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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K
                            ------------------------

      [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934

                      FOR THE YEAR ENDED DECEMBER 31, 2000

                                       OR

      [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934

                         FOR THE TRANSITION PERIOD FROM
                               --------------- TO
                               --------------- .

                        COMMISSION FILE NUMBER 000-31803

                             TRANSMETA CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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<S>                                                         <C>
                      DELAWARE                                                   77-0402448
              (STATE OF INCORPORATION)                                (IRS EMPLOYER IDENTIFICATION NO.)
</TABLE>

                   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

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

     Indicate by check mark 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.  [ ]

     As of February 23, 2001, there were 130,418,988 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 $28.75 for
the common stock as quoted by the Nasdaq National Market on that date), was
approximately $2.3 billion.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant's definitive Proxy Statement for its Annual
Meeting of Stockholders to be held in May 2001 are incorporated by reference
into Part III of this report on Form 10-K.

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                           FISCAL YEAR 2000 FORM 10-K

                             TRANSMETA CORPORATION

                                     INDEX

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  ITEM                                                                    PAGE
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                                    PART I

Item 1.   Business....................................................      1
Item 2.   Properties..................................................     13
Item 3.   Legal Proceedings...........................................     13
Item 4.   Submission of Matters to a Vote of Security Holders.........     13

                                   PART II

Item 5.   Market for Registrant's Common Equity and Related
          Stockholder Matters.........................................     14
Item 6.   Selected Financial Data.....................................     15
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results
          of Operations...............................................     17
Item 7A.  Quantitative and Qualitative Disclosures About Market
          Risk........................................................     33
Item 8.   Financial Statements and Supplementary Data.................     34
Item 9.   Changes in and Disagreements with Accountants on Accounting
          and
          Financial Disclosure........................................     57

                                   PART III

Item 10.  Directors and Executive Officers of the Registrant..........     57
Item 11.  Executive Compensation......................................     57
Item 12.  Security Ownership of Certain Beneficial Owners and
          Management..................................................     57
Item 13.  Certain Relationships and Related Transactions..............     57

                                   PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form
          8-K.........................................................     57

Signatures............................................................     60
</TABLE>

     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(TM), the Transmeta logo, Crusoe(TM), the
Crusoe logo, Code Morphing(TM), LongRun(TM) and Midori(TM) 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 based on our current
expectations, estimates and projections about our industry, management's beliefs
and certain assumptions made by us. Words such as "anticipates," "expects,"
"intends," "plans," believes" or similar expressions are intended to identify
forward-looking statements. These statements include, among other things,
statements concerning our anticipated growth strategies, anticipated trends in
our business and the markets in which we operate, our expectations for our
future performance and the market acceptance of our products, our need for
additional capital, and the status of evolving technologies and their growth
potential. In addition, the section entitled "Risks That Could Affect Future
Results" in Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" consists primarily of forward-looking
statements. Forward looking-statements are only predictions, based upon our
current expectations about future events. We cannot guarantee future results,
performance or achievements or that predictions or current expectations will be
accurate.

     Forward-looking statements are subject to risks, uncertainties and
assumptions that are difficult to predict. Therefore, our actual results could
differ materially and adversely from those expressed in any forward-looking
statements as a result of various factors. The section entitled "Risks That
Could Affect Future Results" in Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" discusses some of the
important risk factors that may affect our business, results of operations and
financial condition. You should carefully consider those risks. Investors are
cautioned not to place undue reliance on these forward-looking statements that
speak only as of the date of this report. We undertake no obligation to revise
or update any forward-looking statements for any reason.

                                     PART I

ITEM 1. BUSINESS

OVERVIEW

     Transmeta Corporation develops and sells software-based microprocessors and
develops additional hardware and software technologies used to build Mobile
Internet Computers, which are portable computing and communication devices that
are compatible with PC software and provide sufficient performance to run
demanding Internet media applications while also offering long battery life.
Mobile Internet Computers include traditional notebook computers and newly
emerging Internet appliances. We believe that Mobile Internet Computers using
our products will allow users to access the Internet virtually anywhere and
anytime, and to benefit from the same full-featured computing experience that
they currently enjoy with their desktop PCs. Crusoe is the name for our
software-based family of microprocessors that operate with low power
consumption, offer high performance and are compatible with software designed
for IBM x86 PC compatible computers. Transmeta offers Crusoe microprocessors
suitable for a broad set of existing and emerging end markets.

INDUSTRY BACKGROUND

  The Evolution of the Desktop Personal Computer Toward Mobile Internet
Computing

     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. Electronic mail, or email, is a widely used means of communication
and information delivery. Many PC users spend a significant portion of their PC
usage time browsing the World Wide Web. The Internet has also become an
efficient means of conducting personal and business transactions, primarily
through business-oriented websites and online business exchanges. Internet usage
has proliferated to the point where, out of a United States population of 273
million people, International Data Corporation, or IDC, estimates that more than
100 million access the Internet.

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     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. As people become more dependent upon email and visiting
their favorite sites on the World Wide Web, they want to have Internet access
wherever they go. 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. According to IDC, approximately 27 million notebook
computers were shipped during 2000 and this number is forecasted to grow to
approximately 35 million in 2002.

     As users seek access to the Internet anytime and anywhere, we believe they
will want the same 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 devices.

     As mobile computer users increasingly use wireless technologies to access
the Internet, they are likely to expect the same full Internet experience that
they currently have with a desktop PC. We believe this ability to access the
entire Internet, anywhere and anytime, with mobile computing devices will change
people's view of communication like cellular telephones changed how people use
the telephone. We refer to these devices, which include notebook computers and
newly emerging devices such as full-featured Internet appliances, as "Mobile
Internet Computers."

     The demand for Internet access has spawned an emerging market for simpler
computing devices dedicated to Internet applications. Often referred to as
"Internet appliances," these devices are designed to provide the user with an
Internet experience comparable to that delivered by a desktop PC. These
appliances may take many forms, such as a handheld tablet computer in which a
touchpad is incorporated in the screen or a computer consisting of a flat panel
display with all of the electronics behind the display panel. As these devices
proliferate throughout the home and office, other types of Internet appliances
are emerging. Examples of these Internet appliances include systems that bring
the Internet into the home or office and distribute it to a number of other
computers. These devices include set-top boxes and residential gateways. Some of
these devices will transform the wired Internet connection into radio-based
communication for other Internet appliances in the home. For example, new
wireless radio standards are being used to provide high-speed wireless Internet
connections in the home. Today the market for Internet appliances is in its
infancy, but is predicted to grow rapidly. IDC forecasts that the market for
Internet appliances and other similar devices that access the Internet will grow
to more than 75 million units in 2003.

     The personal computer has improved tremendously since the introduction of
the first 64KB 5-MHz IBM x86 PC in 1981. While hardware performance and memory
capacity have each increased by a factor of about one thousand since the
original IBM x86 PC, software compatibility has remained largely unchanged.
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. Adherence to IBM x86 PC compatibility has been critical for the
success of both new PCs and thousands of PC-oriented software applications.
Microsoft's Windows95, Windows98 and Windows Millennium Edition operating
systems, for example, are only available for x86 compatible PCs.

     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. Software
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

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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.

  Desirable Features for Mobile Internet Computers

     Today's mobile computers can still be improved in many ways. For users to
obtain a truly satisfying Internet computing experience and for the markets for
notebook computers and Internet appliances to reach their full potential, a wide
range of user requirements must be simultaneously satisfied. To date, no
technology has enabled the full mobile Internet experience that incorporates the
wide range of features that users desire. We believe that the successful
evolution of Mobile Internet Computers will require a single solution that
addresses all of the following user desires:

     Longer Battery Life. As users become increasingly mobile in their business
and personal lives, their ability to plug their Internet computing devices into
an electrical socket becomes increasingly constrained. To mitigate this problem,
Mobile Internet Computing devices need to run several hours on battery power
alone, significantly longer than the two to three hours often experienced with
existing notebook computers. In addition, because mobile users tend to run the
same high performance applications whether their computers are plugged into an
electric socket or running on battery power, they will want several hours of
battery life without noticeably sacrificing performance or portability. For
example, the ability of a battery to last for the entire duration of a
transatlantic airline flight would greatly increase the utility of notebook
computers.

     Lighter Weight. Lighter and thinner notebook computers have grown in
popularity as people who need to stay connected to the Internet have become less
willing to travel regularly with heavy notebook computers. Notebook computers
can weigh as much as 7 to 10 pounds, making them cumbersome to carry. One of the
heaviest components of notebook computers is the battery, but reducing the
battery size to reduce weight also reduces the computer's running time before it
must be recharged.

     Comparable Performance. Most people are accustomed to accessing the
Internet through an x86 desktop PC. Playing a DVD movie, downloading an MPEG-4
streaming video movie or running a Macromedia Flash plug-in, for example,
requires levels of performance comparable to that of a typical 400 MHz desktop
x86 PC. As mobile computing becomes a more integral part of daily business and
personal life, users will expect comparable levels of performance from their
Mobile Internet Computers.

     Full x86 Software and Internet Compatibility. The majority of Internet
sites presume the user has an x86 notebook computer or desktop PC. Users will
expect the same full-featured Internet experience from any new Mobile Internet
Computer as they enjoy with their desktop PC. Internet users require x86-based
plug-in applications and general application software in order to enjoy an
experience comparable to that of the desktop PC. Thus, we believe that
compatibility with the x86 instruction set and basic PC system infrastructure
will be important for any Mobile Internet Computer.

     Cost Effective. For Mobile Internet Computers to proliferate, they must be
priced at levels that are suitable for consumer electronic devices. Particularly
in the Internet appliance market, consumers are expected to look for moderately
priced alternatives to the desktop PC and notebook computer to be used
throughout the home and office.

     Cool and Quiet. As Mobile Internet Computers become more consumer-oriented,
issues such as cooling fan noise and surface heat will become increasingly
important to minimize the annoyance and discomfort associated with loud fans and
hot notebook computers. Ideally, Mobile Internet Computers will remain cool
without requiring a noisy fan.

  The Industry Microprocessor Dilemma

     Within a notebook computer or Internet appliance, the microprocessor
usually dictates the characteristics of the entire computer system.
Unfortunately, no single microprocessor has simultaneously enabled all of the
characteristics users desire for full-featured Mobile Internet Computers. These
limitations force system designers to make choices among various features such
that only a subset of user requirements is satisfied
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when using any traditional microprocessor. For example, a common tradeoff in
existing products is that x86 compatibility is sacrificed in order to achieve
longer battery life.

     Two types of microprocessor architectures dominate today's marketplace.
They are generically known as reduced instruction set computer, or RISC, and
complex instruction set computer, or CISC. RISC is represented by a variety of
different microprocessor architectures such as those licensed from ARM Holdings
and MIPS Technologies, Power PC from IBM and Motorola, and SPARC from Sun
Microsystems. CISC is typically represented by microprocessors found in x86 PCs.
RISC microprocessors were developed in the 1980s as a way to use a simpler
microprocessor design to provide higher performance. However, RISC instruction
sets are not compatible with x86 PC software, and systems that use this
architecture have much more limited software availability. Over recent years,
CISC microprocessor design teams have found that they were able to achieve
levels of performance similar to RISC chips by adding further complexity to
their designs. However, more complex designs have a number of other drawbacks,
including additional power usage and larger, more costly chips. When considering
alternatives among commonly available microprocessors, system designers
typically have the following choices and tradeoffs:

     - High performance, high power x86 compatible microprocessors. These are
       microprocessors typically used in a mobile or desktop PC. For a Mobile
       Internet Computer, the most important user disadvantages of these
       microprocessors are high power consumption and limited battery life.

     - Low-performance x86 compatible microprocessors. These devices are usually
       based on an older generation microprocessor, such as a 486 generation
       design. The cost of these older designs is usually very low, but
       performance is often not sufficient to run modern multimedia applications
       such as MPEG-4 video movies.

     - High performance, high power RISC microprocessors. These microprocessors
       are often found in RISC workstations and do not provide compatibility
       with x86 PC application software or x86 plug-ins.

     - Low power RISC microprocessors. There are several low power RISC
       microprocessors that can provide excellent battery life, but the lack of
       x86 compatibility limits their ability to provide the full-featured
       Internet experience, which requires the ability to run PC software and
       x86 plug-ins.

     We believe that no single microprocessor to date has provided enough of the
desired characteristics for Mobile Internet Computers to satisfy user
requirements and to achieve their full market potential. As a result, systems
developers must compromise their designs and speculate regarding the features
consumers might be willing to sacrifice as part of their Mobile Internet
Computing experience.

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 simultaneously offer long battery life, high performance
and x86 compatibility. 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 of our Crusoe microprocessors is called Code
Morphing software. The primary function of Code Morphing software is to provide
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. This translation process is undetectable to the end user.
In addition, Code Morphing software continuously learns about the programs run
by a user in order to re-optimize the operation of those programs so that they
run on Crusoe with the lowest possible power usage and highest possible
performance.

     The hardware component of our 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 allows
us to

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achieve high performance with a relatively simple internal design primarily
optimized for speed and low power. 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 novel software-based microprocessor approach can help computers built
with Crusoe microprocessors to achieve the following benefits:

     - Longer Battery Life. Crusoe microprocessors consume less power than most
       other x86 microprocessors -- around 1 watt or less in typical
       applications. Since the microprocessor is often the largest user of
       overall system power, Crusoe's lower power consumption translates into
       longer battery life for a given battery size.

     - 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, system designers have the option
       to build lighter weight computers with smaller batteries. Crusoe's lower
       power consumption also means that systems can be designed without heavy
       components used to eliminate heat, such as a fan or heat pipe, which add
       additional weight and thickness.

     - Comparable Performance. Crusoe microprocessors provide performance
       comparable to that of a typical x86 desktop PC. For example, Crusoe
       microprocessors offer sufficient performance for highly computational
       multimedia tasks such as software decoding a DVD movie.

     - Full x86 and Internet Software Compatibility. Crusoe microprocessors are
       compatible with software written for the x86 PC and the Internet. This
       allows Crusoe microprocessors to 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 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. Because Crusoe microprocessors consume low power,
       computers using Crusoe generally do not require a cooling fan. This
       eliminates fan noise, fan weight, fan cost and power consumption by the
       fan itself. We believe that cool and quiet computers will be increasingly
       valued as Internet appliances become more common in the home.

     - Downloadable Over the Internet. Because Crusoe is implemented with
       software, we can send new versions of Code Morphing software over the
       Internet. We can use this feature to send product updates to customers,
       as well as to provide specialized versions with additional diagnostic
       capabilities, or even to fix bugs that may be found at a future time.

     We believe that we have one of the foremost combined hardware and software
engineering teams involved with microprocessor design. David Ditzel, our Vice
Chairman and Chief Technology Officer and a co-founder of Transmeta, is a
pioneer designer in the microprocessor arena. Over the last 25 years, he co-
developed reduced instruction set computer, or RISC, microprocessor technology
while employed at AT&T's Bell Laboratories, and was director of SPARC
Laboratories and Chief Technical Officer of Sun Microsystems' Microelectronics
division. We have recruited a talented engineering staff in both hardware and
software areas consisting of many well respected senior engineers. For example,
we employ Linus Torvalds, the originator of the Linux operating system, to work
on a variety of software projects within the Crusoe solution.

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STRATEGY

     Our objective is to provide industry-leading low power processing solutions
combined with 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 extend our expertise in software-based microprocessor technology to
provide differentiated products to the market. We intend 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 intend to exploit the unique characteristics of
software to continue to move additional hardware features into software. We plan
to 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 further improve performance and lower power consumption.

     Focusing on the Notebook Computer and Mobile Internet Appliance
Markets. Our initial goal is to target our Crusoe microprocessors at growing
markets where low power, mobility and x86 PC software compatibility are
paramount, such as in the Mobile Internet Computing market. We believe that we
are well positioned to be the leading microprocessor solution for Mobile
Internet Computing devices, which are at the convergence point between
communications and computing. Our initial products are focused on the growing
ultra-light, less than 4 pounds, mobile notebook computer market, which seeks
long battery life combined with high performance. We are also focused on the
evolving Internet appliance market, where low power consumption and low cost are
important.

     Developing Additional Low Power Markets Beyond Mobile Computing. We believe
that there are a number of new market opportunities for our Crusoe
microprocessors where low power 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 developing
interest in a new type of high-density web server, where the critical factor is
the number of transactions processed per watt per cubic foot. Crusoe's low power
allows OEM's to pack hundreds of processor-based server cards in a space
normally configured for just a few dozen server cards. This is an application
for which Crusoe's low power features are particularly attractive.

     Developing Relationships With Companies and Communities 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 developed a working
relationship with Microsoft to ensure compatibility with their software products
and to collaborate on future products. We also work closely with the Linux
community to develop new features for our customized version of Linux, called
the Midori Project (previously referred to as Mobile Linux). The Midori Project
is an open source program designed to allow programmers to create enhancements
of Linux in low power, small form factor applications. We use IBM and TSMC to
fabricate silicon wafers using advanced process technologies rather than
developing our own manufacturing facilities. We believe that these relationships
will 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

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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 with software. Each of our
Crusoe microprocessors consists of both a software component and a hardware
component. When combined, these two components form a single 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 applications with performance levels comparable to
those of desktop computers.

     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 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. Because of the incremental
       approach, the Code Morphing process happens so quickly that it is not
       detectable to the end user. 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 the program sections so that they run on the
       Crusoe microprocessor with the lowest possible power consumption and
       highest possible performance.

     - 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
                                        7
<PAGE>   10

       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 has already completed reference designs
suitable for use in notebook computers, mobile Internet appliances 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 longest battery life and best 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 miscellaneous
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 tune the computer system for the
longest possible 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.

                                        8
<PAGE>   11

     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.

     Midori Project (formerly, Mobile Linux). Particularly for Internet
appliances, we find that our potential customers desire customized versions of
the Linux operating system. We have substantial expertise in the Linux operating
system. Linus Torvalds, the creator of Linux, and several other well-known
contributors to Linux and Linux standards are employees of Transmeta. We use
this expertise to work with our customers to port, customize and otherwise
provide enhancements to Linux that work with the different Crusoe-powered
Internet appliance devices that our customers are designing. We have developed a
customized version of Linux, called Midori, that enhances the Linux operating
system to add power management functions, to operate without a hard disk drive
and to use a compressed file system, so that programs can be stored more
efficiently in memory. Following the open source model, we intend to release our
changes for the Midori source code to the Linux community.

     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 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 AND PRODUCTS UNDER DEVELOPMENT

     In January 2000, we introduced our Crusoe family of microprocessors. We
expect to use the name Crusoe to represent current and future products, and to
use this single brand name to represent characteristics of long battery life,
x86 PC software compatibility and high performance. The different microprocessor
models in the Crusoe family offer different levels of performance and different
cost structures. We have found that the marketplace divides Mobile Internet
Computing into two distinct markets: notebook computers and Internet appliances.
Notebook computers usually run a version of the Microsoft Windows operating
system. This market demands higher performance, longer battery life and x86
compatibility and is less price sensitive than the Internet appliance market. To
address the notebook computer market, we have developed the
                                        9
<PAGE>   12

TM5x00 series of Crusoe microprocessors. In the market for Internet appliances,
compatibility with the x86 instruction set is important, but cost can take a
higher level of importance. We have seen a growing interest in the Linux
operating system for this market. To address the newly emerging Internet
appliance market, we have developed the TM3x00 series of Crusoe microprocessors.
The price range for our TM3x00 series for Internet appliances is $50 to $80 per
microprocessor. The price range for our TM5x00 series for notebook computers is
$100 to $180 per microprocessor. The price ranges of these products are subject
to change.

     TM3x00 Series for Internet Appliances. The TM3200 is a Crusoe
microprocessor intended for Internet appliance computers running the Linux
operating system. This microprocessor is composed of Transmeta's Code Morphing
software and a 128-bit very long instruction word, or VLIW, chip. The VLIW chip
runs at up to 400 MHz, contains a processing engine capable of executing up to
four basic operations every clock cycle, and has a 64 KB Level 1 instruction
cache and a 32 KB Level 1 data cache. In addition to the basic processor, the
TM3200 also contains a PCI bus interface and a single data rate synchronous
DRAM, or SDR SDRAM, controller. A PCI bus connects a processor to user
input/output devices such as a graphics controller or modem. The PCI bus
interface and SDR SDRAM controller, often collectively referred to as a
northbridge, are integrated directly onto the Crusoe microprocessor. The TM3200
is produced using a .22 micron CMOS technology.

     TM5x00 Series for Notebook Computers. The TM5400 and TM5600 are high
performance Crusoe microprocessors intended for notebook computers running the
Windows operating system. These microprocessors are composed of Transmeta's Code
Morphing software and a 128-bit VLIW microprocessor. The TM5400 was introduced
in January 2000 and contains a 128KB Level 1 cache and a 256KB Level 2 cache.
This part serves as the entry level solution for ultra-light mobile PC's.

     The TM5600 has the same features as the TM5400, with the exception of the
Level 2 cache. The TM5600 contains a 512KB Level 2 cache for greater performance
and thus serves as the higher end solution for ultra-light mobile PC's. The
TM5600 is produced using a .18 micron CMOS technology.

     In mid 2001, Transmeta expects to introduce the TM5800, which will be
similar to the TM5600, but will be produced using a .13 micron CMOS technology.
We expect that the TM5800 will offer both increased performance and reduced
power consumption for longer battery life. The TM5800 is designed to further
Transmeta's goal of enhancing power management and performance for the mobile
market, while maintaining x86 software compatibility.

CUSTOMERS

     We have and expect to continue to sell our products primarily to end
manufacturers of computer equipment. In September 2000, we began volume
shipments. Before that, we had only manufactured limited quantities of our
products. Sony Electronics currently uses our Crusoe microprocessor in its VAIO
PictureBook C1VN notebook computer. Fujitsu currently uses our Crusoe
microprocessor in its new FM Biblo Loox T and FM Biblo Loox S notebook
computers. Hitachi has announced three notebook computers and an Internet
appliance incorporating Crusoe. Gateway currently uses our Crusoe
microprocessors in Internet appliances in connection with America Online. NEC
has announced that it will use our Crusoe microprocessor in its new LaVie MX
notebook computer. During 2000, sales to Sony Electronics accounted for 59.5% of
our product revenue and sales to Fujitsu accounted for 27.8% of our product
revenue.

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 an office in Taiwan to provide sales
and customer support, and expect to do the same in Japan this year. 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 OEMs and major notebook computer manufacturers. In September 2000,
we appointed All American
                                        10
<PAGE>   13

Semiconductor as the exclusive distributor of our products in North America
until December 31, 2002, other than the right to sell products to 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 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.

     IBM, at its manufacturing plant in Vermont, has manufactured all of our
products to date. We have entered into a manufacturing agreement with IBM, which
expires no sooner than December 30, 2003. We may cancel any outstanding purchase
orders, but we must pay IBM for expenses it has incurred in connection with the
purchase orders through the date of cancellation. Our agreement with IBM does
not guarantee any level of production capacity or any particular price. Any
inability of IBM to provide the necessary capacity or output could result in
significant production delays. If IBM experiences capacity constraints, it may
allocate its available capacity to its other customers. If IBM suffers any
damage to its facility, or there is any other disruption of its manufacturing
capacity, we may not be able to qualify alternative manufacturing sources for
our products and bring them to volume production in a timely manner.

     We have qualified Taiwan Semiconductor Manufacturing Co., or TSMC, to
fabricate wafers for Crusoe microprocessors. We expect TSMC will be operational
for fabrication of wafers in production quantities during 2001. 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 any particular price
from 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. We believe this compatibility will permit us to qualify additional
manufacturers to mitigate the risk of using a single source for a product. Our
products are now primarily fabricated using .18 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. We expect to begin producing in 2001 some of
our products using a .13 micron, rather than a .18 micron, geometry process.
Difficulties in shifting to smaller geometry process technologies or new
manufacturing processes can lead to reductions in manufacturing yields, delays
in product deliveries and increased expenses.

     IBM also performs 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 audit our test facilities to ensure that
their procedures remain consistent with those required for the production of our
products. We rely upon IBM, at a site located in Canada, to assemble and test
substantially all of our products. This reliance on IBM 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 are in the process of qualifying
alternative assembly and test contractors in Asia.

                                        11
<PAGE>   14

     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 recently announced lower power versions of its microprocessor
to target applications in the ultra-light notebook computer market. Significant
competitors that offer microprocessors for the Internet appliance market include
licensees of technology from ARM Holdings and MIPS Technologies. We also face
competition from providers of x86 compatible microprocessors for the Internet
appliance market, including National Semiconductor.

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

     - technical innovation;

     - performance of our products, including their power usage, product system
       compatibility, speed, reliability and density;

     - product price;

     - product availability;

     - reputation and branding; and

     - technical support.

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

INTELLECTUAL PROPERTY

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

                                        12
<PAGE>   15

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, 2000, we and our subsidiaries employed 418 people in the
United States, Taiwan, Japan and Europe. Of these employees, 299 were engaged in
research and development, 53 were engaged in sales and marketing and 66 were
engaged in general and administrative.

     Twelve of our employees are located in Asia and two are located in Europe.
In addition, at December 31, 2000, six people in the United States and Taiwan
worked for us on a contract basis. None of our employees is subject to any
collective bargaining agreements. We believe our employee relations are good.

ITEM 2. PROPERTIES

     We lease a total of approximately 137,475 square feet of office space in
five buildings in a business park complex located in Santa Clara, California. We
lease space in these buildings under four separate leases and one sublease, four
of which expire in June 2008 and one of which expires in July 2001. We sublease
a total of approximately 42,180 square feet of office space in two of the
buildings to three different subtenants. These subleases expire between
September 2001 and July 2002. We also lease office space in Taiwan to support
our sales and marketing personnel worldwide. We intend to expand our operations
significantly and therefore may discontinue subleasing space to others and may
require additional facilities in the future.

ITEM 3. LEGAL PROCEEDINGS

     From time to time, we may be subject to legal proceedings and claims in the
ordinary course of business. We are not currently involved in any material legal
proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not applicable.

                                        13
<PAGE>   16

                                    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. Prices reflect inter-dealer prices without retail markup, markdown or
commissions. 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 23, 2001, the
closing price of our common stock was $30.94.

<TABLE>
<CAPTION>
          YEAR ENDED DECEMBER 31, 2000              HIGH        LOW
          ----------------------------             -------    -------
<S>                                                <C>        <C>
Fourth quarter (starting November 6, 2000).......  $50.875    $18.750
</TABLE>

  Stockholders

     As of February 23, 2001, we had approximately 530 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 fiscal year ended December 31, 2000, we issued and sold the
following unregistered securities, all of which reflect the two-for-one common
stock split effected in October 2000:

     In February 2000, we issued a warrant to IDEO Product Development Inc. to
purchase up to 8,000 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 January 14, 2005.

     In February 2000, we issued and sold 1,200,000 shares of common stock to
Toshiba Corporation in consideration for entering into the Restated and Amended
Technology License Agreement on February 17, 2000.

     In April 2000, we issued and sold a total of 7,040,000 shares of Series G
preferred stock to a group of 71 investors, consisting of 22 individuals, 14
corporate investors, including a company controlled by one of our directors, and
35 venture capital and investment funds for a total purchase price of $88.0
million, all of which was paid in cash.

     We issued non-plan stock options to three executive officers and issued and
sold common stock upon the exercise of those options, as follows: Mark K. Allen
purchased 2,000,000 shares of common stock at a price of $3.00 per share on
January 17, 2000 upon exercise of an option granted on January 4, 2000; David P.
Jensen purchased 550,000 shares of common stock at a price of $3.63 per share on
March 6, 2000 upon exercise of an option granted on February 18, 2000; and Merle
A. McClendon purchased 1,100,000 shares of common stock at a price of $6.00 per
share on August 3, 2000 upon exercise of an option granted on July 21, 2000. All
of these purchasers executed promissory notes for the purchase price. The notes
have five-year terms and bear interest semi-annually on the principal amounts at
the applicable federal rate.

     In August 2000, we issued 80,000 shares of common stock to CPU Technology,
Inc. upon exercise of a warrant that was granted in August 1996 as partial
consideration for services. The exercise price of $.63 per share was paid in
cash.

     In November 2000, we issued 1,200,000 shares of common stock to
International Business Machines upon conversion of a convertible promissory note
that was issued in December 1997.

                                        14
<PAGE>   17

     In November 2000, we issued 321,914 shares of common stock to Comdisco,
Inc. upon exercise of a warrant that was granted in March 1996. The exercise
price of $0.41 per share was paid by a net exercise of the warrant through the
surrender of shares issuable under the warrant.

     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.

     In November 2000, we issued a total of 73,174,342 shares of common stock
upon the conversion of all shares of preferred stock then outstanding. The
transaction was deemed to be exempt from registration under Section 3(a)(9) of
the Securities Act.

     The following issuances and sales of securities were deemed to be exempt
from registration under the Securities Act by virtue of Rule 701 under Section
3(b) of the Securities Act as transactions under compensation benefit plans and
contracts relating to compensation.

     During fiscal 2000, we issued 665,406 shares of common stock to employees,
directors, consultants and other service providers upon exercise of options
granted under our 1995 Equity Incentive Plan, with an exercise price of $0.04
per share paid in cash.

     During fiscal 2000, we issued 1,713,451 shares of common stock to
employees, directors, consultants and other service providers upon exercise of
options granted under our 1997 Equity Incentive Plan, with exercise prices
ranging from $0.13 to $3.25 per share paid in cash.

  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 SEC on November 6, 2000. A
total of 14,950,000 shares of our Common Stock was registered with the SEC with
an aggregate offering price of approximately $314 million. All of these shares
were registered on our behalf. The offering commenced on November 6, 2000 and
all shares of common stock offered were sold for the aggregate offering price
through a syndicate of underwriters managed by Morgan Stanley Dean Witter;
Deutsche Banc Alex Brown; Salomon Smith Barney; Banc of America Securities LLC;
and SG Cowen.

     We paid to the underwriters underwriting discounts and commissions totaling
$21.9 million in connection with the offering. In addition, we incurred
additional expenses of approximately $2.5 million in connection with the
offering, which when added to the underwriting discounts and commissions paid by
us amounts to total expenses of $24.4 million. Thus the net offering proceeds to
us (after deducting underwriting discounts and commissions and offering
expenses) were approximately $289.6 million. No offering expenses were paid
directly or indirectly to any of our directors or officers (or their
associates), persons owning ten percent (10%) or more of any class of our equity
securities or to any other affiliates.

     As of December 31, 2000, we had paid $2.5 million of the net proceeds to
IBM under the terms of our amended license agreement and $1.1 million to
Quickturn Design Systems to repay indebtedness incurred in conjunction with
equipment purchases in 1998. The remaining net proceeds had been invested in
interest bearing, investment-grade securities.

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 consolidated financial statements of Transmeta Corporation for
the five years ended December 31, 2000. The historical consolidated financial
statements for the five years ended December 31, 2000 have been audited.

     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.
                                        15
<PAGE>   18

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                              ----------------------------------------------------
                                                2000        1999       1998       1997      1996
                                              ---------   --------   --------   --------   -------
                                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                           <C>         <C>        <C>        <C>        <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
  Product...................................  $  16,180   $     76   $    326   $     --   $    --
  License...................................         --      5,000     28,000      1,400        --
                                              ---------   --------   --------   --------   -------
          Total revenue.....................     16,180      5,076     28,326      1,400        --
Cost of product revenue.....................      9,461         18         71         --        --
                                              ---------   --------   --------   --------   -------
Gross profit................................      6,719      5,058     28,255      1,400        --
Operating expenses:
  Research and development..................     61,415     33,122     23,467     12,828     5,800
  Selling, general and administrative.......     27,045     12,811     12,616      4,584     1,840
  Amortization of deferred charges under
     license agreements.....................     10,416        218         --         --        --
  Amortization of deferred stock
     compensation...........................     13,056         --         --         --        --
                                              ---------   --------   --------   --------   -------
          Total operating expenses..........    111,932     46,151     36,083     17,412     7,640
                                              ---------   --------   --------   --------   -------
Operating loss..............................   (105,213)   (41,093)    (7,828)   (16,012)   (7,640)
  Interest and other income.................      9,174      2,456        892         96       200
  Interest expense..........................     (1,666)    (1,952)    (1,154)      (271)      (31)
                                              ---------   --------   --------   --------   -------
Loss before income taxes....................    (97,705)   (40,589)    (8,090)   (16,187)   (7,471)
Provision for income taxes..................         --        500      2,000         --        --
                                              ---------   --------   --------   --------   -------
Net loss....................................  $ (97,705)  $(41,089)  $(10,090)  $(16,187)  $(7,471)
                                              =========   ========   ========   ========   =======
Net loss per share -- basic and diluted.....  $   (2.18)  $  (1.51)  $  (0.44)  $  (0.79)  $ (0.37)
                                              =========   ========   ========   ========   =======
Weighted average shares outstanding -- basic
  and diluted...............................     44,741     27,236     23,074     20,576    20,000
                                              =========   ========   ========   ========   =======
</TABLE>

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                    ----------------------------------------------
                                                      2000      1999      1998      1997     1996
                                                    --------   -------   -------   ------   ------
                                                                    (IN THOUSANDS)
<S>                                                 <C>        <C>       <C>       <C>      <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.........................  $259,744   $46,645   $27,809   $5,342   $3,639
Working capital...................................   343,004    58,912    21,909    2,732    3,063
Total assets......................................   412,536    99,443    43,497    8,740    4,509
Long-term obligations, net of current portion.....    20,950    27,020    10,798    1,823    6,911
Total stockholders' equity........................   364,916    63,083    24,032    3,764    3,346
</TABLE>

                                        16
<PAGE>   19

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
computers that simultaneously offer long battery life, high performance and x86
compatibility. 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 significantly
reduces the amount of capital we need to invest in manufacturing products.

     From our inception in March 1995 through September 2000, we were in the
development stage and 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 we 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 began
volume shipments of production units in the third quarter of 2000 and emerged
from the development stage during that period.

     License fees from IBM and Toshiba constituted substantially all of our
revenue in 1999, 1998 and 1997. We negotiated a technology license agreement
with IBM in December 1997 and a technology license agreement with Toshiba in
February 1998. Under these agreements, we received license fees, access to
technology, engineering and test services, photomasks used to print circuits on
a wafer, and wafer and other production services. In exchange, we granted IBM
and Toshiba nonexclusive rights to manufacture, market and sell both x86
compatible products and other types of products, in each case incorporating the
licensed technology. The IBM agreement was amended in November 1999 and
September 2000 and the Toshiba agreement was amended in February 2000. Under the
first amendment to the IBM agreement and the amendment to the Toshiba agreement,
we reacquired the rights to manufacture, market and sell x86 compatible products
incorporating our technology. IBM retains a nonexclusive license until December
2003 and Toshiba retains a nonexclusive license until February 2003, in each
case, to manufacture, market and sell non-x86 compatible products incorporating
the licensed technology. In connection with amending the IBM agreement, we
agreed to pay IBM a total of $33.0 million over the next four years and fixed
the conversion rate of a convertible promissory note issued to IBM at 1,200,000
shares of our common stock. In connection with amending the Toshiba agreement,
we issued 1,200,000 shares of our common stock to Toshiba. We are entitled to
future royalties under these amended license agreements for sales by IBM or
Toshiba of non-x86 compatible products that incorporate the licensed technology.
We have no indication from IBM or Toshiba that either will sell non-x86
compatible products that incorporate the licensed technology. As a result, we do
not expect to receive any royalties under these agreements.

     We recognized license revenue when earned, which occurred when agreed-upon
deliverables were provided, or milestones were met and confirmed by our
licensees. Also, license revenue was recognized only if payments received were
non-refundable and not subject to any future performance obligation by us. The
timing of license revenue reflects significant deliverables provided and
milestones achieved in 1998. The final IBM milestone was achieved and the
related final license payment was made to us in 1998. The final Toshiba
milestone was achieved and the related final license payment was made to us in
1999.

     We currently sell our products primarily to OEMs and, to a lesser extent,
through distributors. Two customers accounted for a substantial percentage of
our revenue in 2000. During 2000, sales to Sony Electronics accounted for 59.5%
of our product revenue and sales to Fujitsu accounted for 27.8% of our product
revenue. The loss of a major customer, or the delay of significant orders from
these customers could
                                        17
<PAGE>   20

reduce or delay our recognition of product revenue. Although we derive a
substantial portion of our product revenue from customers in Asia, we expect
that these customers ultimately will sell their products to major PC
manufacturers in the United States and Japan. 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. Substantially all of our product sales in
2000 were for the notebook computer market. If our Crusoe products fail to
achieve widespread acceptance in the notebook computer market we may not achieve
revenue sufficient to sustain our business.

     In August 2000, we entered into a distribution agreement with Siltrontech
Electronics Corporation in Taiwan to support our sales and marketing activities
in the Far East market. 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 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 OEMs and major notebook computer
manufacturers. These agreements specify inventory levels and price protection
and contain provisions regarding rights of return.

     We generally recognize revenue from product sales upon transfer of title,
typically upon shipment, and provide for expected returns and warranty costs at
that time. With respect to products shipped to distributors, we defer
recognition of product revenue until the distributors sell our products to their
customers.

     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.
Research and development expenses consist primarily of salaries and related
overhead costs associated with employees engaged in research, design and
development activities, as well as the cost of masks, wafers and other materials
and related test services and equipment used in the development process.
Selling, general and administrative expenses consist of salaries and related
overhead costs for sales, marketing and administrative personnel and legal and
accounting services. They also will include commissions paid to internal and
external sales representatives, once volume shipments increase. We have incurred
no 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 $44.7 million,
representing the difference between the deemed fair value of our common stock
for accounting purposes and the exercise price of these options at the date of
grant. Deferred stock compensation is presented as a reduction of stockholders'
equity and is amortized on the graded vesting method. In addition, we recorded
$1.3 million of deferred compensation charges in the first quarter of 2000
related to a severance agreement with a former employee. We will incur
substantial expense in future periods as a result of the amortization of the
deferred stock compensation.

     Historically, we have incurred significant losses. As of December 31, 2000,
we had an accumulated deficit of $173.7 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. General softening in
the semiconductor industry and in the general economy has occurred in the first
calendar quarter of 2001. Our operating results could fluctuate in response to
the general economic downturn.

RESULTS OF OPERATIONS

     Revenue. Product revenue was $16.2 million in 2000, $76,000 in 1999 and
$326,000 in 1998. The increase from 1999 to 2000 results from volume shipments
of products and shipments of prototypes and development systems. Revenue from
two of our customers, Sony Electronics and Fujitsu comprised 87.3% of product
revenue recognized in 2000. Product revenue decreased from 1998 to 1999
primarily due to one-time requirements in 1998 for development systems used by
licensees.

                                        18
<PAGE>   21

     Substantially all of the revenue recognized in 1999 and 1998 consisted of
license revenue, which decreased from $28.0 million in 1998 to $5.0 million in
1999. This revenue was earned in connection with the technology license
agreements with IBM and Toshiba executed in 1997 and 1998 and was based upon
fulfilling certain milestones. Most milestones were achieved during 1998
resulting in a significant decrease of license revenue in 1999. We do not expect
to recognize any future license revenue in connection with the license
agreements with IBM and Toshiba.

     Gross Profit. Product gross profit, which equals product revenue less cost
of product revenue, was $6.7 million in 2000, $58,000 in 1999 and $255,000 in
1998. Product gross profit in 2000 reflects a significant increase in the volume
of product shipments including prototypes and development systems. Product gross
profit in 1999 and 1998 reflects sales of small volume prototypes and
development systems. We expect our gross margin, which is product gross profit
as a percentage of product revenue, to change in future quarters as volume
shipments increase. In addition, we expect our gross margin to vary from period
to period due to the mix of products sold, the stage in the life cycle of each
of our products and expenses in connection with the manufacturing process. For
example, newly-introduced products generally have higher average selling prices,
which typically decline over product life cycles due to competitive pressures
and technological advances.

     Research and Development. Research and development expenses were $61.4
million in 2000, $33.1 million in 1999 and $23.5 million in 1998. These
increases were primarily a result of hiring additional development personnel,
prototype wafer costs and services, costs of photomasks used to print circuits
on a wafer and depreciation and amortization expenses arising from significant
purchases of computer aided design and other software tools. The increase year
to year was principally due to increased expenses related to recruiting and
retaining development personnel of $10.5 million in 2000 and $3.2 million in
1999. In addition, we incurred $15.9 million of additional prototype wafer and
related costs in 2000 compared to 1999 and $2.2 million in 1999 compared to
1998.

     Selling, General and Administrative. Selling, general and administrative
expenses were $27.0 million in 2000, $12.8 million in 1999 and $12.6 million in
1998. The increase year to year was largely due to additional costs related to
recruiting and retaining personnel of $12.6 million in 2000 and $1.6 million in
1999. In 1998, selling, general and administrative expenses included $1.2
million for implementation of our ERP system.

     Amortization of Deferred Charges Under License Agreements. In connection
with the renegotiation of our technology license agreement with IBM in November
1999, we agreed to pay a total of $33.0 million over a four year period in order
to reacquire license rights previously granted to IBM. We recorded the present
value of these payments, $18.9 million, as a liability with a corresponding
deferred charge. We also fixed the conversion rate of the IBM convertible
promissory note at 1,200,000 shares of common stock. 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 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.
These deferred charges are 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. In November 2000, IBM exercised its option to
convert the note into 1,200,000 shares of common stock and the present value of
the note, $433,000, was reclassified as additional paid in capital.

     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, is recorded
on the balance sheet as deferred charges under license agreements and is being
amortized on a straight-line basis over the license buyback period.

     We recorded amortization of $10.4 million in 2000 and $218,000 in 1999 in
connection with the renegotiation of the IBM and Toshiba technology license
agreements. Future amortization in connection with the IBM and Toshiba license
agreement amendments will be $12.6 million in 2001, $12.5 million in 2002, $10.2
million in 2003 and $2.1 million in 2004.

                                        19
<PAGE>   22

     Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation was $13.1 million in 2000. In connection with stock option grants
through November 6, 2000, we expect to record $20.3 million in 2001, $8.3
million in 2002 and the balance in future years.

     Interest Income. Interest income was $9.2 million in 2000, $2.5 million in
1999 and $892,000 in 1998. The increase in 2000 was primarily due to larger
average invested cash balances resulting from the closing of an equity offering
in April 2000 and the initial public offering in November 2000.

     Interest Expense. Interest expense was $1.7 million in 2000, $2.0 million
in 1999 and $1.2 million in 1998. The decrease from 1999 to 2000 was due to
lower average debt balances due to several lease financing arrangements expiring
during 2000. The increase from 1998 to 1999 was primarily due to increasing
average debt balances and capital expenditure financing activity as we expanded
our operating activities.

     Provision for Income Taxes. We recorded tax provisions of $500,000 in 1999
and $2.0 million in 1998 relating to foreign taxes in Japan withheld on license
revenue from Toshiba. We did not record a tax provision in 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 license revenue and
lease financing.

     Net cash used in operating activities was $78.6 million in 2000, $36.4
million in 1999 and $5.2 million in 1998. In each year, net cash used in
operating activities was attributable to our net losses and significant
inventory and accounts receivable increases, partially offset by non-cash
depreciation and amortization charges and increases in accounts payable and
accrued liabilities. Increases in accounts payable and accrued liabilities were
due to the general continued growth in business activity from 1998 to 2000. The
increase in accounts payable during 2000 was also due to inventory-related
purchases.

     Net cash used in investing activities was $82.0 million in 2000, $19.2
million in 1999 and $15.9 million in 1998. Net cash used in investing activities
consisted of capital expenditures on property and equipment and, in 2000 and
1999, net purchases of investments. Capital expenditures were $8.4 million in
2000, $1.4 million in 1999 and $13.9 million in 1998 and consisted primarily of
property, equipment and software. Net purchases of investments were $63.4
million in 2000. We loaned a total of $5.3 million to our founders in May 2000.
The purpose of these loans was to provide an incentive to these founders to
remain as employees. The loans bear 6.4% interest, compounded annually, and are
due in May 2005. The loans are evidenced by non-recourse promissory notes that
are secured by a total of 1,050,000 shares of our common stock.

     Net cash provided by financing activities was $373.8 million in 2000, $74.4
million in 1999 and $43.5 million in 1998. The increase in 2000 is primarily
attributable to the net proceeds from the initial public offering in November
2000 and the net proceeds from the sale of convertible preferred stock in April
2000. The increase year to year is also due to the portion of our capital
expenditures subsequently financed with leasing companies of $1.2 million in
2000, $1.4 million in 1999 and $7.4 million in 1998. In addition, during 1999
net cash provided by financing activities was attributable to net proceeds from
the sale of convertible preferred stock and the issuance of promissory notes to
financing companies totaling $1.4 million. In 1998, net cash provided by
financing activities was primarily attributable to net proceeds from the sale of
convertible preferred stock and the issuance of debt. Debt issued in 1998
consisted of promissory notes issued to financing companies totaling $3.5
million and a $1.1 million note issued to a supplier in connection with an
equipment purchase.

     At December 31, 2000, we had $259.7 million in cash and cash equivalents
and $83.4 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, 2000, we had total minimum lease payments of $32.5 million under
our operating leases and $6.4 million under our capital leases. We also are
obligated to pay IBM a total of $33.0 million -- $4.0 million in 2001, $6.0
million in 2002, $7.0 million in 2003 and $16.0 million in 2004 -- in connection
with amendments to our technology license agreement. Finally, our foundry
relationship with IBM allows us to
                                        20
<PAGE>   23

cancel all outstanding purchase orders, but requires us to pay the foundry for
expenses it has incurred in connection with the purchase orders through the date
of cancellation. As of December 31, 2000, IBM had incurred approximately $19.6
million of manufacturing expenses on our outstanding purchase orders. We also
had minimum aggregate principal payments of $2.8 million under our long-term
debt. As of December 31, 2000, we had a $1.8 million commitment for a capital
expenditure. We anticipate that additional capital expenditures will be required
as we grow our business.

     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 June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS 133, as amended by SFAS 137, establishes methods
for recording derivative financial instruments and hedging activities related to
those instruments, as well as other hedging activities. We are required to adopt
SFAS 133 effective January 1, 2001. Because we currently do not hold any
derivative instruments and do not engage in hedging activities, we do not
currently believe that the adoption of SFAS 133, as amended by SFAS 137, will
have a significant impact on our consolidated financial position or results of
operations.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101. SAB 101 summarizes certain areas of the staff's
views in applying generally accepted accounting principles to revenue
recognition in financial statements. We believe that our current revenue
recognition policies and practices comply with SAB 101.

     In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, Interpretation of APB Opinion
No. 25." Interpretation No. 44 clarifies the application of Accounting Principle
Board Opinion No. 25 to certain issues including: (1) the definition of employee
for purposes of applying APB Opinion No. 25, (2) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (3) the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award, and (4) the accounting for an exchange of stock compensation
awards in business combinations. The adoption of Interpretation No. 44 did not
have a material effect 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.

                                        21
<PAGE>   24

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 $97.7 million in 2000, $41.1 million in 1999
and $10.1 million in 1998. As of December 31, 2000, we had an accumulated
deficit of approximately $173.7 million. We intend to significantly increase our
product development, sales and marketing, and administrative expenses. We also
expect to incur substantial non-cash charges relating to the amortization of
deferred stock compensation, which will serve to increase our net losses
further. We cannot assure you that our revenue will increase, and we may never
achieve profitability. Even if we achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or an annual basis.

OUR BUSINESS IS DIFFICULT TO 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 all of 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. As a result, 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.

WE DEPEND ON 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. We recognized $12.4 million of product revenue during
the fourth quarter of 2000. Therefore, our future operating results will depend
on the demand for Crusoe by future customers. If Crusoe is not widely accepted
by the market due to performance, price, compatibility or any other reason, or
if, following acceptance, we fail to enhance Crusoe in a timely manner, demand
for our products may fail to increase. If demand for our Crusoe products does
not increase, our revenue will not increase.

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 makers of notebook computers, which consist of a small number of OEMs.
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. For example, IBM showed a
technology demonstration at a trade show in June 2000 using the Crusoe
microprocessor in an existing ThinkPad model 240 notebook computer, but decided
not to proceed with the project. If our Crusoe products fail to achieve
widespread acceptance in the notebook computer market, we may never achieve
revenue sufficient to sustain our business and the value of an investment in our
common stock would decline significantly.
                                        22
<PAGE>   25

THE GROWTH OF OUR BUSINESS DEPENDS IN PART ON THE GROWTH OF THE INTERNET
APPLIANCE AND HIGH DENSITY SERVER 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 Internet appliance and high density server
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 introduce and promote their products successfully. 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 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. In addition, the Internet
appliance and high density server 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.

OUR OPERATING RESULTS ARE DIFFICULT TO PREDICT IN ADVANCE AND MAY FLUCTUATE
SIGNIFICANTLY, AND A FAILURE TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR
INVESTORS WOULD LIKELY RESULT IN A SUBSTANTIAL DECLINE IN OUR STOCK PRICE.

     There is little historical financial information that is useful in
evaluating our business, prospects and future operating results. You should not
rely on quarter-to-quarter comparisons of our results of operations as an
indication of our future performance. We expect our future operating results to
fluctuate significantly from quarter to quarter. If our operating results fail
to meet or exceed the expectations of securities analysts or investors, our
stock price would likely decline substantially.

     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
       purchasing volume;

     - the amount and timing of our operating expenses and capital expenditures;

     - pricing concessions 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 we sell.

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

     - fluctuations in manufacturing yields;

     - cancellations, changes or delays of deliveries to us by our
       manufacturers;

     - the cost and availability of manufacturing, assembly and test capacity;
       and

     - problems or delays due to shifting our products to smaller geometry
       process technologies and designing our products to achieve higher levels
       of design integration.

                                        23
<PAGE>   26

     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;

     - fluctuations in the cost and availability of components, such as dynamic
       random access memory, or DRAM, 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.

     Because a large portion of our expenses, including rent, salaries and
capital leases, is fixed and difficult to reduce, if our revenue does not meet
our expectations, the adverse effect of the revenue shortfall will be magnified
by the fixed nature of our expenses.

COMPETITION IN THE SEMICONDUCTOR MARKET IS INTENSE; MANY OF OUR COMPETITORS AND
POTENTIAL 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 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 recently announced lower power versions of its microprocessor
to target applications in the ultra-light notebook computer market. Significant
competitors that offer microprocessors for the Internet appliance market include
licensees of technology from ARM Holdings and MIPS Technologies. We also face
competition from providers of x86 compatible microprocessors for the Internet
appliance market, including National Semiconductor.

     Many of 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, a number of these competitors may merge or form strategic
relationships that would enable them to offer, or bring to market earlier,
products that are superior to ours in terms of features, quality, pricing
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<PAGE>   27

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
material. Often, these defects and bugs are not detected until after the
products have been shipped. For example, in November 2000, our customer NEC
Corporation recalled 284 computers manufactured using Crusoe products, which had
a defect in the silicon. 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 CANCELS,
REDUCES OR DELAYS A PURCHASE OF OUR PRODUCTS.

     During 2000, sales to Sony Electronics accounted for 59.5% of our product
revenue and sales to Fujitsu accounted for 27.8% of our product revenue. We
expect that a small number of OEM customers and distributors will continue to
account for a significant portion of our revenue. Our future success will depend
upon the timing and size of future purchase orders, if any, from these customers
and new customers and, in particular:

     - the success of our customers in marketing products that incorporate our
       products;

     - the product requirements of our customers; and

     - the financial and operational success of our customers.

     We have entered into 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 promotes products of our competitors might not
sell a significant or any amount of our products. We expect that our sales to
OEM customers will 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 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

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<PAGE>   28

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. We
anticipate that our customers will 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 dynamic random access memory, or DRAM.
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 perceived to be significant, our products
may never achieve market acceptance and we may not receive significant revenue
from product sales.

OUR RECENT 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. We have recently increased our
number of employees substantially and plan to increase the scope of our
operations and the size of our direct sales force domestically and
internationally. The number of employees that we and our subsidiaries employ
increased from 193 at January 1, 2000 to 418 at December 31, 2000. We expect to
expand our facilities in proportion to any expansion in the number of our
employees. This 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, which would
jeopardize our ability to execute on our business plan.

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<PAGE>   29

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 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. 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. Therefore, we take risks
related to project cancellations or changed product plans, which could result in
the loss of 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
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 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. 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.

OUR DEPENDENCE ON THIRD PARTIES 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 to the successful production of our products. We currently rely
exclusively on IBM to fabricate our wafers. Our contract with IBM does not
obligate IBM to provide us with any specified number of wafers at any specified
price until IBM has accepted a purchase order. The absence of dedicated capacity
under our agreement means that, with little or no notice, IBM 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 IBM were to stop manufacturing for
us, we would likely be unable to replace the lost capacity on a timely basis.
Transferring to another manufacturer would require a significant amount of time,
and a smooth and timely transition would be unlikely. As a result, we could lose
potential

                                        27
<PAGE>   30

sales and fail to meet existing obligations to our customers. In addition, if
IBM were to change the terms under which it manufactures for us, our
manufacturing costs could increase.

     We have qualified TSMC in Taiwan to fabricate wafers for Crusoe
microprocessors. 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. Any
inability of TSMC to fabricate our wafers could result in significant delays and
increase production costs of our microprocessors.

     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.

OUR DEPENDENCE ON THIRD PARTIES TO PROVIDE ASSEMBLY AND TEST SERVICES LIMITS OUR
CONTROL OVER PRODUCTION COSTS AND PRODUCT SUPPLY.

     We rely on IBM 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 as IBM manufactures our current
products in volume and, in the future, as we introduce new products. Product
shortages could increase our costs or delay delivery of our products. We do not
have a contract with IBM for test and assembly services, and we typically
procure these services from IBM on a per order basis. 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 or a decline
in product quality.

WE 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. If we do not achieve expected yields, our product costs
would increase. 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. Further, we may experience yield
problems as we migrate our manufacturing processes to smaller geometries. 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 could hamper our ability to deliver our products to our customers in a
timely manner.

IF WE EXPERIENCE DIFFICULTIES IN TRANSITIONING TO SMALLER GEOMETRY PROCESS
TECHNOLOGIES, WE COULD EXPERIENCE REDUCED MANUFACTURING YIELDS, DELAYS IN
PRODUCT DELIVERIES AND INCREASED EXPENSES.

     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. We expect to begin producing in 2001
some of our products using .13 micron, rather than .18 micron, geometry process.
This

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<PAGE>   31

transition involves redesigning the product and modifying the manufacturing
processes for the product. Difficulties in shifting to a smaller geometry
process technologies or other new manufacturing processes can lead to reductions
in manufacturing yields, delays in product deliveries and increased expenses. In
addition, if we experience 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. If our third party
manufacturers or we experience significant delays in this transition or fail to
efficiently implement this transition, our ability to achieve revenue growth and
margin improvement from existing manufacturing capacity would be jeopardized,
particularly if we experience price pressures on the affected products.

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, we have little
historical information about 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-offs. We have limited capability to
reduce ongoing production once wafer fabrication has commenced. Excess materials
would likely result in excess or obsolete inventory. If demand exceeds our
expectations, IBM may not be able to fabricate wafers as quickly as we need
them. In that event, we would need to increase production rapidly at IBM or
find, qualify and begin production at additional manufacturers, which may not be
possible within a time frame acceptable to our customers. The inability of IBM
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 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 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
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<PAGE>   32

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 ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, OUR COMPETITORS
MAY 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 adequately protect our proprietary rights, our competitors may 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. Even if
our pending patent applications are approved, the resulting patents 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 away from our business operations.

WE MIGHT NOT BE ABLE TO EXECUTE ON OUR BUSINESS PLAN IF WE LOSE KEY MANAGEMENT
AND TECHNICAL PERSONNEL, ON WHOSE KNOWLEDGE, LEADERSHIP AND TECHNICAL EXPERTISE
WE RELY.

     Our success depends heavily upon the continued contributions of our key
management and technical personnel, whose knowledge, leadership and technical
expertise would be difficult to replace. Several of these personnel have been
with us for a number of years. All of our executive officers and key personnel
are employees at-will. We have no employment contracts and maintain no 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.

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. In particular, we will need
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. 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.

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<PAGE>   33

SEVERAL OF OUR EXECUTIVES AND OTHER EMPLOYEES JOINED US IN 2000, AND IF THEY ARE
UNABLE TO WORK TOGETHER EFFECTIVELY, WE MAY NOT BE ABLE TO MANAGE OUR GROWTH AND
OPERATIONS.

     Several of our executives and other employees joined us in 2000 and have
had only a limited time to work together. Mark K. Allen, our Chief Executive
Officer and President, joined us in January 2000; David P. Jensen, our Vice
President of Operations, joined us in February 2000; Merle A. McClendon, our
Chief Financial Officer, joined us in March 2000; John O. Horsley, our General
Counsel, joined us in July 2000; and Barry L. Rubinson, our Vice President of
Software, joined us in August 2000. Our management team might not be able to
work effectively together or with the rest of our employees to develop our
technology and manage our growth and continuing operations.

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 to expand our business. 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.

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. General softening in the
semiconductor industry has occurred in the first calendar quarter of 2001. Our
operating results could fluctuate in response to industry-wide fluctuations.

GENERAL ECONOMIC CONDITIONS CAN LEAD TO REDUCED DEMAND FOR OUR PRODUCTS.

     A decline in economic conditions generally could lead to reduced demand for
notebook computers, which would also reduce demand for our products. A
significant decline in economic conditions in any geographic area that is
significant to us, such as Japan or the United States, could decrease the
overall demand for our products and harm our operating results.

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 expect to sell a significant portion of our
products to customers overseas. As part of our international expansion, we have
opened an office in Taiwan to provide sales and customer support, and expect to
do the same in Japan during 2001. 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;

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     - 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.

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 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;

     - 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;

     - changes in the estimates of our operating performance or changes in
       recommendations by any securities analysts that follow our stock; and

     - market conditions in our industry, the industries of our customers and
       the economy as a whole.

     In addition, the stock market generally and the market for
technology-related stocks in particular has experienced a decline in recent
months 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 and 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. In the past, securities
class action litigation has often been brought against a company following a
period of volatility in the market price of its securities. We may in the future
be the target of similar litigation. Securities litigation could result in
substantial costs and divert management's attention and resources.

OUR CERTIFICATE OF INCORPORATION AND BYLAWS 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 only be removed "for cause" and only with
       the approval of 66 2/3% of our stockholders;

     - requiring super-majority voting to amend some provisions in our
       certificate of incorporation and bylaws;

                                        32
<PAGE>   35

     - 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, 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;

     - hire additional personnel;

     - respond to competitive pressures; or

     - acquire complementary businesses or technologies.

     If we 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.

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, 2000, our cash equivalents
and short-term investments included money market funds, commercial paper and
medium term notes and earned interest at an average rate of 6.6%. Due to the
short-term nature of our investment portfolio, we would not expect our operating
results or cash flows to be affected to any significant degree by a sudden
change in market interest rates. We do not use our investment portfolio for
trading or other speculative purposes.

     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.

                                        33
<PAGE>   36

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Ernst & Young LLP, Independent Auditors...........   35
Consolidated Balance Sheets.................................   36
Consolidated Statements of Operations.......................   37
Consolidated Statements of Stockholders' Equity.............   38
Consolidated Statements of Cash Flows.......................   39
Notes to Consolidated Financial Statements..................   40
</TABLE>

                                        34
<PAGE>   37

               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, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2000. 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, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.

                                          /s/ ERNST & YOUNG LLP

San Jose, California
January 16, 2001

                                        35
<PAGE>   38

                             TRANSMETA CORPORATION

                          CONSOLIDATED BALANCE SHEETS
              (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                2000         1999
                                                              ---------    --------
<S>                                                           <C>          <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 259,744    $ 46,645
  Short-term investments....................................     83,358      19,799
  Accounts receivable, net..................................      3,298          --
  Inventories...............................................     15,453          --
  Prepaid expenses and other current assets.................      7,821       1,808
                                                              ---------    --------
          Total current assets..............................    369,674      68,252
Property and equipment, net.................................     10,482       8,537
Deferred charges under license agreements...................     26,097      22,143
Loans to founders...........................................      5,446          --
Other assets................................................        837         511
                                                              ---------    --------
          Total assets......................................  $ 412,536    $ 99,443
                                                              =========    ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $   7,237    $    853
  Accrued compensation and related compensation
     liabilities............................................      2,215       1,113
  Other accrued liabilities.................................      7,926       1,880
  Payable to a development partner under license agreement,
     current portion........................................      4,000          --
  Current portion of long-term debt and capital lease
     obligations............................................      5,292       5,494
                                                              ---------    --------
          Total current liabilities.........................     26,670       9,340
Long-term debt and capital lease obligations, net of current
  portion...................................................      3,046       7,256
Deposits received under subleasing agreements...............        138         231
Payable to a development partner under license agreement....     17,766      19,533
Commitments and contingencies
Stockholders' equity:
  Convertible preferred stock, $0.00001 par value, at
     amounts paid in;
  Authorized shares -- 5,000,000 in 2000 and 21,119,835 in
     1999
  Issued and outstanding shares -- None in 2000 and
     21,119,835 in 1999
  Liquidation preference -- None in 2000 and $135,149,603 in
     1999...................................................         --     134,980
  Common stock, $0.00001 par value, at amounts paid in;
  Authorized shares -- 160,000,000
  Issued and outstanding shares -- 130,418,928 in 2000 and
     34,179,904 in 1999.....................................    589,220       7,183
Notes receivable from stockholders..........................    (17,752)     (3,071)
Deferred stock compensation.................................    (32,988)         --
Accumulated other comprehensive income/(loss)...............        147          (3)
Accumulated deficit.........................................   (173,711)    (76,006)
                                                              ---------    --------
          Total stockholders' equity........................    364,916      63,083
                                                              ---------    --------
          Total liabilities and stockholders' equity........  $ 412,536    $ 99,443
                                                              =========    ========
</TABLE>

                            (See accompanying notes)
                                        36
<PAGE>   39

                             TRANSMETA CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                   (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                            ---------------------------------
                                                              2000         1999        1998
                                                            ---------    --------    --------
<S>                                                         <C>          <C>         <C>
Revenue:
  Product.................................................  $  16,180    $     76    $    326
  License.................................................         --       5,000      28,000
                                                            ---------    --------    --------
          Total revenue...................................     16,180       5,076      28,326
Cost of product revenue...................................      9,461          18          71
                                                            ---------    --------    --------
Gross profit..............................................      6,719       5,058      28,255
                                                            ---------    --------    --------
Operating expenses:
  Research and development(1).............................     61,415      33,122      23,467
  Selling, general and administrative(2)..................     27,045      12,811      12,616
  Amortization of deferred charges under license
     agreements...........................................     10,416         218          --
  Amortization of deferred stock compensation.............     13,056          --          --
                                                            ---------    --------    --------
          Total operating expenses........................    111,932      46,151      36,083
                                                            ---------    --------    --------
Operating loss............................................   (105,213)    (41,093)     (7,828)
  Interest and other income...............................      9,174       2,456         892
  Interest expense........................................     (1,666)     (1,952)     (1,154)
                                                            ---------    --------    --------
Loss before income taxes..................................    (97,705)    (40,589)     (8,090)
  Provision for income taxes..............................         --         500       2,000
                                                            ---------    --------    --------
Net loss..................................................  $ (97,705)   $(41,089)   $(10,090)
                                                            =========    ========    ========
Net loss per share -- basic and diluted...................  $   (2.18)   $  (1.51)   $  (0.44)
                                                            =========    ========    ========
Weighted average shares outstanding -- basic and
  diluted.................................................     44,741      27,236      23,074
                                                            =========    ========    ========
</TABLE>

---------------
(1) Excludes $5,557 in amortization of deferred stock compensation for the year
    ended December 31, 2000.

(2) Excludes $7,499 in amortization of deferred stock compensation for the year
    ended December 31, 2000.

                            (See accompanying notes)
                                        37
<PAGE>   40

                             TRANSMETA CORPORATION

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                           NOTES                       ACCUMULATED
                               CONVERTIBLE               RECEIVABLE      DEFERRED         OTHER                         TOTAL
                                PREFERRED     COMMON        FROM          STOCK       COMPREHENSIVE   ACCUMULATED   STOCKHOLDERS'
                                  STOCK       STOCK     STOCKHOLDERS   COMPENSATION   INCOME/(LOSS)     DEFICIT        EQUITY
                               -----------   --------   ------------   ------------   -------------   -----------   -------------
<S>                            <C>           <C>        <C>            <C>            <C>             <C>           <C>
Balance at December 31,
  1997.......................   $  28,226    $    490     $   (124)      $     --        $    --       $ (24,827)     $  3,765
Issuance of warrants to
  purchase 735,032 shares of
  common stock in connection
  with lease financing.......          --          78           --             --             --              --            78
Issuance of 7,757,748 shares
  of common stock to
  employees under option
  exercises, net of
  repurchases................          --       1,167         (837)            --             --              --           330
Issuance of 68,000 shares of
  common stock to employees
  under bonus plan...........          --          26           --             --             --              --            26
Issuance of 4,999,999 shares
  of Series E convertible
  preferred stock to
  investors for cash at $6.00
  per share, net of issuance
  costs of $77,000...........      29,923          --           --             --             --              --        29,923
Net loss.....................          --          --           --             --             --         (10,090)      (10,090)
                                ---------    --------     --------       --------        -------       ---------      --------
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
  income/(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
Deferred stock
  compensation...............          --      46,044           --        (46,044)            --              --            --
Amortization of deferred
  stock compensation.........          --          --           --         13,056             --              --        13,056
Other comprehensive
  income/(loss) -- 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
                                =========    ========     ========       ========        =======       =========      ========
</TABLE>

                            (See accompanying notes)

                                        38
<PAGE>   41

                             TRANSMETA CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                            ---------------------------------
                                                              2000         1999        1998
                                                            ---------    --------    --------
<S>                                                         <C>          <C>         <C>
Cash flows from operating activities:
  Net loss................................................  $ (97,705)   $(41,089)   $(10,090)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
     Amortization of deferred stock compensation..........     13,056          --          --
     Depreciation and amortization........................      6,091       5,275       3,809
     Fair value of equity instruments issued for
       services...........................................         30          52          20
     Stock compensation in connection with severance
       agreement..........................................        945          --          --
     Amortization of deferred charges under license
       agreements.........................................     10,416         218          --
     Accretion of interest payable to a development
       partner............................................         45          45          45
  Changes in operating assets and liabilities:
     Accounts receivable..................................     (3,298)        114        (114)
     Inventories..........................................    (15,453)         --          --
     Prepaid expenses and other current assets............     (6,209)     (1,145)       (121)
     Accounts payable and accrued liabilities.............     13,532          40       1,168
     Deposits received under subleasing agreements........        (93)        132          99
                                                            ---------    --------    --------
Net cash used in operating activities.....................    (78,643)    (36,358)     (5,184)
                                                            ---------    --------    --------
Cash flows used in investing activities:
  Purchase of available-for-sale investments..............   (526,218)    (57,312)         --
  Proceeds from sale or maturity of available-for-sale
     investments..........................................    462,811      37,510          --
  Change in restricted cash...............................         --       1,990      (1,990)
  Purchase of property and equipment......................     (8,036)     (1,323)    (13,543)
  Loans to founders.......................................     (5,250)         --          --
  Payment to development partner..........................     (5,000)         --          --
  Other assets............................................       (326)        (79)       (332)
                                                            ---------    --------    --------
Net cash used in investing activities.....................    (82,019)    (19,214)    (15,865)
                                                            ---------    --------    --------
Cash flows from financing activities:
  Net proceeds from issue of preferred stock..............     87,942      76,831      29,923
  Net proceeds from initial public offering of common
     stock................................................    289,638          --          --
  Common stock issued under stock option plans............        544          44         356
  Issuance of common stock upon exercise of a warrant.....         50          --          --
  Issuance of debt and capital lease obligations..........      1,248       2,773      11,989
  Repayment of debt and capital lease obligations.........     (5,661)     (3,665)       (327)
  Borrowings under line of credit.........................         --      (1,575)      1,575
                                                            ---------    --------    --------
Net cash provided by financing activities.................    373,761      74,408      43,516
                                                            ---------    --------    --------
Change in cash and cash equivalents.......................    213,099      18,836      22,467
Cash and cash equivalents at beginning of period..........     46,645      27,809       5,342
                                                            ---------    --------    --------
Cash and cash equivalents at end of period................  $ 259,744    $ 46,645    $ 27,809
                                                            =========    ========    ========
Supplemental disclosure of cash paid during the period:
  Cash paid for interest..................................  $   1,534    $  1,846    $  1,080
  Cash paid for taxes.....................................          1         500       2,105
Supplemental disclosure of noncash financing and investing
  activities:
  Issuance of warrants....................................         30          17          78
  Issuance of common stock to consultants in connection
     with Series F financing..............................         --          35          --
  Issuance of common stock to employees for notes
     receivable...........................................     14,817       2,123         837
  Issuance of payable to development partner..............      5,000      18,927          --
  Issuance of common stock upon conversion of a note
     payable to development partner.......................        433          --          --
  Common stock issued in connection with license
     agreement............................................      6,750          --          --
</TABLE>

                            (See accompanying notes)
                                        39
<PAGE>   42

                             TRANSMETA CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 computers that
simultaneously offer long battery life, high performance and x86 compatibility.

     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 December 31, 1999, substantially all
of Transmeta's revenue was derived from technology license agreements with
development partners. In January 2000, the Company introduced its Crusoe family
of microprocessors. Revenue during 2000 was derived from sales of microprocessor
products, prototypes and development systems. The Company began shipping
production units in the third quarter of 2000 and emerged from the development
stage during that period.

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 year 2000 consisted of
52 weeks and ended on December 29. Fiscal years 1999 and 1998 also consisted of
52 weeks and ended on December 31.

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 reserves 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.

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, notes receivable from
certain founders and stockholders and accounts receivable from customers.
Substantially all of the Company's cash equivalents are invested in highly
liquid money market

                                        40
<PAGE>   43
                             TRANSMETA CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

     Transmeta sells its products principally to original equipment
manufacturers and their subcontract manufacturers. Revenue from two Japanese
customers represents 59.5% and 27.8%, respectively, of the Company's product
revenue for the year ended December 31, 2000. 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 IBM to fabricate its wafers and
provide assembly and test services.

LOANS TO FOUNDERS

     Certain founders of Transmeta received loans from the Company in May 2000.
The notes received as consideration for these loans, aggregating $5.3 million,
are non-recourse and are secured by a total of 1.1 million shares of common
stock held by the founders. The shares were originally issued and vested in
1995. The notes accrete interest, compounded annually, at 6.4% and are due in
May 2005.

REVENUE RECOGNITION

     Transmeta recognizes revenue from product sales upon transfer of title to
its customers, typically upon shipment. The Company accrues for estimated
warranty costs, 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.
Accordingly, the Company defers recognition of revenue on these sales until the
products are sold by the distributors.

     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 in 1999 and $28.0 million in 1998 in connection with
technology license agreements (see Note 2). No license revenue was recognized
during 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
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.

                                        41
<PAGE>   44
                             TRANSMETA CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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, 2000 the Company
did not have an allowance for doubtful accounts nor did the Company write off
any bad debt during the year. At December 31, 2000 net accounts receivable
included a provision for sales returns of $711,000. Also, at December 31, 2000,
three customers accounted for 41%, 26% and 18% of net receivables.

INVENTORIES

     Inventories are stated at the lower of cost (first-in, first-out) or
market. The Company did not have inventories as of December 31, 1999. The
components of inventories as of December 31, 2000, were as follows:

<TABLE>
<CAPTION>
                                                       DECEMBER 31, 2000
                                                       -----------------
                                                        (IN THOUSANDS)
<S>                                                    <C>
Work in progress.....................................       $ 6,680
Finished goods.......................................         8,773
                                                            -------
                                                            $15,453
                                                            =======
</TABLE>

PROPERTY AND EQUIPMENT

     Property and equipment are carried 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") No. 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 No. 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.

                                        42
<PAGE>   45
                             TRANSMETA CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

INCOME TAXES

     Transmeta accounts for income taxes in accordance with the FASB's SFAS No.
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.

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.

     The fair values of long-term assets are valued on the basis of present
value calculations and are amortized over the useful life of these assets.

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 has capitalized the cost of intangibles associated with license
agreements with third-party developers (see Note 2). These intangibles are
amortized over their estimated useful lives. Payment obligations to IBM under
the license agreement are accreted using the effective interest method over the
payment period.

SEGMENT INFORMATION

     Transmeta has adopted the FASB's SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information" ("SFAS 131"). 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.

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 No. 25,
"Accounting for Stock Issued to Employees," and has elected to follow the
"disclosure only" alternative prescribed by the FASB's SFAS No. 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 No.
28. Accordingly, approximately 59% of the unearned deferred
                                        43
<PAGE>   46
                             TRANSMETA CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 No. 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 8 for pro forma
disclosures of stock-based compensation pursuant to SFAS 123).

NET LOSS PER SHARE

     Basic and diluted net loss per share is presented in conformity with the
FASB's SFAS No. 128, "Earnings Per Share" ("SFAS 128"), 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.

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.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS
137, establishes methods for recording derivative financial instruments and
hedging activities related to those instruments, as well as other hedging
activities. The Company is required to adopt SFAS 133 effective January 1, 2001.
Because Transmeta currently does not hold any derivative instruments and does
not engage in hedging activities, it does not currently believe that the
adoption of SFAS 133, as amended by SFAS 137, will have a significant impact on
its consolidated financial position or results of operations.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes certain areas of the
Staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. Transmeta believes that its current revenue
recognition policies and practices comply with SAB 101.

     In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, Interpretation of APB Opinion
No. 25" ("FIN 44"). FIN 44 clarifies the application of Accounting Principle
Board Opinion No. 25 to certain issues including: (i) the definition of employee
for purposes of applying APB Opinion No. 25, (ii) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (iii) the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award and (iv) the accounting for an exchange of stock compensation
awards in business combinations. The adoption of FIN 44 did not have a material
effect on Transmeta's consolidated financial position or results of operations.

RECLASSIFICATIONS

     Certain prior-year amounts have been reclassified to conform to the current
year's presentation.

                                        44
<PAGE>   47
                             TRANSMETA CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 2. 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 as
described below. The term of the original agreement was five years. Under the
original agreement, Transmeta granted to IBM a worldwide non-exclusive license
to certain technology developed and under development by Transmeta. In return,
Transmeta received $2.0 million in cash and issued IBM a non-interest-bearing
convertible promissory note in the face amount of $600,000. The agreement also
entitled Transmeta to earn royalties on sales by IBM of products incorporating
the licensed technology.

     During 1998, IBM made license payments of $8.0 million upon the Company's
meeting certain milestones. In addition, IBM agreed to perform certain
engineering and production services without charge and to provide credits
against future sales to Transmeta in connection with the agreement.

     In November 1999, the parties amended the technology license agreement. IBM
relinquished certain of the worldwide license rights previously obtained in
exchange for commitments by Transmeta. These commitments included paying a total
of $33.0 million to IBM in various installments through fiscal 2004.

     The then net present value of the $33.0 million commitment (approximately
$18.9 million) was recorded on the balance sheet as an element of deferred
charges under license agreements with a corresponding liability. The liability
is being accreted to its future value using the effective interest method at a
rate of approximately 15% per annum and is being recorded as part of deferred
charges under license agreements. The deferred charges under license agreements
are being amortized on a straight-line basis over the remaining period of the
original license agreement through December 2003. Management assesses the
realizability of the intangible asset at each balance sheet date. The future
cash commitment to IBM at December 31, 2000 was as follows:

<TABLE>
<CAPTION>
                                                              (IN THOUSANDS)
<S>                                                           <C>
Due on or before December 15,
  2001......................................................     $  4,000
  2002......................................................        6,000
  2003......................................................        7,000
  2004......................................................       16,000
                                                                 --------
          Total payments....................................       33,000
Less unamortized discounts..................................      (11,234)
                                                                 --------
Present value as recorded on the balance sheet..............     $ 21,766
                                                                 ========
</TABLE>

     In addition, as part of the November 1999 amended technology license
agreement, Transmeta committed to pay IBM a total of $4.3 million for
engineering and production services ($2.9 million in 2000 and $1.4 million in
1999). Transmeta's payments to IBM for expenses related to the engineering and
production services are expensed as incurred.

     The convertibility of the convertible promissory note described above 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. The deferred charges under license agreements are
being amortized on a straight-line basis over the remaining period of the
original license agreement through December 2003. In November 2000, IBM
exercised its option to convert the note into 1,200,000 common shares and the
present value of the note payable, $433,000, was reclassified as additional
paid-in-capital.

                                        45
<PAGE>   48
                             TRANSMETA CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     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 is recorded as additional deferred charges under license agreements and
is being amortized over the then remaining term of the original license
agreement through December 2003.

     In February 1998, Transmeta also entered into a technology license
agreement with Toshiba Corporation ("Toshiba"). Under this agreement, Transmeta
granted to Toshiba a worldwide non-exclusive license to certain technology
developed and under development by Transmeta. In return, Transmeta received
nonrefundable cash payments totaling $20.0 million and $5.0 million upon the
attainment of certain milestones in 1998 and 1999, respectively. The agreement
also entitles Transmeta to earn royalties on sales by Toshiba of products
incorporating the licensed technology.

     On February 17, 2000, Transmeta and Toshiba amended their technology
license agreement. Toshiba relinquished certain of the 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, has been
recorded on the balance sheet as a deferred charge under license agreement and
is being amortized on a straight-line basis over the remaining period of the
original license agreement through February 2003.

     Accumulated amortization of deferred charges related to the technology
license agreements was $10.6 million in 2000 and $218,000 in 1999.

 3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

     All cash equivalents, short-term investments and investments as of December
31, 2000 and 1999 were classified as available-for-sale securities and consisted
of the following:

<TABLE>
<CAPTION>
                                                          GROSS        GROSS
                                            AMORTIZED   UNREALIZED   UNREALIZED     FAIR
                                              COST        GAINS        LOSSES       VALUE
                                            ---------   ----------   ----------   ---------
                                                            (IN THOUSANDS)
<S>                                         <C>         <C>          <C>          <C>
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
                                                                                  =========
As of December 31, 1999:
  Money market funds......................  $ 21,994       $ --         $ --      $  21,994
  Federal agency discount notes...........    29,032          5            3         29,034
  Bank obligations........................    14,630          2            7         14,625
                                            --------       ----         ----      ---------
  Total available-for-sale securities.....  $ 65,656       $  7         $ 10      $  65,653
                                            ========       ====         ====
  Less amounts classified as cash
     equivalents..........................                                          (45,854)
                                                                                  ---------
  Total short-term investments............                                        $  19,799
                                                                                  =========
</TABLE>

                                        46
<PAGE>   49
                             TRANSMETA CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
                                                         AMORTIZED      FAIR
                                                           COST        VALUE
                                                         ---------    --------
                                                            (IN THOUSANDS)
<S>                                                      <C>          <C>
As of December 31, 2000:
  Amounts maturing within one year.....................  $317,225     $317,228
  Amounts maturing after one year, within five years...  $ 27,864     $ 28,008
</TABLE>

 4. PROPERTY AND EQUIPMENT

     Property and equipment consisted of the following:

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                          -------------------
                                                            2000       1999
                                                          --------    -------
                                                            (IN THOUSANDS)
<S>                                                       <C>         <C>
Furniture and fixtures..................................  $  1,537    $ 1,368
Computer equipment......................................    14,494      8,438
Computer software.......................................     8,878      7,236
Leasehold improvements..................................     1,209      1,040
                                                          --------    -------
                                                            26,118     18,082
Less accumulated depreciation and amortization..........   (15,636)    (9,545)
                                                          --------    -------
          Total.........................................  $ 10,482    $ 8,537
                                                          ========    =======
</TABLE>

 5. 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 $5.6 million in 2000, $5.3 million in 1999 and $4.3 million in
1998.

     During 2000, 1999 and 1998 Transmeta subleased a portion of its facilities.
The subleases extend through 2002. Sublease income was $1.2 million in 2000,
$1.1 million in 1999 and $105,000 in 1998.

     Future minimum rentals to be received under the facilities subleases at
December 31, 2000 are as follows:

<TABLE>
<CAPTION>
                                                         (IN THOUSANDS)
<S>                                                      <C>
Years ending December 31,
  2001.................................................    $1,204,000
  2002.................................................       125,000
                                                           ----------
                                                           $1,329,000
                                                           ==========
</TABLE>

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 $9.8 million in 2000, $8.5 million
in 1999 and $8.0 million in 1998. Related accumulated depreciation was $7.7
million in 2000, $4.6 million in 1999 and $1.8 million in 1998. At

                                        47
<PAGE>   50
                             TRANSMETA CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2000, future minimum payments for noncancellable capital lease and
operating obligations were as follows:

<TABLE>
<CAPTION>
                                                          CAPITAL    OPERATING
                                                          LEASES      LEASES
                                                          -------    ---------
                                                             (IN THOUSANDS)
<S>                                                       <C>        <C>
Years ending December 31,
  2001..................................................  $ 4,112     $ 4,492
  2002..................................................    1,882       3,662
  2003..................................................      387       4,135
  2004..................................................       --       4,241
  Thereafter............................................       --      16,018
                                                          -------     -------
          Total minimum lease payments..................    6,381     $32,548
                                                                      =======
Less amount representing interest.......................     (793)
                                                          -------
Present value of capital lease obligations..............    5,588
Less current portion....................................   (3,517)
                                                          -------
Noncurrent portion......................................  $ 2,071
                                                          =======
</TABLE>

COMMITMENTS

     Transmeta's foundry relationship with IBM 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, 2000, IBM had incurred approximately $19.6
million of manufacturing expenses on the Company's outstanding purchase orders.

 6. DEBT

     Transmeta issued promissory notes to financing companies in the principal
amounts of $1.4 million in 1999 and $3.5 million in 1998, 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 $786,000 as of
December 31, 2000. No notes were issued during 2000.

     Transmeta signed a note during 1998 with a supplier in the principal amount
of $1.1 million in connection with an equipment purchase. Under the terms of the
agreement the note was paid upon the closing of the Company's initial public
offering.

     In connection with the notes issued to the financing companies and the
supplier, 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
remaining discount on the notes of $7,000 at December 31, 2000 is being accreted
as additional financing (interest) expense over the term of each respective
note. The amount of discount accreted and recorded as interest expense for the
years ended December 31, 2000, 1999 and 1998 was $26,000, $26,000 and $19,000,
respectively.

                                        48
<PAGE>   51
                             TRANSMETA CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     At December 31, 2000, aggregate future minimum principal payments on the
obligations described above were as follows:

<TABLE>
<CAPTION>
                                                              (IN THOUSANDS)
<S>                                                           <C>
Years ending December 31,
  2001......................................................     $ 1,775
  2002......................................................         950
  2003......................................................          25
                                                                 -------
          Total minimum principal payments..................       2,750
Less current portion........................................      (1,775)
                                                                 -------
Noncurrent portion..........................................     $   975
                                                                 =======
</TABLE>

     Additionally, as discussed in Note 2, Transmeta issued a convertible
promissory note in the face amount of $600,000 in December 1997. The present
value of the note was recorded on the balance sheet as payable to a development
partner under license agreement and accreted interest until paid. Under the
terms of the agreement the note was converted into 1,200,000 shares of common
stock upon the completion of the Company's initial public offering and the
present value of the note, $433,000, was reclassified as additional paid in
capital.

 7. 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 noncumulative convertible preferred stock were
automatically converted into an aggregate of 73,174,342 shares of common stock.
As of December 31, 2000 there were no preferred shares outstanding.

COMMON STOCK RESERVED FOR ISSUANCE

     Shares reserved for future issuance are as follows:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                      ------------------------
                                                         2000          1999
                                                      ----------    ----------
<S>                                                   <C>           <C>
Preferred stock conversion..........................          --    59,094,342
Warrants outstanding................................   1,688,068     2,088,432
Options outstanding.................................  16,586,546     8,694,960
Employee Stock Purchase Plan........................   2,000,000            --
Future option grants................................   6,974,000     6,094,136
                                                      ----------    ----------
                                                      27,248,614    75,971,870
                                                      ==========    ==========
Shares subject to repurchase........................   5,855,413     5,296,994
                                                      ==========    ==========
</TABLE>

     Transmeta's equity incentive plans permit holders of options granted prior
to March 1999 and certain holders of non-plan grants to exercise stock options
before they are vested. Common stock issued in connection with these exercises
is subject to repurchase at the exercise price until vesting occurs. Notes
issued by employees to exercise stock options bear interest at rates ranging
from 4.47% to 6.69% and have terms of five years. All notes are full recourse
and are recorded as a reduction of stockholders' equity when issued.

                                        49
<PAGE>   52
                             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, 2000:

<TABLE>
<CAPTION>
                                                             EXERCISE
                                                 NUMBER        PRICE
                ISSUANCE DATE                   OF SHARES    PER SHARE    EXPIRATION DATE
                -------------                   ---------    ---------    ---------------
<S>                                             <C>          <C>          <C>
October 1995..................................    277,284      $0.41      October 2005
May 1996......................................     96,968      $0.41      December 2001
September 1996................................     38,784      $0.41      December 2001
April 1997....................................    160,000      $1.25      March 2003
April 1997....................................    144,000      $1.25      April 2007
August 1997...................................    160,000      $1.25      August 2007
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
                                                ---------
       Total number of shares.................  1,688,068
                                                =========
</TABLE>

     All warrants have been valued using the Black-Scholes valuation model based
on the assumptions used for stock-based awards to employees (see Note 8) except
that a volatility of 0.80 was used. Assigned values of $30,000, $17,000 and
$78,000 associated with these warrant issuances were recorded as common stock in
2000, 1999 and 1998, respectively and are being amortized as interest expense
over the term of the agreement or the period the services are rendered. Costs
associated with earlier periods were immaterial.

PREFERRED STOCK

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

     The Board of Directors may authorize the issuance of preferred stock with
voting or conversion rights that could harm the voting power or other rights of
the holders of the common stock. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, have the effect of delaying,
deferring or preventing a change in control of Transmeta and might harm the
market price of its common stock and the voting and other rights of the holders
of common stock. The Company has no current plans to issue any shares of
preferred stock. As of December 31, 2000, there were no shares of preferred
stock outstanding.

                                        50
<PAGE>   53
                             TRANSMETA CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 8. 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.

     The Company reserved 7,000,000 shares of common stock under the Plan. In
addition, subject to the Board of Director's discretion, the aggregate number of
shares reserved for issuance under the Plan will be 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.

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, 2,500,000 in 1999 and
970,000 in 1998.

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. The
Company is no longer granting options under these Prior Plans subsequent to the
adoption of the 2000 Equity Incentive Plan discussed above.

                                        51
<PAGE>   54
                             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:

<TABLE>
<CAPTION>
                                                        OPTIONS OUTSTANDING
                                         -------------------------------------------------
                                                                     WEIGHTED    WEIGHTED
                                           SHARES                    AVERAGE     AVERAGE
                                          AVAILABLE       NUMBER     EXERCISE   GRANT DATE
                                          FOR GRANT     OF SHARES     PRICE     FAIR VALUE
                                         -----------    ----------   --------   ----------
<S>                                      <C>            <C>          <C>        <C>
Balance at December 31, 1997...........       68,200     9,814,068    $0.07
  Additional shares reserved...........    4,970,000            --
  Options granted......................   (4,602,000)    4,602,000    $0.54       $0.10
  Options exercised....................           --    (7,757,748)   $0.15
  Options canceled.....................      129,998      (348,334)   $0.12
  Bonus shares distributed.............      (68,000)           --
                                         -----------    ----------
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
                                         ===========    ==========
</TABLE>

     The exercise prices for options outstanding and exercisable as of December
31, 2000 and their weighted average remaining contractual lives were as follows:

<TABLE>
<CAPTION>
                                                          OUTSTANDING
                                              ------------------------------------        EXERCISABLE
                                                             WEIGHTED                ----------------------
                                                              AVERAGE     WEIGHTED                 WEIGHTED
                                                             REMAINING    AVERAGE                  AVERAGE
                                                SHARES      CONTRACTUAL   EXERCISE     SHARES      EXERCISE
          RANGE OF EXERCISE PRICES            OUTSTANDING   LIFE YEARS     PRICE     EXERCISABLE    PRICE
          ------------------------            -----------   -----------   --------   -----------   --------
<S>                                           <C>           <C>           <C>        <C>           <C>
As of December 31, 2000:
  $0.04 - $ 0.65............................   4,954,235        7.9        $0.57      2,154,236     $0.50
  $1.00 - $ 4.75............................   2,323,711        9.0        $3.55        424,408     $3.42
  $5.25 - $ 6.00............................   5,003,000        9.5        $5.63        600,000     $6.00
  $8.25 - $24.88............................   4,305,600        9.7        $9.09      1,576,000     $9.42
                                              ----------                              ---------
  $0.04 - $24.88............................  16,586,546        9.0        $4.72      4,754,644     $4.64
                                              ==========                              =========
</TABLE>

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

                                        52
<PAGE>   55
                             TRANSMETA CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Company reserved 2,000,000 shares of common stock for issuance under the
Purchase Plan. As of December 31, 2000 no shares had been issued under the
Purchase Plan.

DEFERRED STOCK COMPENSATION

     Transmeta recorded deferred stock compensation of $46,044,000 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. These amounts are being amortized by charges to
operations, using the graded vesting method, over the four year vesting periods
of the individual stock options. During 2000, the Company recorded $13,056,000
of amortization expense related to deferred stock compensation.

ACCOUNTING FOR STOCK-BASED COMPENSATION

     The Company has elected to follow APB Opinion No. 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 No. 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.

     The fair value for the Company's stock-based awards was estimated at the
date of grant using an option pricing model. Option pricing models were
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option pricing
models require 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:

<TABLE>
<CAPTION>
                                                     YEARS ENDED DECEMBER 31,
                                                   ----------------------------
                                                   2000        1999        1998
                                                   ----    ------------    ----
<S>                                                <C>     <C>             <C>
Expected volatility..............................   0.8        N/A         N/A
Expected life of options in years................     4          4           4
Risk-free interest rate..........................   6.5%       6.1%        4.7%
Expected dividend yield..........................     0          0           0
</TABLE>

     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:

<TABLE>
<CAPTION>
                                                   YEARS ENDED DECEMBER 31,
                                            ---------------------------------------
                                               2000           1999          1998
                                            -----------    ----------    ----------
                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                         <C>            <C>           <C>
Net loss
  As reported.............................   $ (97,705)     $(41,089)     $(10,090)
  Pro forma...............................   $(112,406)     $(41,601)     $(10,196)
Net loss per share -- basic and diluted
  As reported.............................   $   (2.18)     $  (1.51)     $  (0.44)
  Pro forma...............................   $   (2.51)     $  (1.53)     $  (0.44)
</TABLE>

                                        53
<PAGE>   56
                             TRANSMETA CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                     YEARS ENDED DECEMBER 31,
                                                             -----------------------------------------
                                                                2000           1999           1998
                                                             -----------    -----------    -----------
                                                             (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                          <C>            <C>            <C>
Basic and diluted:
  Net loss.................................................   $(97,705)      $(41,089)      $(10,090)
                                                              --------       --------       --------
Basic and diluted:
  Weighted average shares outstanding......................     51,016         33,154         25,402
  Less: Weighted average shares subject to repurchase......     (6,275)        (5,918)        (2,328)
                                                              --------       --------       --------
  Weighted average shares used in computing basic and
     diluted net loss per share............................     44,741         27,236         23,074
                                                              --------       --------       --------
Net loss per share -- basic and diluted....................   $  (2.18)      $  (1.51)      $  (0.44)
                                                              ========       ========       ========
</TABLE>

     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 18,274,614 shares of common stock in 2000, 10,783,392
shares in 1999 and 8,330,418 shares in 1998, 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.

 9. 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.

10. INCOME TAXES

     The Company recorded tax provisions of $500,000 in 1999 and $2.0 million in
1998. 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 2000. The Company has incurred operating losses in all periods
that have not been tax benefited.

                                        54
<PAGE>   57
                             TRANSMETA CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     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:

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                             --------------------------------
                                                               2000        1999        1998
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Federal operating loss carryforwards.......................  $ 43,600    $ 18,900    $  8,300
State operating loss carryforwards.........................     5,400       2,200       1,300
Federal tax credit carryforwards...........................     3,700       2,200       1,200
State tax credit carryforwards.............................     2,000       1,450         900
Non-deductible reserves and capitalized expenses...........     4,040         960         740
                                                             --------    --------    --------
                                                               58,740      25,710      12,440
Less: Valuation allowance..................................   (58,740)    (25,710)    (12,440)
Net deferred taxes.........................................  $     --    $     --    $     --
                                                             ========    ========    ========
</TABLE>

     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 $33.0 million in 2000, $13.3 million in 1999 and $3.0 million in
1998.

     The federal operating loss and tax credit carryforwards listed above will
expire between 2010 and 2020, if not previously utilized. The state operating
loss and tax credit carryforwards will expire beginning in 2003, if not
previously utilized. Because of certain ownership change rules under federal and
state tax regulations, approximately $5.0 million of the December 31, 2000
tax-effected amounts of federal and state operating loss and tax credit
carryforwards listed above are not immediately available to offset future tax
liabilities. These amounts will be available through 2002.

                                        55
<PAGE>   58

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     The following table presents Transmeta's unaudited quarterly statement of
operations data for the four quarters of fiscal 1999 and fiscal 2000. 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.

<TABLE>
<CAPTION>
                                                                 QUARTERS ENDED
                             --------------------------------------------------------------------------------------
                             DEC. 31,   SEPT. 30,   JUN. 30,   MAR. 31,   DEC. 31,   SEPT. 30,   JUN. 30,   MAR. 31
                               2000       2000        2000       2000       1999       1999        1999      1999
                             --------   ---------   --------   --------   --------   ---------   --------   -------
                                                                 (IN THOUSANDS)
<S>                          <C>        <C>         <C>        <C>        <C>        <C>         <C>        <C>
Revenue:
  Product..................  $ 12,363   $  3,459    $    354   $      4   $     --   $      2    $     13   $    61
  License..................        --         --          --         --         --         --          --     5,000
                             --------   --------    --------   --------   --------   --------    --------   -------
         Total revenue.....    12,363      3,459         354          4         --          2          13     5,061
Cost of product revenue....     7,156      2,082         219          4         --          2           3        13
                             --------   --------    --------   --------   --------   --------    --------   -------
Gross profit...............     5,207      1,377         135         --         --         --          10     5,048
                             --------   --------    --------   --------   --------   --------    --------   -------
Operating expenses.........
  Research and
    development............    17,766     17,100      15,072     11,477      9,543      7,436       8,167     7,976
  Selling, general and
    administrative.........     8,561      7,037       5,781      5,666      3,873      3,133       3,044     2,761
  Amortization of deferred
    charges under license
    agreements.............     2,986      2,567       2,614      2,249        218         --          --        --
  Amortization of deferred
    stock compensation.....     5,949      3,967       2,014      1,126         --         --          --        --
                             --------   --------    --------   --------   --------   --------    --------   -------
         Total operating
           expenses........    35,262     30,671      25,481     20,518     13,634     10,569      11,211    10,737
                             --------   --------    --------   --------   --------   --------    --------   -------
Operating loss.............   (30,055)   (29,294)    (25,346)   (20,518)   (13,634)   (10,569)    (11,201)   (5,689)
  Interest and other
    income.................     4,207      2,022       2,007        938        992        957         224       283
  Interest expense.........      (393)      (397)       (426)      (450)      (457)      (494)       (502)     (499)
                             --------   --------    --------   --------   --------   --------    --------   -------
Loss before income taxes...   (26,241)   (27,669)    (23,765)   (20,030)   (13,099)   (10,106)    (11,479)   (5,905)
Provision for income
  taxes....................        --         --          --         --         --         --          --       500
                             --------   --------    --------   --------   --------   --------    --------   -------
Net loss...................  $(26,241)  $(27,669)   $(23,765)  $(20,030)  $(13,099)  $(10,106)   $(11,479)  $(6,405)
                             ========   ========    ========   ========   ========   ========    ========   =======
Net loss per share.........  $  (0.30)  $  (0.82)   $ ( 0.73)  $  (0.67)  $  (0.46)  $  (0.37)   $  (0.43)  $ (0.25)
                             ========   ========    ========   ========   ========   ========    ========   =======
Weighted average shares
  outstanding..............    86,742     33,688      32,452     29,787     28,381     27,582      26,425    25,568
                             ========   ========    ========   ========   ========   ========    ========   =======
</TABLE>

                                        56
<PAGE>   59

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 "Section 16(a)
Beneficial Ownership Compliance" in our Proxy Statement for our May 2001 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 2001 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 2001 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 2001
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:

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                          EXHIBIT TITLE
    -------                         -------------
    <S>      <C>
     3.01*   Second Amended and Restated Certificate of Incorporation.
     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").
     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.
</TABLE>

                                        57
<PAGE>   60

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                          EXHIBIT TITLE
    -------                         -------------
    <S>      <C>
    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, as amended through January 1,
             2001.**
    10.05*   2000 Employee Stock Purchase Plan, as amended through
             January 1, 2001.**
    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++  Agreement for Purchase and Sale of Custom Semiconductor
             Products, effective December 12, 1997, between International
             Business Machines Corporation and Transmeta. Incorporated by
             reference to Exhibit 10.07 to the IPO S-1.
    10.08    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.
    10.09    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.
    10.10    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 10.10 to the IPO S-1.
    10.11    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.
    10.12    Sublease Agreement, dated as of October 28, 1998, between
             Transmeta and Mitel, Inc. Incorporated by reference to
             Exhibit 10.12 to the IPO S-1.
    10.13    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.
    10.14    Sublease Agreement, dated as of November 1, 1999, between
             Transmeta and Moscape, Inc. Incorporated by reference to
             Exhibit 10.14 to the IPO S-1.
    10.15    Sublease Agreement, dated as of June 15, 2000, between
             Transmeta and Bitlocker, Inc. Incorporated by reference to
             Exhibit 10.15 to the IPO S-1.
    10.16    Form of Stock Option Agreement under Transmeta's 2000 Equity
             Incentive Plan. Incorporated by reference to Exhibit 10.17
             to the IPO S-1.**
    10.17    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.**
    10.18*   Form of Stock Option Agreement.**
    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.
</TABLE>

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

** Management contract or compensatory arrangement.

                                        58
<PAGE>   61

 ++ Confidential treatment has been granted for portions of this exhibit. These
    portions have been omitted from the exhibit and have been filed separately
    with the Securities and Exchange Commission.

     (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.

                                        59
<PAGE>   62

                                   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

Dated: March 5, 2001                      By:    /s/  MERLE A. MCCLENDON
                                            ------------------------------------
                                                     Merle A. McClendon
                                                  Chief Financial Officer

                               POWER OF ATTORNEY

     By signing this Form 10-K below, I hereby appoint each of Mark K. Allen 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.

<TABLE>
<CAPTION>
                SIGNATURE                                     TITLE                         DATE
                ---------                                     -----                         ----
<S>                                         <C>                                        <C>
            /s/ MARK K. ALLEN                Chief Executive Officer, President and    March 5, 2001
------------------------------------------   Director [Principal Executive Officer]
              Mark K. Allen

          /s/ MERLE A. MCCLENDON              Chief Financial Officer and Secretary    March 5, 2001
------------------------------------------      [Principal Financial Officer and
            Merle A. McClendon                    Principal Accounting Officer]

            /s/ R. HUGH BARNES                              Director                   March 5, 2001
------------------------------------------
              R. Hugh Barnes

           /s/ LARRY R. CARTER                              Director                   March 5, 2001
------------------------------------------
             Larry R. Carter

                                                            Director                   March   , 2001
------------------------------------------
             David R. Ditzel

          /s/ MURRAY A. GOLDMAN                             Director                   March 5, 2001
------------------------------------------
            Murray A. Goldman

           /s/ PAUL M. MCNULTY                              Director                   March 5, 2001
------------------------------------------
             Paul M. McNulty

            /s/ WILLIAM P. TAI                              Director                   March 5, 2001
------------------------------------------
              William P. Tai

           /s/ T. PETER THOMAS                              Director                   March 5, 2001
------------------------------------------
             T. Peter Thomas
</TABLE>

                                        60
<PAGE>   63

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S>       <C>
 3.01*    Second Amended and Restated Certificate of Incorporation.
 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").
 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.
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, as amended through January 1,
          2001.**
10.05*    2000 Employee Stock Purchase Plan, as amended through
          January 1, 2001.**
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++   Agreement for Purchase and Sale of Custom Semiconductor
          Products, effective December 12, 1997, between International
          Business Machines Corporation and Transmeta. Incorporated by
          reference to Exhibit 10.07 to the IPO S-1.
10.08     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.
10.09     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.
10.10     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 10.10 to the IPO S-1.
10.11     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.
10.12     Sublease Agreement, dated as of October 28, 1998, between
          Transmeta and Mitel, Inc. Incorporated by reference to
          Exhibit 10.12 to the IPO S-1.
10.13     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.
10.14     Sublease Agreement, dated as of November 1, 1999, between
          Transmeta and Moscape, Inc. Incorporated by reference to
          Exhibit 10.14 to the IPO S-1.
</TABLE>
<PAGE>   64

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S>       <C>
10.15     Sublease Agreement, dated as of June 15, 2000, between
          Transmeta and Bitlocker, Inc. Incorporated by reference to
          Exhibit 10.15 to the IPO S-1.
10.16     Form of Stock Option Agreement under Transmeta's 2000 Equity
          Incentive Plan. Incorporated by reference to Exhibit 10.17
          to the IPO S-1.**
10.17     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.**
10.18*    Form of Stock Option Agreement.**
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.
</TABLE>

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

** Management contract or compensatory arrangement.

 ++ Confidential treatment has been granted for portions of this exhibit. These
    portions have been omitted from the exhibit and have been filed separately
    with the Securities and Exchange Commission.