | (8,036   | )       |   |         | (1,323  | )     
|                                                                         | Loans to founders                                                                          |                                                              |          | 5,446    |        |      |         | (5,250   | )       |   |         |        |       
|                                                                         | Payment to development partner                                                             |                                                              |          | (3,500   | )      |      |         | (5,000   | )       |   |         |        |       
|                                                                         | Purchase of patents and patent rights                                                      |                                                              |          | (12,041  | )      |      |         |         |         |   |         |        |       
|                                                                         | Other assets                                                                               |                                                              |          | (466     | )      |      |         | (326     | )       |   |         | (79     | )     
|                                                                         |                                                                                            |                                                              |          |          |        |      |         |          |         |   |         |        
|Net cash used in investing activities                                    |                                                                                            |                                                              | (118,205 | )        |        |      | (82,019 | )        |         |   | (19,214 | )      
|                                                                         |                                                                                            |                                                              |          |          |        |      |         |          |         |   |         |        
|Cash flows from financing activities:                                    |                                                                                            |                                                              |          |          |        |      |         |          |         |   |         |        
|                                                                         | Net proceeds from issue of preferred stock                                                 |                                                              |          |         |        |      |         | 87,942   |         |   |         | 76,831  |       
|                                                                         | Net proceeds from initial public offering of
	common stock                                 |                                                              |          | (256     | )      |      |         | 289,638  |         |   |         |        |       
|                                                                         | Common stock issued under stock option plans and
	employee stock purchase programs         |                                                              |          | 2,371    |        |      |         | 544      |         |   |         | 44      |       
|                                                                         | Issuance of common stock upon exercise of a
	warrant                                       |                                                              |          |         |        |      |         | 50       |         |   |         |        |       
|                                                                         | Proceeds from debt and capital lease obligations                                           |                                                              |          |         |        |      |         | 1,248    |         |   |         | 2,773   |       
|                                                                         | Repayment of debt and capital lease obligations                                            |                                                              |          | (5,286   | )      |      |         | (5,661   | )       |   |         | (3,665  | )     
|                                                                         | Repayment of borrowings under line of credit                                               |                                                              |          |         |        |      |         |         |         |   |         | (1,575  | )     
|                                                                         |                                                                                            |                                                              |          |          |        |      |         |          |         |   |         |        
|Net cash provided by/(used in) financing
	activities                     |                                                                                            |                                                              | (3,171   | )        |        |      | 373,761 |          |         |   | 74,408  |        
|                                                                         |                                                                                            |                                                              |          |          |        |      |         |          |         |   |         |        
|Change in cash and cash equivalents                                      |                                                                                            |                                                              | (201,997 | )        |        |      | 213,099 |          |         |   | 18,836  |        
|Cash and cash equivalents at beginning of period                         |                                                                                            |                                                              | 259,744  |          |        |      | 46,645  |          |         |   | 27,809  |        
|                                                                         |                                                                                            |                                                              |          |          |        |      |         |          |         |   |         |        
|Cash and cash equivalents at end of period                               |                                                                                            | $                                                            | 57,747   |          |        | $    | 259,744 |          |         | $ | 46,645  |        
|                                                                         |                                                                                            |                                                              |          |          |        |      |         |          |         |   |         |        
|Supplemental disclosure of cash paid during the
	period:                 |                                                                                            |                                                              |          |          |        |      |         |          |         |   |         |        
|                                                                         | Cash paid for interest                                                                     |                                                              | $        | 908      |        |      | $       | 1,534    |         |   | $       | 1,846   |       
|                                                                         | Cash paid for taxes                                                                        |                                                              |          |         |        |      |         | 1        |         |   |         | 500     |       
|Supplemental disclosure of non-cash financing and
	investing activities: |                                                                                            |                                                              |          |          |        |      |         |          |         |   |         |        
|                                                                         | Issuance of warrants                                                                       |                                                              |          |         |        |      |         | 30       |         |   |         | 17      |       
|                                                                         | Issuance of common stock in connection with net
	exercise of warrants                      |                                                              |          | 170      |        |      |         |         |         |   |         |        |       
|                                                                         | Issuance of common stock to consultants in
	connection with Series F financing             |                                                              |          |         |        |      |         |         |         |   |         | 35      |       
|                                                                         | Issuance of common stock to employees for notes
	receivable                                |                                                              |          | 40       |        |      |         | 14,817   |         |   |         | 2,123   |       
|                                                                         | 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    |         |   |         | 18,927  |       

(See accompanying notes)

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##### Table of Contents



TRANSMETA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Overview

The
Company

Transmeta Corporation (Transmeta or the Company)
develops and sells software-based microprocessors and develops
additional hardware and software technologies that enable
computer manufacturers to build mobile Internet computers, which
are portable computing and communication devices that are
compatible with PC software and deliver the high performance
required to run standard PC and Internet applications while also
offering long battery life.

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.

Reincorporation

Effective October 26, 2000, Transmeta
reincorporated as a Delaware corporation. Share capital
information for all periods has been retroactively adjusted to
reflect the par value of common and preferred stock and amounts
of additional paid-in-capital.

Fiscal
Year

Transmeta changed its fiscal year-end during 1999
to end 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 2001, 2000
and 1999 consisted of 52 weeks and ended on
December 28, December 29 and December 31,
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.

Risk Factors
and Concentrations

Transmeta is subject to various risks similar to
other companies in a comparable stage of growth, including
dependence on key individuals, competition from substitute
products and larger companies and the continued successful
development and marketing of its products.

Financial instruments that subject the Company to
credit risk consist primarily of cash equivalents, short-term
investments and accounts receivable from customers.
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 bonds and notes.

During 2001 and 2000, Transmeta sold its products
principally to original equipment manufacturers and their
subcontract manufacturers. During 1999, Transmetas
revenues were comprised almost entirely of license revenue from
Toshiba in connection with their technology license agreement
(see note 3). The following customers accounted for more than
10% the Companys product revenue for the years indicated;
Sony Electronics accounted for 30% of product revenue in 2001
and 60% in 2000; Fujitsu accounted for 12% of product revenue in
2001 and 28% in 2000; Toshiba accounted for 18% of product
revenue in 2001; and

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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Siltrontech Electronics Corporation accounted for
11% of product revenue in 2001. Revenue from Toshiba and
Siltrontech in 2000 was less than 10% each. Siltrontech is the
exclusive distributor of the Companys products in Asia.
The Company performs ongoing credit evaluations of its
customers, maintains an allowance for potential credit losses
and does not generally require collateral.

The Company currently relies exclusively on
Taiwan Semiconductor Manufacturing Co. (TSMC) to fabricate its
wafers and on Advance Semiconductor Engineering (ASE) to provide
assembly and test services.

2.     Summary of
Significant Accounting Policies

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 sales returns and allowances, inventory valuation,
long-lived asset valuation, fair value of stock compensation,
accruals and income tax valuation allowances.

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 on consolidation.

Revenue
Recognition

Transmeta generally recognizes revenue from
product sales upon transfer of title to its customers, typically
upon shipment. 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.

Transmeta recognizes license revenue from
technology license agreements when earned, which generally
occurs when agreed-upon deliverables are provided, or milestones
are met and confirmed by licensees. License revenues are
recognized only if payments received are non-refundable and not
subject to any future performance obligation by the Company.
Transmeta recognized license revenue of $5.0 million from
Toshiba in 1999 in connection with technology license agreements
(see Note 3). No license revenue was recognized during 2001
or 2000. Transmeta does not expect to record license revenue in
future periods.

Comprehensive
Income/(Loss)

Comprehensive loss was $170.7 million for
2001 compared to $97.6 million for 2000. Total
comprehensive loss for 2001 and 2000 includes $720,000 and
$147,000, respectively, of other comprehensive income due to
unrealized gains on available-for-sale investments. Increases in
other comprehensive income are due to larger average cash
balances as a result of the Companys initial public
offering, which closed in November 2000.

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

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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. Transmetas policy is to
minimize principal risk by investing in high credit-quality
financial instruments.

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 and cash
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.

Accounts
Receivable

Transmeta performs periodic credit evaluations of
its open account customers financial condition and,
generally, requires no collateral. The Company maintains an
allowance for doubtful accounts receivable based upon the
expected collectibility of accounts receivable. At
December 31, 2001 and 2000 Transmeta did not have an
allowance for doubtful accounts nor did the Company write off
any bad debt during the year. At December 31, 2001 and 2000
net accounts receivable included a provision for sales returns
of $34,000 and $711,000, respectively. Customers who accounted
for more than 10% of Transmetas accounts receivable
balance at December 31, 2001 and 2000 are as follows:

|                 |  |              |    |              |  |  |    |  
|---------------- |  | ------------ | -- | ------------ |  |  | -- | -
|                 |  | December 31, |    | December 31,
|Customer         |  | 2000         |    | 2001        
|                 |  |              |    |             
|Sonic Blue       |  |              | 44 | %            |  |  | 0  | %
|Fujitsu          |  |              | 20 | %            |  |  | 44 | %
|Sony Electronics |  |              | 16 | %            |  |  | 18 | %
|Toshiba          |  |              | 12 | %            |  |  | 0  | %
|Quanta Computer  |  |              | 0  | %            |  |  | 20 | %

Inventories

Inventories are stated at the lower of cost
(first-in, first-out) or market. The components of inventories,
in thousands as of December 31, 2001 and 2000, were as
follows:

|                 |  |              |       |      |  |   |        | 
|---------------- |  | ------------ | ----- | ---- |  | - | ------ | 
|                 |  |             
|                 |  | December 31,
|                 |  |             
|                 |  | 2001         |       | 2000
|                 |  |              |       |     
|Work in progress |  | $            | 838   |      |  | $ | 6,680  | 
|Finished goods   |  |              | 550   |      |  |   | 8,773  | 
|                 |  |              |       |      |  |   |        | 
|                 |  | $            | 1,388 |      |  | $ | 15,453 | 
|                 |  |              |       |      |  |   |        | 

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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

During the second quarter of 2001, Transmeta
recorded a charge to cost of product revenue totaling
$28.1 million. This amount includes $24.4 million
related to excess inventory and related non-cancelable purchase
commitments due to a sudden and significant decrease in actual
and forecasted demand for specific products. In addition, the
$28.1 million charge includes $3.7 million primarily
related to the write-off of obsolete inventory and related
estimated non-cancelable purchase commitments incurred during
the second quarter of fiscal 2001. During the third quarter
Transmeta recognized 100% gross profit on sales of
$1.7 million relating to inventories that had been
previously written off in the second quarter. In addition,
during the third quarter the Company settled certain accrued
purchase commitments at amounts less than originally accrued,
resulting in $0.8 million of reduced cost to product
revenues. Both of these items favorably impacted
Transmetas gross margin during the third quarter.

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.

Impairment of
Long-Lived Assets

Transmeta evaluates its long-lived assets for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If an asset is
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of
are reported at the lower of the carrying amount or the fair
value less costs to sell.

Research and
Development

Costs to develop Transmetas products are
expensed as incurred in accordance with the Financial Accounting
Standards Boards (FASB) Statement of Financial Accounting
Standards (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.

Income
Taxes

Transmeta accounts for income taxes in accordance
with the FASBs SFAS 109, Accounting for Income
Taxes (SFAS 109), 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.

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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

Deferred
Charges Under License Agreements and Related Payment
Obligations

Transmeta capitalized the cost of intangibles
associated with license agreements with third-party developers
and through the fourth quarter of 2001 amortized these assets on
a straight-line basis over the life of the assets. During the
fourth quarter of 2001 the Company assessed the value of these
assets in accordance with its policies for the impairment of
long-lived assets under SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of (SFAS 121), and recorded a
$16.6 million charge to reduce the carrying value of the
deferred charges to zero, which was equal to the fair value (see
Note 3). Payment obligations to IBM under the license
agreement will continue in effect and the Company will accrete
interest using the effective interest until the obligation is
fully repaid.

Segment
Information

Transmeta has adopted the FASBs
SFAS 131, Disclosure About Segments of an Enterprise
and Related Information. Transmeta operates solely in one
segment, the development, marketing and sale of hardware and
software technologies for the mobile computing market. The
Company also currently operates in one geographic region and is
evaluated by management on a single segment basis. Sales to
customers based in Japan, Taiwan and the United States in 2001
accounted for 67%, 24% and 9% of product revenue, respectively.
This compares to sales to customers based in Japan, Taiwan and
the United States in 2000 accounting for 83%, 12% and 5% of
product revenue, respectively. Product revenue in 1999 was
insignificant.

Advertising
Expenses

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

Stock-Based
Compensation

Transmeta accounts for its stock options and
equity awards in accordance with the provisions of Accounting
Principles Board (APB) Opinion 25,
Accounting for Stock Issued to Employees, and
related interpretations and has elected to follow the
disclosure only alternative prescribed by the
FASBs SFAS 123, Accounting for Stock-Based
Compensation (SFAS 123). 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.

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 consensus 96-18. The assumptions used to value
stock-based awards to consultants and vendors are similar to
those used for employees except that a volatility of 0.80 was
used (see Note 11 for pro forma disclosures of stock-based
compensation pursuant to SFAS 123).

Due to the resignation 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 shareholder notes that were issued to purchase
shares of the Companys common stock as if such notes had
terms equivalent to

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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

non-recourse notes. As a result, the Company
recorded additional stock compensation expense to write-off all
accrued interest related to the notes to its remaining
shareholder notes and recorded an adjustment to its balance
sheet to reduce common stock and reduce notes receivable from
shareholders by the remaining amounts owed under the shareholder
notes. This entry did not have a material impact on
shareholders equity.

In addition, under the terms of the outstanding
shareholder 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 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 shareholder
note. This variable accounting resulted in the Company recording
additional stock compensation expense in the fourth quarter of
$2.5 million based on the market value of $2.22 per share
for the Companys common stock as of the end of fiscal
2001. During the remaining life of these outstanding shareholder
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.

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 shares subject to repurchase.

Recent
Accounting Pronouncements

In July 2001, the FASB issued SFAS 141
Business Combinations and SFAS 142
Goodwill and Other Intangible Assets. SFAS 141
eliminates the pooling-of-interests method of accounting for
business combinations except for qualifying business
combinations that were initiated prior to July 1, 2001.
Statement 141 further clarifies the criteria to recognize
intangible assets separately from goodwill. The requirements of
SFAS 141 are effective for any business combination accounted
for by the purchase method that is completed after June 30,
2001 (i.e., the acquisition date is July 1, 2001 or
after). Under SFAS 142, goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to
have an indefinite life will continue to be amortized over their
useful lives. SFAS 141 and SFAS 142 became effective
on January 1, 2002 however, the adoption is not expected to
have any material impact on the Companys financial
position or results of operations.

In December 2001, the FASB issued SFAS 144,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of (SFAS 144).
SFAS 144 supersedes SFAS 121 and provides a single
accounting model for long-lived assets to be disposed of. The
Company is required to adopt SFAS 144 effective
January 1, 2002. The Company does not believe the adoption
of SFAS 144 will have a significant impact on its
consolidated financial position or results of operations.

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

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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. The future cash
commitment to IBM at December 31, 2001 was as follows:

|                                               |      |                |        |        |        | 
|---------------------------------------------- | ---- | -------------- | ------ | ------ | ------ | 
|                                               |      | (In thousands)
|Due on or before December 15,                  |      |                |        |       
|                                               | 2002 |                | $      | 6,000  |       
|                                               | 2003 |                |        | 7,000  |       
|                                               | 2004 |                |        | 16,000 |       
|                                               |      |                |        |       
|                                               |      | Total payments |        |        | 29,000 | 
|Less unamortized discounts                     |      |                | (7,969 | )     
|                                               |      |                |        |       
|Present value as recorded on the balance sheet |      | $              | 21,031 |       
|                                               |      |                |        |       

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 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.

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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The fair values of fixed assets and patents and
patent rights were assessed to be approximately equal to or in
excess of their current carrying values and no impairment loss
was required.

4.     Cash
Equivalents and Short-Term Investments

All cash equivalents and short-term investments
as of December 31, 2001 and 2000 were classified as
available-for-sale securities and consisted of the following:

|                         |                                             |                |   |            |  |            |   |       |  |  |   |     |  |  |   |          |  
|------------------------ | ------------------------------------------- | -------------- | - | ---------- |  | ---------- | - | ----- |  |  | - | --- |  |  | - | -------- | -
|                         |                                             |                |   | Gross      |  | Gross      |   |      
|                         |                                             | Amortized      |   | Unrealized |  | Unrealized |   | Fair 
|                         |                                             | Cost           |   | Gains      |  | Losses     |   | Value
|                         |                                             |                |   |            |  |            |   |      
|                         |                                             |               
|                         |                                             | (In thousands)
|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  |  
|                         |                                             |                |   |            |  |            |   |       |  |  |   |     |  |  |   |         
|As of December 31, 2000: |                                             |                |   |            |  |            |   |       |  |  |   |     |  |  |   |         
|                         | Money market funds                          |                | $ | 101,488    |  |            | $ |      |  |  | $ |    |  |  | $ | 101,488  |  
|                         | Commercial paper                            |                |   | 185,646    |  |            |   | 82    |  |  |   |    |  |  |   | 185,728  |  
|                         | Medium term notes                           |                |   | 57,955     |  |            |   | 178   |  |  |   | 113 |  |  |   | 58,020   |  
|                         |                                             |                |   |            |  |            |   |       |  |  |   |     |  |  |   |         
|                         | Total available-for-sale securities         |                | $ | 345,089    |  |            | $ | 260   |  |  | $ | 113 |  |  | $ | 345,236  |  
|                         |                                             |                |   |            |  |            |   |       |  |  |   |     |  |  |   |         
|                         | Less amounts classified as cash equivalents |                |   |            |  |            |   |       |  |  |   |     |  |  |   | (261,878 | )
|                         |                                             |                |   |            |  |            |   |       |  |  |   |     |  |  |   |         
|                         | Total short-term investments                |                |   |            |  |            |   |       |  |  |   |     |  |  | $ | 83,358   |  
|                         |                                             |                |   |            |  |            |   |       |  |  |   |     |  |  |   |         

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, 2001: |                                                    |                |   |         |  |  |   |        
|                         | Amounts maturing within one year                   |                | $ | 179,979 |  |  | $ | 180,388 | 
|                         | Amounts maturing after one year, within five years |                | $ | 59,050  |  |  | $ | 59,361  | 

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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5.     Property and
Equipment

Property and equipment consisted of the following:

|                                               |       |                |         |        |  |   |         |        | 
|---------------------------------------------- | ----- | -------------- | ------- | ------ |  | - | ------- | ------ | 
|                                               |       |               
|                                               |       | December 31,  
|                                               |       |               
|                                               |       | 2001           |         | 2000  
|                                               |       |                |         |       
|                                               |       |               
|                                               |       | (In thousands)
|Furniture and fixtures                         |       | $              | 2,466   |        |  | $ | 1,537   |       
|Computer equipment                             |       |                | 18,683  |        |  |   | 14,494  |       
|Computer software                              |       |                | 9,746   |        |  |   | 8,878   |       
|Leasehold improvements                         |       |                | 2,857   |        |  |   | 1,209   |       
|                                               |       |                |         |        |  |   |         |       
|                                               |       |                | 33,752  |        |  |   | 26,118  |       
|Less accumulated depreciation and amortization |       |                | (22,130 | )      |  |   | (15,636 | )     
|                                               |       |                |         |        |  |   |         |       
|                                               | Total |                | $       | 11,622 |  |   | $       | 10,482 | 
|                                               |       |                |         |        |  |   |         |       

6.     Patents and
Patent Rights

Patents and patent rights for microprocessor
technology were acquired from Seiko Epson (Epson) and others in
fiscal 2001. Under the patent and patent rights agreement with
Epson, in May 2001, 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 paid
Epson $7.5 million in cash and 766,930 shares of the
Companys unregistered common stock in May 2001. 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. 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
future payments and $0.5 million of acquisition costs on
the balance sheet as an element of patents and patent rights.

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
2003 and 2004 (currently $13.9 million as of
December 31, 2001) accrete interest using an effective
interest methodology at 10% per annum. Total amortization for
patents and patent rights during 2001 was approximately
$4.5 million. Total commitments for patents and patent
rights to Epson and others are as follows:

|                                               |      |                |        |       |        | 
|---------------------------------------------- | ---- | -------------- | ------ | ----- | ------ | 
|                                               |      | (In thousands)
|                                               | 2002 |                | $      | 9,000 |       
|                                               | 2003 |                |        | 9,000 |       
|                                               | 2004 |                |        | 7,500 |       
|                                               |      |                |        |      
|                                               |      | Total payments |        |       | 25,500 | 
|Less unamortized discounts                     |      |                | (2,627 | )    
|                                               |      |                |        |      
|Present value as recorded on the balance sheet |      | $              | 22,873 |      
|                                               |      |                |        |      

7.     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 are currently in research and development and are
not anticipated to be commercially available before late 2002.

8.     Leases and
Commitments



| |                 
| | ----------------
| | Operating Leases

Transmeta leases its facilities and certain
equipment under noncancelable operating leases expiring through
2008. Gross operating lease and rental expenses were
$4.9 million in 2001, $5.6 million in 2000 and
$5.3 million in 1999.

During 2001, 2000 and 1999 Transmeta subleased a
portion of its facilities. A single sublease remains, but
expires in 2002. Sublease income was $547,000 in 2001,
$1.2 million in 2000 and $1.1 million in 1999. Future
minimum rentals to be received under the sublet facilities
during 2002 are expected to be $125,000.



| |               
| | --------------
| | Capital Leases

Transmeta finances certain equipment under
noncancelable lease agreements subsequent to original purchase
that are accounted for as capital leases.

The original cost of equipment recorded under
capital lease arrangements included in property and equipment
aggregated $4.4 million at 2001 and $9.8 million in
2000. The decrease from 2000 to 2001 was due to several lease
arrangements terminating during 2001. Related accumulated
depreciation was $3.7 million in 2001 and $7.7 million
in 2000. At December 31, 2001, future minimum payments for
noncancelable capital lease and operating lease obligations were
as follows:

|                                           |            |                              |        |           |       |  |   |        |        | 
|------------------------------------------ | ---------- | ---------------------------- | ------ | --------- | ----- |  | - | ------ | ------ | 
|                                           |            | Capital                      |        | Operating
|                                           |            | Leases                       |        | Leases   
|                                           |            |                              |        |          
|                                           |            |                             
|                                           |            | (In thousands)              
|Years ending December 31,                  |            |                              |        |           |       |  |   |       
|                                           | 2002       |                              | $      | 1,879     |       |  | $ | 3,970  |       
|                                           | 2003       |                              |        | 387       |       |  |   | 4,216  |       
|                                           | 2004       |                              |        |          |       |  |   | 4,241  |       
|                                           | 2005       |                              |        |          |       |  |   | 4,393  |       
|                                           | Thereafter |                              |        |          |       |  |   | 11,625 |       
|                                           |            |                              |        |           |       |  |   |       
|                                           |            | Total minimum lease payments |        |           | 2,266 |  |   | $      | 28,445 | 
|                                           |            |                              |        |           |       |  |   |       
|Less amount representing interest          |            |                              | (195   | )         |       |  |   |       
|                                           |            |                              |        |           |       |  |   |       
|Present value of capital lease obligations |            |                              | 2,071  |           |       |  |   |       
|Less current portion                       |            |                              | (1,711 | )         |       |  |   |       
|                                           |            |                              |        |           |       |  |   |       
|Non-current portion                        |            | $                            | 360    |           |       |  |   |       
|                                           |            |                              |        |           |       |  |   |       



| |            
| | -----------
| | Commitments

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, 2001, TSMC had incurred
approximately $1.2 million of manufacturing expenses on the
Companys outstanding purchase orders.

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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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, 2001,
2000 and 1999 was $7,000, $26,000 and $26,000, respectively.

At December 31, 2001, aggregate future
minimum principal payments on the obligations described above
were as follows:

|                          |      |                                  |      |     |     | 
|------------------------- | ---- | -------------------------------- | ---- | --- | --- | 
|                          |      | (In thousands)                  
|Years ending December 31, |      |                                  |      |    
|                          | 2002 |                                  | $    | 950 |    
|                          | 2003 |                                  |      | 31  |    
|                          |      |                                  |      |    
|                          |      | Total minimum principal payments |      |     | 981 | 
|Less current portion      |      |                                  | (950 | )  
|                          |      |                                  |      |    
|Non-current portion       |      | $                                | 31   |    
|                          |      |                                  |      |    

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 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,
2001 and 2000 there were no preferred shares outstanding.



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

Shares reserved for future issuance are as
follows:

|                             |  |              |            |      |  |  |            | 
|---------------------------- |  | ------------ | ---------- | ---- |  |  | ---------- | 
|                             |  |             
|                             |  | December 31,
|                             |  |             
|                             |  | 2001         |            | 2000
|                             |  |              |            |     
|Warrants outstanding         |  |              | 1,046,228  |      |  |  | 1,688,068  | 
|Options outstanding          |  |              | 21,839,209 |      |  |  | 16,586,546 | 
|Employee Stock Purchase Plan |  |              | 2,979,321  |      |  |  | 2,000,000  | 
|Future option grants         |  |              | 6,696,841  |      |  |  | 6,974,000  | 
|                             |  |              |            |      |  |  |            | 
|                             |  |              | 32,561,599 |      |  |  | 27,248,614 | 
|                             |  |              |            |      |  |  |            | 
|Shares subject to repurchase |  |              | 1,484,747  |      |  |  | 5,855,413  | 
|                             |  |              |            |      |  |  |            | 

52



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##### Table of Contents



TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2001:

|              |                        |           |         |           |  |                 |      |  |  |  |               |  | 
|------------- | ---------------------- | --------- | ------- | --------- |  | --------------- | ---- |  |  |  | ------------- |  | 
|              |                        |           |         | Exercise  |  |                
|              |                        | Number    |         | Price     |  |                
|Issuance Date |                        | of Shares |         | Per 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. 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 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).
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

53



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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2001, there were no shares of preferred
stock outstanding.

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 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, 6,520,946 shares were added to the
Plan in 2001. 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, 1,508,882
shares were also added to the Plan in 2001.

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 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.

54



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##### Table of Contents



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           |           | Number      |   | Exercise |            | Grant Date
|                             |                            | for Grant           |           | of Shares   |   | Price    |            | Fair Value
|                             |                            |                     |           |             |   |          |            |           
|Balance at December 31, 1998 |                            |                     | 498,198   |             |   |          | 6,309,986  |            |   | $ | 0.31 |      |  |  |   |     
|                             | Additional shares reserved |                     |           | 12,500,000  |   |          |            |           |   |   |      |      |  |  |   |      | 
|                             | Options granted            |                     |           | (8,067,000  | ) |          |            | 8,067,000  |   |   | $    | 0.95 |  |  | $ | 0.25 | 
|                             | Options exercised          |                     |           |            |   |          |            | (4,832,696 | ) |   | $    | 0.47 |  |  |   |      | 
|                             | Options canceled           |                     |           | 1,162,938   |   |          |            | (849,330   | ) |   | $    | 0.56 |  |  |   |      | 
|                             |                            |                     |           |             |   |          |            |            |   |   |      |      |  |  |   |     
|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 |  |  | $ | 3.62 | 
|                             | 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 |      |  |  |   |     
|                             |                            |                     |           |             |   |          |            |            |   |   |      |      |  |  |   |     

The exercise prices for options outstanding and
exercisable as of December 31, 2001 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, 2001: |                |             |  |             |  |          |  |             |  |          |   |      |  |  |  |           |  |  |   |     
|                         | $0.13 - $ 2.50 |             |  | 5,847,460   |  |          |  | 8.2         |  |          | $ | 1.13 |  |  |  | 2,148,691 |  |  | $ | 0.65 | 
|                         | $2.60 - $ 3.11 |             |  | 5,823,609   |  |          |  | 9.4         |  |          | $ | 3.09 |  |  |  | 607,398   |  |  | $ | 3.06 | 
|                         | $3.25 - $ 6.00 |             |  | 5,779,703   |  |          |  | 8.5         |  |          | $ | 5.30 |  |  |  | 2,157,732 |  |  | $ | 5.28 | 
|                         | $6.18 - $32.06 |             |  | 4,388,437   |  |          |  | 8.8         |  |          | $ | 9.94 |  |  |  | 1,153,659 |  |  | $ | 9.04 | 
|                         |                |             |  |             |  |          |  |             |  |          |   |      |  |  |  |           |  |  |   |     
|                         | $0.13 - $32.06 |             |  | 21,839,209  |  |          |  | 8.7         |  |          | $ | 4.53 |  |  |  | 6,067,480 |  |  | $ | 4.15 | 
|                         |                |             |  |             |  |          |  |             |  |          |   |      |  |  |  |           |  |  |   |     



| |                                   
| | ----------------------------------
| | 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 Plan. In addition,
the aggregate number of

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##### Table of Contents



TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

shares reserved for issuance under the Plan will
be increased automatically on January 1 of each year starting on
January 1, 2002 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 shares in the
Purchase Plan were increased by 1,304,189 shares. As of
December 31, 2001, 324,868 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 graded vesting method, over
the four year vesting periods of the individual stock options.
During 2001 and 2000, the Company recorded $16.6 million
and $13.1 million, respectively, of net amortization
expense related to deferred stock compensation.



| |                                         
| | ----------------------------------------
| | 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.

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 6.69% 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.

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.

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
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, 2001, the
Company had 1,682,368 shares that are subject to variable stock
compensation at prices ranging from $0.13 to $1.25 per share. In
the fourth quarter of fiscal 2001,

56



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##### Table of Contents



TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 $1.6 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 they intend to exercise before
the stock price exceeds $11.50 per share and they do not believe
they will incur variable stock compensation on these shares.

Because variable stock compensation expense is
calculated based on the then current market value of the
Companys common stock, 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. During the remaining life of the outstanding
notes, the Companys reported stock compensation will be
adjusted upward (expense) or downward (benefit) at
each period end using the methodology described above. Because
variable stock compensation expense is calculated based on the
then current market value of the Companys common stock,
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.

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. Options granted prior to 2000
were determined based on the minimum value method. The weighted
average assumptions used to determine fair value were as follows:

|                                  |  |              |     |              |  |      |     |      |  |      |     |      |  |  |     |   |  |  |     |  |  |  |     | 
|--------------------------------- |  | ------------ | --- | ------------ |  | ---- | --- | ---- |  | ---- | --- | ---- |  |  | --- | - |  |  | --- |  |  |  | --- | 
|                                  |  |              |     |             
|                                  |  | Options      |     | ESPP        
|                                  |  |              |     |             
|                                  |  |              |     |             
|                                  |  | Years Ended  |     | Years Ended 
|                                  |  | December 31, |     | December 31,
|                                  |  |              |     |             
|                                  |  | 2001         |     | 2000         |  | 1999 |     | 2001 |  | 2000 |     | 1999
|                                  |  |              |     |              |  |      |     |      |  |      |     |     
|Expected volatility               |  |              | 1.1 |              |  |      | 0.8 |      |  |      | N/A |      |  |  | 1.3 |   |  |  | N/A |  |  |  | N/A | 
|Expected life of options in years |  |              | 4   |              |  |      | 4   |      |  |      | 4   |      |  |  | 0.5 |   |  |  | N/A |  |  |  | N/A | 
|Risk-free interest rate           |  |              | 4.4 | %            |  |      | 6.5 | %    |  |      | 6.1 | %    |  |  | 3.8 | % |  |  | N/A |  |  |  | N/A | 
|Expected dividend yield           |  |              | 0   |              |  |      | 0   |      |  |      | 0   |      |  |  | 0   |   |  |  | N/A |  |  |  | N/A | 

57



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##### Table of Contents



TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 graded
vesting methodology. Pro forma information follows:

|                                       |             |                                       |   |          |   |      |   |          |   |  |   |         |  
|-------------------------------------- | ----------- | ------------------------------------- | - | -------- | - | ---- | - | -------- | - |  | - | ------- | -
|                                       |             |                                      
|                                       |             | Years Ended December 31,             
|                                       |             |                                      
|                                       |             | 2001                                  |   | 2000     |   | 1999
|                                       |             |                                       |   |          |   |     
|                                       |             |                                      
|                                       |             | (In thousands, except per share data)
|Net loss                               |             |                                       |   |          |   |      |   |          |   |  |   |        
|                                       | As reported |                                       | $ | (171,251 | ) |      | $ | (97,705  | ) |  | $ | (41,089 | )
|                                       | Pro forma   |                                       | $ | (189,945 | ) |      | $ | (112,406 | ) |  | $ | (41,601 | )
|Net loss per share  basic and diluted |             |                                       |   |          |   |      |   |          |   |  |   |        
|                                       | As reported |                                       | $ | (1.33    | ) |      | $ | (2.18    | ) |  | $ | (1.51   | )
|                                       | Pro forma   |                                       | $ | (1.47    | ) |      | $ | (2.51    | ) |  | $ | (1.53   | )

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

|                                       |                                                                                 |                                          |       |          |   |      |       |         |   |   |       |         |  
|-------------------------------------- | ------------------------------------------------------------------------------- | ---------------------------------------- | ----- | -------- | - | ---- | ----- | ------- | - | - | ----- | ------- | -
|                                       |                                                                                 |                                         
|                                       |                                                                                 | Years Ended December 31,                
|                                       |                                                                                 |                                         
|                                       |                                                                                 | 2001                                     |       | 2000     |   | 1999
|                                       |                                                                                 |                                          |       |          |   |     
|                                       |                                                                                 |                                         
|                                       |                                                                                 | (In thousands, except per share amounts)
|Basic and diluted:                     |                                                                                 |                                          |       |          |   |      |       |         |   |   |       |        
|                                       | Net loss                                                                        |                                          | $     | (171,251 | ) |      | $     | (97,705 | ) |   | $     | (41,089 | )
|                                       |                                                                                 |                                          |       |          |   |      |       |         |   |   |       |        
|Basic and diluted:                     |                                                                                 |                                          |       |          |   |      |       |         |   |   |       |        
|                                       | Weighted average shares outstanding                                             |                                          |       | 132,779  |   |      |       | 51,016  |   |   |       | 33,154  |  
|                                       | Less: Weighted average shares subject to
	repurchase                            |                                          |       | (3,777   | ) |      |       | (6,275  | ) |   |       | (5,918  | )
|                                       |                                                                                 |                                          |       |          |   |      |       |         |   |   |       |        
|                                       | Weighted average shares used in computing basic
	and diluted net loss per share |                                          |       | 129,002  |   |      |       | 44,741  |   |   |       | 27,236  |  
|                                       |                                                                                 |                                          |       |          |   |      |       |         |   |   |       |        
|Net loss per share  basic and diluted |                                                                                 | $                                        | (1.33 | )        |   | $    | (2.18 | )       |   | $ | (1.51 | )      
|                                       |                                                                                 |                                          |       |          |   |      |       |         |   |   |       |        

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 22,885,437 shares of common stock in 2001,
18,274,614 in 2000 and 10,783,392 shares in 1999, 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.

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 $945,000 was expensed as
compensation in 2000.

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.

58



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TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

13.     Income
Taxes

The Company recorded tax provisions of $500,000
in 1999. These taxes were withheld from license revenue received
from Toshiba in accordance with the United States-Japan tax
treaty. No tax provision was recorded during 2001 and 2000. 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 loss 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, and consist of:

|                                                 |  |                          |          |      |  |      |         |   |  |   |         |  
|------------------------------------------------ |  | ------------------------ | -------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                 |  |                         
|                                                 |  | Years Ended December 31,
|                                                 |  |                         
|                                                 |  | 2001                     |          | 2000 |  | 1999
|                                                 |  |                          |          |      |  |     
|Federal operating loss carryforwards             |  | $                        | 67,400   |      |  | $    | 43,600  |   |  | $ | 18,900  |  
|State operating loss carryforwards               |  |                          | 5,400    |      |  |      | 5,400   |   |  |   | 2,200   |  
|Federal tax credit carryforwards                 |  |                          | 6,500    |      |  |      | 3,700   |   |  |   | 2,200   |  
|State tax credit carryforwards                   |  |                          | 3,300    |      |  |      | 2,000   |   |  |   | 1,450   |  
|Non-deductible reserves and capitalized expenses |  |                          | 29,600   |      |  |      | 4,040   |   |  |   | 960     |  
|                                                 |  |                          |          |      |  |      |         |   |  |   |         |  
|                                                 |  |                          | 112,200  |      |  |      | 58,740  |   |  |   | 25,710  |  
|Less: Valuation allowance                        |  |                          | (112,200 | )    |  |      | (58,740 | ) |  |   | (25,710 | )
|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 $53.4 million in 2001,
$33.0 million in 2000 and $13.3 million in 1999.

The federal operating loss and tax credit
carryforwards listed above will expire between 2010 and 2021, if
not previously utilized. The state operating loss and tax credit
carryforwards will expire beginning in 2003, 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.

14.     Legal
Proceedings

Between June 25, 2001 and the effective
date, the Company, 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) These actions were
consolidated into a single action by a court order dated
October 3, 2001. Plaintiffs filed their Consolidated
Amended Complaint on December 20, 2001. The Consolidated
Amended Complaint purports to be a class action on behalf of all
persons, other than the individual defendants and the other
officers of Transmeta, who purchased or otherwise acquired common



---

1 Hertzfeld, 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.).


59



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##### Table of Contents



TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

stock of Transmeta during the period from
November 7, 2000 to July 19, 2001. The Consolidated
Amended Complaint alleges various violations of federal
securities law, including violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder, and Sections 11 and 15 of the
Securities Act of 1933. The Consolidated Amended Complaint
further alleges that the Company and certain defendants made
materially misleading statements or material omissions in
various contexts, including the registration statement and
prospectus for the initial public offering of the Companys
common stock on November 7, 2000. Plaintiffs seek
unspecified damages, unspecified injunctive relief, interest,
attorney and expert fees, and other litigation costs.

On January 17, 2002, the Company timely
filed a motion to dismiss all claims of the Consolidated Amended
Complaint as to all defendants. On March 5, 2002, the court
granted in part and denied in part the Companys motion to
dismiss the Consolidated Amended Complaint, and directed
plaintiffs to file an amended pleading by March 22, 2002.
Plaintiffs filed their Second Amended Complaint on
March 22, 2002. The Company believes that the allegations
in the Second Amended Complaint and the antecedent complaints
are without merit and intends to defend the consolidated action
vigorously. The Company intends to file a motion to dismiss the
Second Amended Complaint in April 2002. Based upon information
presently known to management, the Company does not believe that
the ultimate resolution of these lawsuits will have a material
adverse effect on its business, including our financial
position, results of operations or cash flows.

In addition, the Company and certain of its
directors and officers have been named as defendants in two
shareholder class actions filed in the United States District
Court for the Southern District of New York: Schwarz v.
Transmeta Corp., et al.(Case No. 01 CV 6492,
S.D.N.Y.) and Robin v. Transmeta Corp., et al.(Case
No. 01 CV 10060, S.D.N.Y.). By an order dated
October 18, 2001, the court dismissed all claims against
the Company and its directors and officers in the Schwarzcase without prejudice to plaintiffs right to pursue
such claims in the consolidated class action pending in the
Northern District of California. By an order dated
January 15, 2002, the court in New York ordered that all
matters in the Southern District of New York be consolidated in
the Schwarz case. The Company believes that the
allegations in the Schwarzand Robin complaints
are without merit and intends to defend any consolidated action
vigorously. Based upon information presently known to
management, the Company does not believe that the ultimate
resolution of these lawsuits will have a material adverse effect
on its business, including our financial position, results of
operations or cash flows.

Between June 28, 2001 and the effective
date, the directors and certain officers of the Company were
sued in three purported shareholder derivative actions.(2) The
three cases have been effectively consolidated in Santa Clara
Superior Court by an order dated October 10, 2001. All
three complaints are based upon the same general allegations set
out in the purported shareholder class actions described above.
The complaints allege that certain of the individual defendants
sold shares of Transmeta Corporation common stock while in
possession of material inside information, purportedly in breach
of their fiduciary duties to the Company, and that the so-called
Selling Defendants were aided and abetted by the other
individual defendants. The complaints also allege gross
mismanagement, waste of corporate assets and
abuse of control, all based upon the same general
allegations.

By a stipulated order dated January 8, 2002,
the Court ordered plaintiffs to file a consolidated amended
complaint by April 29, 2002, and ordered that the
defendants will have 45 days from the date of any such
filing to answer or otherwise respond. Plaintiffs have
propounded some limited discovery, which has been stayed by the
same January 8 stipulated order until April 15, 2002. The
Company believes that the allegations in these



---

2 Pereira v. David Ditzel, et al.
(Case No. CV 799491) and Sweeney v. Mark Allen, et
al. (Case No. CV 799667), both 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.


60



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##### Table of Contents



TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

purported derivative actions are also without
merit and intends to challenge the complaints and defend the
actions vigorously. Based upon information presently known to
management, the Company does not believe that the ultimate
resolution of these lawsuits will have a material adverse effect
on its business, including our financial position, results of
operations or cash flows.

15.     Subsequent
Event

On January 10, 2002, the Company entered 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.

61



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##### Table of Contents



TRANSMETA CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Quarterly
Results of Operations (Unaudited)

The following table presents Transmetas
unaudited quarterly statement of operations data for the four
quarters of fiscal 2000 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,
|                                    |                                                             | 2001                     |         | 2001      |        | 2001     |         | 2001     |        | 2000     |         | 2000      |        | 2000     |         | 2000    
|                                    |                                                             |                          |         |           |        |          |         |          |        |          |         |           |        |          |         |         
|                                    |                                                             |                         
|                                    |                                                             | (In thousands)          
|Revenue:                            |                                                             |                          |         |           |        |          |         |          |        |          |         |           |        |          |         |          |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|                                    | Product                                                     |                          | $       | 1,462     |        |          | $       | 5,027    |        |          | $       | 10,531    |        |          | $       | 18,570   |        |   | $       | 12,363 |        |   | $       | 3,459  |        |   | $       | 354    |        |   | $       | 4      |       
|Cost of product revenue             |                                                             |                          | 1,451   |           |        |          | 2,837   |          |        |          | 34,026  |           |        |          | 10,381  |          |        |   | 7,156   |        |        |   | 2,082   |        |        |   | 219     |        |        |   | 4       |       
|                                    |                                                             |                          |         |           |        |          |         |          |        |          |         |           |        |          |         |          |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|Gross profit                        |                                                             |                          | 11      |           |        |          | 2,190   |          |        |          | (23,495 | )         |        |          | 8,189   |          |        |   | 5,207   |        |        |   | 1,377   |        |        |   | 135     |        |        |   |        |       
|                                    |                                                             |                          |         |           |        |          |         |          |        |          |         |           |        |          |         |          |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|Operating expenses                  |                                                             |                          |         |           |        |          |         |          |        |          |         |           |        |          |         |          |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|                                    | Research and development                                    |                          |         | 16,251    |        |          |         | 17,029   |        |          |         | 17,233    |        |          |         | 17,126   |        |   |         | 17,766 |        |   |         | 17,100 |        |   |         | 15,072 |        |   |         | 11,477 |       
|                                    | Purchased in-process research and development               |                          |         |          |        |          |         |         |        |          |         | 13,600    |        |          |         |         |        |   |         |       |        |   |         |       |        |   |         |       |        |   |         |       |       
|                                    | Selling, general and administrative                         |                          |         | 8,835     |        |          |         | 8,775    |        |          |         | 8,860     |        |          |         | 8,990    |        |   |         | 8,561  |        |   |         | 7,037  |        |   |         | 5,781  |        |   |         | 5,666  |       
|                                    | Amortization of deferred charges, patent and
	patent rights |                          |         | 5,044     |        |          |         | 5,024    |        |          |         | 4,109     |        |          |         | 3,379    |        |   |         | 2,986  |        |   |         | 2,567  |        |   |         | 2,614  |        |   |         | 2,249  |       
|                                    | Impairment write-off of deferred charges                    |                          |         | 16,564    |        |          |         |         |        |          |         |          |        |          |         |         |        |   |         |       |        |   |         |       |        |   |         |       |        |   |         |       |       
|                                    | Stock compensation                                          |                          |         | 5,131     |        |          |         | 4,046    |        |          |         | 5,650     |        |          |         | 6,127    |        |   |         | 5,949  |        |   |         | 3,967  |        |   |         | 2,014  |        |   |         | 1,126  |       
|                                    |                                                             |                          |         |           |        |          |         |          |        |          |         |           |        |          |         |          |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|                                    |                                                             | Total operating expenses |         |           | 51,825 |          |         |          | 34,874 |          |         |           | 49,452 |          |         |          | 35,622 |   |         |        | 35,262 |   |         |        | 30,671 |   |         |        | 25,481 |   |         |        | 20,518 | 
|                                    |                                                             |                          |         |           |        |          |         |          |        |          |         |           |        |          |         |          |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|Operating loss                      |                                                             |                          | (51,814 | )         |        |          | (32,684 | )        |        |          | (72,947 | )         |        |          | (27,433 | )        |        |   | (30,055 | )      |        |   | (29,294 | )      |        |   | (25,346 | )      |        |   | (20,518 | )     
|                                    | Interest and other income                                   |                          |         | 2,324     |        |          |         | 3,332    |        |          |         | 3,959     |        |          |         | 5,072    |        |   |         | 4,207  |        |   |         | 2,022  |        |   |         | 2,007  |        |   |         | 938    |       
|                                    | Interest expense                                            |                          |         | (218      | )      |          |         | (232     | )      |          |         | (265      | )      |          |         | (345     | )      |   |         | (393   | )      |   |         | (397   | )      |   |         | (426   | )      |   |         | (450   | )     
|                                    |                                                             |                          |         |           |        |          |         |          |        |          |         |           |        |          |         |          |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|Net loss                            |                                                             | $                        | (49,708 | )         |        | $        | (29,584 | )        |        | $        | (69,253 | )         |        | $        | (22,706 | )        |        | $ | (26,241 | )      |        | $ | (27,669 | )      |        | $ | (23,765 | )      |        | $ | (20,030 | )     
|                                    |                                                             |                          |         |           |        |          |         |          |        |          |         |           |        |          |         |          |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|Net loss per share                  |                                                             | $                        | (0.38   | )         |        | $        | (0.22   | )        |        | $        | (0.54   | )         |        | $        | (0.18   | )        |        | $ | (0.30   | )      |        | $ | (0.82   | )      |        | $ | (0.73   | )      |        | $ | (0.67   | )     
|                                    |                                                             |                          |         |           |        |          |         |          |        |          |         |           |        |          |         |          |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|Weighted average shares outstanding |                                                             |                          | 130,874 |           |        |          | 131,560 |          |        |          | 128,478 |           |        |          | 125,970 |          |        |   | 86,742  |        |        |   | 33,688  |        |        |   | 32,452  |        |        |   | 29,787  |       
|                                    |                                                             |                          |         |           |        |          |         |          |        |          |         |           |        |          |         |          |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       

62



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##### Table of Contents






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
2002 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 2002
Annual Meeting.




Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

This information required by this item is
incorporated by reference to the caption Principal
Stockholders in our Proxy Statement for our May 2002
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 2002
Annual Meeting.




PART IV




Item 14.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.                                                                                                                                                                                                                                 

63



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##### Table of Contents



|        |       |               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------- | ----- | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |              
|Number  |       | Exhibit Title
|        |       |              
|        | 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 (File No. 333-77052) (the
	S-8 Registration Statement).**                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 10.05 |               |  | 2000 Employee Stock Purchase Plan, incorporated
	by reference to Exhibit 4.07 to the S-8 Registration
	Statement.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 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.                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 10.16 | *             |  | Full Recourse, Unsecured Promissory Note, dated
	April 10, 2001, between Transmeta and James Chapman.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

64



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##### Table of Contents



|        |       |               |  |                                                                                                                                                                                          
|------- | ----- | ------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |              
|Number  |       | Exhibit Title
|        |       |              
|        | 10.17 | *             |  | Option Amendment and Termination Agreement, dated
	November 16, 2001, between Transmeta and Merle McClendon.**                                                                           
|        | 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.**         
|        | 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.**
|        | 10.20 | *             |  | Separation Agreement, dated as of
	December 11, 2001, between Transmeta and Mark Allen.                                                                                                  
|        | 10.21 | *             |  | Separation Agreement, dated as of
	December 11, 2001, between Transmeta and David Jensen.                                                                                                
|        | 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.                                                                                                                                                   



---



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



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

(b) Reports on Form 8-K

Not applicable.

(c) Exhibits

See Item 14(a)(3) above.

(d) Financial Statement Schedules

See Item 14(a)(2) above.

65



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##### Table of Contents






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/ MERLE A. MCCLENDON

| |                        
| | -----------------------
| |                        
| | Merle A. McClendon     
| | Chief Financial Officer

Dated:




POWER OF ATTORNEY

By signing this Form 10-K below, I hereby
appoint each of Murray A. Goldman and Merle A.
McClendon, 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/ MURRAY A. GOLDMANMurray A. Goldman   |  | Chief Executive Officer and Director [Principal
	Executive Officer]                                   |  |      | 3/25/02 | 
|                                        
|/s/ MERLE A. MCCLENDONMerle A. McClendon |  | Chief Financial Officer and Secretary [Principal
	Financial Officer and Principal Accounting Officer] |  |      | 3/25/02 | 
|                                        
|/s/ R. HUGH BARNESR. Hugh Barnes         |  | Director                                                                                              |  |      | 3/25/02 | 
|                                        
|Larry R. Carter                          |  | Director                                                                                              |  |      |         | 
|                                        
|/s/ DAVID R. DITZELDavid R. Ditzel       |  | Director                                                                                              |  |      | 3/25/02 | 
|                                        
|/s/ WILLIAM P. TAIWilliam P. Tai         |  | Director                                                                                              |  |      | 3/25/02 | 
|                                        
|/s/ T. PETER THOMAST. Peter Thomas       |  | Director                                                                                              |  |      | 3/25/02 | 

66



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##### Table of Contents






EXHIBIT INDEX

|        |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------- | ----- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | 
|Number  |       | 
|        |       | 
|        | 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 (File No. 333-77052) (the
	S-8 Registration Statement).**                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 10.05 |  |  | 2000 Employee Stock Purchase Plan, incorporated
	by reference to Exhibit 4.07 to the S-8 Registration
	Statement.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 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.                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 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.**                                                                                                                                                                                                                                                                                                                                                                                                                                                     



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##### Table of Contents



|        |       |   |  |                                                                                                                                                                                        
|------- | ----- | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  
|Number  |       |  
|        |       |  
|        | 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.                                                     
|        | 10.16 | * |  | Full Recourse, Unsecured Promissory Note, dated
	April 10, 2001, between Transmeta and James Chapman.**                                                                                
|        | 10.17 | * |  | Option Amendment and Termination Agreement, dated
	November 16, 2001, between Transmeta and Merle McClendon.**                                                                         
|        | 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.**       
|        | 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.**
|        | 10.20 | * |  | Separation Agreement, dated as of
	December 11, 2001, between Transmeta and Mark Allen.                                                                                                
|        | 10.21 | * |  | Separation Agreement, dated as of
	December 11, 2001, between Transmeta and David Jensen.                                                                                              
|        | 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.                                                                                                                                                 



---

* Filed herewith.

** Management contract or compensatory
arrangement.