##### Table of Contents



UNITED
STATESSECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period from to
 Commission File Number 000-31803
 TRANSMETA CORPORATION
 (Exact name of Registrant as specified in its charter)
 Delaware
    
    77-0402448(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification no.)
 3990 Freedom Circle, Santa Clara, CA 95054
(Address of principal executive offices, including zip code)
(408) 919-3000
(Registrants telephone number, including area code)
 þ o
  o þ o
 Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ




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##### 



TRANSMETA CORPORATION
FORM 10-Q
Quarterly Period Ended March 31, 2007  TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006
    
    
    3Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and 2006
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and, 2006
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    28Item 6. Exhibits
    
    
    37Signatures
    
    
    38EXHIBIT 10.30EXHIBIT 10.31EXHIBIT 10.32EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01EXHIBIT 32.02
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 TRANSMETA CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share amounts)
 March 31,
    
    
    December 31,2007
    
    
    2006(1)(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,863
    
    
    $
    11,595Short-term investments
    
    
    18,981
    
    
    
    29,955Accounts receivable
    
    
    454
    
    
    
    310Inventories
    
    
    
    
    
    
    Prepaid expenses and other current assets
    
    
    2,383
    
    
    
    2,729Total current assets
    
    
    28,681
    
    
    
    44,589Property and equipment, net
    
    
    639
    
    
    
    758Patents and patent rights, net
    
    
    7,523
    
    
    
    9,234Other assets
    
    
    2,147
    
    
    
    2,148Total assets
    
    $
    38,990
    
    
    $
    56,729LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    
    2,523
    
    
    
    1,467Accrued compensation and related compensation liabilities
    
    
    1,193
    
    
    
    3,245Deferred income, net
    
    
    
    
    
    
    15Other accrued liabilities
    
    
    2,288
    
    
    
    3,015Advance from customers
    
    
    
    
    
    
    1,320Current portion of accrued restructuring costs
    
    
    4,667
    
    
    
    1,996Current portion of long-term payable
    
    
    533
    
    
    
    667Total current liabilities
    
    
    11,204
    
    
    
    11,725Long-term accrued restructuring costs, net of current portion
    
    
    651
    
    
    
    988Long-term payables, net of current portion
    
    
    1,339
    
    
    
    1,333Total liabilities
    
    
    13,194
    
    
    
    14,046Commitments and Contingencies (Note 5)Stockholders equity:Convertible preferred stock, $0.00001 par value, at amounts
paid in; Authorized shares  5,000,000. None issued in 2007 and 2006
    
    
    
    
    
    
    Common stock, $0.00001 par value, at amounts
paid in; Authorized shares  1,000,000,000. Issued and outstanding shares
199,913,774 and 197,876,403 respectively
    
    
    726,003
    
    
    
    724,229Treasury stock  796,875 shares in 2007 and 2006
    
    
    (2,439
    )
    
    
    (2,439
    )Accumulated other comprehensive gain (loss)
    
    
    7
    
    
    
    (66
    )Accumulated deficit
    
    
    (697,775
    )
    
    
    (679,041
    )Total stockholders equity
    
    
    25,796
    
    
    
    42,683Total liabilities and stockholders equity
    
    $
    38,990
    
    
    $
    56,729
 
 (1)
    
    Derived from the Companys audited financial statements as of December 31, 2006 but
does not include all disclosures required by accounting principles generally accepted in the
United States of America.  3




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##### Table of Contents



TRANSMETA CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 (Unaudited)
 Three Months EndedMarch 31,
    
    
    March 31,2007
    
    
    2006Revenue:Product
    
    $
    142
    
    
    $
    589License
    
    
    
    
    
    
    Service
    
    
    1,997
    
    
    
    18,920Total revenue
    
    
    2,139
    
    
    
    19,509Cost of revenue:Product
    
    
    80
    
    
    
    162License
    
    
    
    
    
    
    Service
    
    
    1,138
    
    
    
    10,881Impairment charge on inventories
    
    
    364
    
    
    
    Total cost of revenue
    
    
    1,582
    
    
    
    11,043Gross profit
    
    
    557
    
    
    
    8,466Operating expenses:Research and development
    
    
    4,936
    
    
    
    3,252Selling, general and administrative
    
    
    6,106
    
    
    
    5,544Restructuring charges, net
    
    
    6,665
    
    
    
    74Amortization of patents and patent rights
    
    
    1,712
    
    
    
    1,711Impairment charge on long-lived and other assets
    
    
    294
    
    
    
    Total operating expenses
    
    
    19,713
    
    
    
    10,581Operating loss
    
    
    (19,156
    )
    
    
    (2,115
    )Interest income and other, net
    
    
    490
    
    
    
    503Interest expense
    
    
    (68
    )
    
    
    (35
    )Net loss from continuing operations
    
    $
    (18,734
    )
    
    $
    (1,647
    )Net loss per share  basic and diluted
    
    $
    (0.09
    )
    
    $
    (0.01
    )Weighted average shares outstanding  basic and diluted
    
    
    199,220
    
    
    
    193,365
  4




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TRANSMETA CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Three Months EndedMarch 31,
    
    
    March 31,2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (18,734
    )
    
    $
    (1,647
    )Adjustments to reconcile net loss to net cash used in operating activities:Stock-based compensation expense
    
    
    303
    
    
    
    1,317Depreciation
    
    
    176
    
    
    
    301Amortization of patents and patent rights
    
    
    1,711
    
    
    
    1,711Non cash restructuring charges
    
    
    
    
    
    
    74Impairment charge on long-lived and other assets
    
    
    294
    
    
    
    Loss on disposal of fixed assets, net
    
    
    11
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (144
    )
    
    
    1,470Inventories
    
    
    
    
    
    
    97Prepaid expenses and other current assets
    
    
    8
    
    
    
    124Other assets
    
    
    
    
    
    
    (9
    )Accounts payable and accrued liabilities
    
    
    (1,836
    )
    
    
    (1,233
    )Deferred income
    
    
    (15
    )
    
    
    (86
    )Advances from customers
    
    
    (1,320
    )
    
    
    (3,674
    )Accrued restructuring charges
    
    
    2,334
    
    
    
    (484
    )Net cash (used in) operating activities
    
    
    (17,212
    )
    
    
    (2,039
    )Cash flows from investing activities:Purchase of available-for-sale investments
    
    
    
    
    
    
    (4,000
    )Proceeds from sale or maturity of available-for-sale investments
    
    
    11,000
    
    
    
    2,999Purchase of property and equipment
    
    
    (24
    )
    
    
    (114
    )Net cash provide by (used in) investing activities
    
    
    10,976
    
    
    
    (1,115
    )Cash flows from financing activities:Proceeds from sales of common stock under employee stock purchase and
incentive option plans
    
    
    1,504
    
    
    
    3,017Net cash provided by financing activities
    
    
    1,504
    
    
    
    3,017Change in cash and cash equivalents
    
    
    (4,732
    )
    
    
    (137
    )Cash and cash equivalents at beginning of period
    
    
    11,595
    
    
    
    27,659Cash and cash equivalents at end of period
    
    $
    6,863
    
    
    $
    27,522Supplemental disclosure of cash paid during the period:Cash paid for interest
    
    $
    
    
    
    $
    Cash paid for taxes
    
    $
    
    
    
    $
    4
  5




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##### Table of Contents



TRANSMETA CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. Description of Business
   2. Basis of Presentation
     6




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##### Table of Contents



3. Balance Sheet Details
 March 31,
    
    
    December 31,(In thousands)
    
    2007
    
    
    2006InventoriesRaw materials
    
    $
    
    
    
    $
    Work in progress
    
    
    
    
    
    
    Finished goods
    
    
    
    
    
    
    Total
    
    $
    
    
    
    $
    Property and equipment, netLeasehold improvements
    
    $
    2,326
    
    
    $
    2,076Computer equipment
    
    
    3,604
    
    
    
    4,183Furniture and fixtures
    
    
    406
    
    
    
    677Computer software
    
    
    772
    
    
    
    1,8587,107
    
    
    
    8,794Less accumulated depreciation and amortization
    
    
    (6,468
    )
    
    
    (8,036
    )Total
    
    $
    639
    
    
    $
    758Other accrued liabilitiesAccrued audit
    
    $
    414
    
    
    $
    847Deferred rent
    
    
    252
    
    
    
    407Accrued Insurance
    
    
    450
    
    
    
    546Other
    
    
    1,172
    
    
    
    1,215$
    2,288
    
    
    $
    3,015
 4. Short-Term Investments
   7




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##### Table of Contents



Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Aggregate Fair(In thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueAs of March 31, 2007Federal agency discount notes
    
    $
    13,000
    
    
    $
    
    
    
    $
    19
    
    
    $
    12,981Commercial paper
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    6,000Total
    
    $
    19,000
    
    
    $
    
    
    
    $
    19
    
    
    $
    18,981As of December 31, 2006Federal agency discount notes
    
    $
    16,000
    
    
    $
    
    
    
    $
    45
    
    
    $
    15,955Commercial paper
    
    
    14,000
    
    
    
    
    
    
    
    
    
    
    
    14,000Total
    
    $
    30,000
    
    
    $
    
    
    
    $
    45
    
    
    $
    29,955
  Amortized
    
    
    Aggregate Fair(In thousands)
    
    Cost
    
    
    ValueAs of March 31, 2007:Amounts maturing within one year
    
    $
    15,000
    
    
    $
    14,981Amounts maturing after one year, within five years
    
    
    4,000
    
    
    
    4,000Total
    
    $
    19,000
    
    
    $
    18,981
     In Loss Position < 12 Months
    
    
    In Loss Position > 12 Months
    
    
    Total in Loss PositionGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized(In thousands)
    
    Fair Value
    
    
    (Loss)
    
    
    Fair Value
    
    
    (Loss)
    
    
    Fair Value
    
    
    (Loss)Short-term investments:Federal agency discount notes
    
    $
    6,981
    
    
    $
    (19
    )
    
    $
    
    
    
    $
    
    
    
    $
    6,981
    
    
    $
    (19
    )Commercial paper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total in loss position
    
    $
    6,981
    
    
    $
    (19
    )
    
    $
    
    
    
    $
    
    
    
    $
    6,981
    
    
    $
    (19
    )
 8




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##### Table of Contents



5. Commitments and Contingencies
 Purchase
Commitments
  Operating Leases
   OperatingLeases(In thousands)Years ending December 31,2007(remaining 9 months)
    
    $
    3,4982008
    
    
    2,7532009
    
    
    800Total minimum operating lease payments
    
    $
    7,051
 Litigation
 In
re Transmeta Corporation Initial Public Offering Securities Litigation, In re
Initial Public Offering Securities Litigation,
 9




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##### Table of Contents



6. Net Comprehensive Loss
  Three Months EndedMarch 31,
    
    
    March 31,(In thousands)
    
    2007
    
    
    2006Net loss
    
    $
    (18,734
    )
    
    $
    (1,647
    )Net change in unrealized gain (loss) on investments
    
    
    26
    
    
    
    48Net change in foreign currency translation adjustments
    
    
    47
    
    
    
    (1
    )Net comprehensive loss
    
    $
    (18,661
    )
    
    $
    (1,600
    )
  March 31,
    
    
    December 31,(In thousands)
    
    2007
    
    
    2006Net unrealized loss on investments
    
    $
    (19
    )
    
    $
    (45
    )Cumulative foreign currency translation adjustments
    
    
    26
    
    
    
    (21
    )Accumulated other comprehensive loss
    
    $
    7
    
    
    $
    (66
    )
 7. Stock Based Compensation
  10




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##### Table of Contents



Valuation Assumptions
  Three Months Ended March 31,Incentive Stock Plans
    
    2007
    
    2006Risk-free interest rate
    
    
    4.7
    %
    
    
    4.6
    %Expected life of option
    
    
    4
    years
    
    
    3 - 4
    yearsExpected dividend yield
    
    
    0
    
    
    
    0Volatility
    
    
    87
    %
    
    
    100
    %
 Three Months Ended March 31,Employee Stock Purchase Plan
    
    2007
    
    2006Risk-free interest rate
    
    
    5.1
    %
    
    
    4.7
    %Expected life of option
    
    
    1.25
    years
    
    
    0.5
    yearsExpected dividend yield
    
    
    0
    
    
    
    0Volatility
    
    
    71
    %
    
    
    100
    %
   11




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##### Table of Contents



Stock Compensation Expense
  Three Months EndedMarch 31,
    
    
    March 31,(In thousands)
    
    2007
    
    
    2006Cost of product revenue
    
    $
    
    
    
    $
    4Cost of service revenue
    
    
    3
    
    
    
    601Research and Development
    
    
    (82
    )
    
    
    258Selling, general and administrative
    
    
    382
    
    
    
    454Total stock-based compensation
    
    $
    303
    
    
    $
    1,317
 Equity Incentive Plans
    WeightedAverageWeighted
    
    RemainingShares
    
    
    
    
    
    Average
    
    Contractual
    
    Average IntrinsicAvailable for
    
    Number of
    
    Exercise
    
    Term
    
    ValueGrant
    
Shares
    
Price
    
    (In Years)Balance at December 31, 2006
    
    
    20,542,264
    
    
    
    37,980,675
    
    
    $
    1.90Additional shares reserved
    
    
    9,893,820Options granted
    
    
    (1,000,000
    )
    
    
    1,000,000
    
    
    $
    0.67Options exercised
    
    
    
    
    
    
    (486,119
    )
    
    $
    0.75Options forfeited / canceled / expired
    
    
    7,361,816
    
    
    
    (7,361,816
    )
    
    $
    1.31Balance at March 31, 2007
    
    
    36,797,900
    
    
    
    31,132,740
    
    
    $
    2.02
    
    
    
    3.64
    
    
    $
    7,650Vested and expected to be vested
    
    
    
    
    
    
    29,289,250
    
    
    $
    2.08
    
    
    
    3.37
    
    
    $
    7,650Shares Exercisable:March 31, 2007
    
    
    
    
    
    
    24,672,606
    
    
    $
    2.26
    
    
    
    2.49
    
    
    $
    7,650
  12




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##### Table of Contents



Outstanding
    
    ExercisableWeighted
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    Average
    
    
    
    
    
    AverageShares
    
    Contractual
    
    Exercise
    
    Shares
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    Life Years
    
    Price
    
    Exercisable
    
    PriceAs of March 31, 2007:$0.19 - $0.72
    
    
    1,823,293
    
    
    
    7.64
    
    
    $
    0.67
    
    
    
    521,521
    
    
    $
    0.65$0.75 - $0.75
    
    
    5,965,385
    
    
    
    4.72
    
    
    $
    0.75
    
    
    
    4,339,581
    
    
    $
    0.75$0.77 - $1.15
    
    
    3,276,309
    
    
    
    2.30
    
    
    $
    0.99
    
    
    
    3,064,891
    
    
    $
    1.00$1.19 - $1.32
    
    
    3,125,528
    
    
    
    2.88
    
    
    $
    1.22
    
    
    
    2,810,268
    
    
    $
    1.22$1.33 - $1.48
    
    
    3,891,225
    
    
    
    6.94
    
    
    $
    1.45
    
    
    
    1,090,247
    
    
    $
    1.47$1.49 - $2.15
    
    
    3,819,495
    
    
    
    2.45
    
    
    $
    1.87
    
    
    
    3,658,275
    
    
    $
    1.87$2.16 - $2.46
    
    
    4,010,905
    
    
    
    2.53
    
    
    $
    2.42
    
    
    
    3,991,703
    
    
    $
    2.42$2.48 - $6.00
    
    
    4,247,929
    
    
    
    1.58
    
    
    $
    4.34
    
    
    
    4,223,449
    
    
    $
    4.34$8.25 - $13.62
    
    
    954,671
    
    
    
    1.66
    
    
    $
    9.43
    
    
    
    954,671
    
    
    $
    9.43$14.49- $14.49
    
    
    18,000
    
    
    
    0.09
    
    
    $
    14.49
    
    
    
    18,000
    
    
    $
    14.49Total
    
    
    31,132,740
    
    
    
    
    
    
    
    
    
    
    
    24,672,606
 2000 Employee Stock Purchase Plan
  8. Geographic and Customer Concentration Information
  Three Months EndedMarch 31,
    
    March 31,2007
    
    2006Sony Corporation
    
    
    86
    %
    
    
    50
    %Microsoft Corporation
    
    
    *
    %
    
    
    47
    %
 
 
    
    *% represents less than 10% of total revenue 13




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##### Table of Contents



March 31,
    
    December 31,2007
    
    2006Microsoft Corporation
    
    
    *
    %
    
    
    100
    %Toshiba Corporation
    
    
    100
    %
    
    
    *
    %
 
 
    
    *% represents less than 10% of net accounts receivable  9. Net Loss per Share
  Three Months EndedMarch 31, 2007
    
    
    March 31, 2006(In thousands, except per share amounts)Basic and diluted:Net Loss, as reported
    
    $
    (18,734
    )
    
    $
    (1,647
    )Shares used to compute basic net loss per share
    
    
    199,220
    
    
    
    193,365Effect of dilutive securities:Common stock equivalents
    
    
    
    
    
    
    Shares used to compute diluted net loss per share
    
    
    199,220
    
    
    
    193,365Basic and diluted net loss per share
    
    $
    (0.09
    )
    
    $
    (0.01
    )
 10. Advances from Customers
  11. Deferred income
  14




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##### Table of Contents



March 31,
    
    
    December 31,2007
    
    
    2006Deferred revenue:Product
    
    $
    
    
    
    $
    48License
    
    
    
    
    
    
    Service
    
    
    
    
    
    
    Total
    
    $
    
    
    
    $
    48Deferred costs:Product
    
    $
    
    
    
    $
    33License
    
    
    
    
    
    
    Service
    
    
    
    
    
    
    Total
    
    $
    
    
    
    $
    33Deferred income
    
    $
    
    
    
    $
    15
 12. Restructuring Charges
   Excess
    
    
    Workforce(In thousands)
    
    Facilities
    
    
    Reduction
    
    
    TotalBalance as of December 31, 2005
    
    
    4,256
    
    
    
    
    
    
    
    4,256Restructuring charges
    
    
    373
    
    
    
    
    
    
    
    373Change in estimates
    
    
    325
    
    
    
    
    
    
    
    325Cash drawdowns
    
    
    (1,970
    )
    
    
    
    
    
    
    (1,970
    )Balance as of December 31, 2006
    
    
    2,984
    
    
    
    
    
    
    
    2,984Restructuring charges
    
    
    701
    
    
    
    5,806
    
    
    
    6,507Change in estimates
    
    
    158
    
    
    
    
    
    
    
    158Cash drawdowns
    
    
    (529
    )
    
    
    (3,802
    )
    
    
    (4,331
    )Balance as of March 31, 2007
    
    $
    3,314
    
    
    $
    2,004
    
    
    $
    5,318
  15




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##### Table of Contents



13.
Stockholders Equity
  Three Months EndedMarch 31,
    
    
    March 31,2007
    
    
    2006Beginning balance:
    
    $
    42,683
    
    
    $
    54,952Net Loss
    
    
    (18,734
    )
    
    
    (1,647
    )Proceeds from stock option exercises and ESPP
    
    
    1,504
    
    
    
    3,103Stock-based
compensation expense
    
    
    270
    
    
    
    1,330Comprehensive Income (Loss)
    
    
    73
    
    
    
    47Ending balance:
    
    $
    25,796
    
    
    $
    57,785
 14.
Correspondence from Nasdaq
  15. Recent Accounting Pronouncements
     16. Segment Information
  16




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##### Table of Contents



17. Income Taxes
 Accounting for Uncertainty in Income Taxes.
    18. Subsequent Events
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Caution Regarding Forward-Looking Statements
    Overview
  17




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18




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##### Table of Contents



Critical Accounting Policies
   Accounting for Stock-Based Compensation
  Results of Operations
  19




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##### Table of Contents



Three Months EndedMarch 31,
    
    March 31,2007
    
    2006Product
    
    
    7
    %
    
    
    3
    %License
    
    
    0
    %
    
    
    0
    %Service
    
    
    93
    %
    
    
    97
    %Total
    
    
    100
    %
    
    
    100
    %Costs of product
    
    
    4
    %
    
    
    1
    %Costs of license
    
    
    0
    %
    
    
    0
    %Costs of service
    
    
    53
    %
    
    
    56
    %Impairment charges on long-lived assets
    
    
    17
    %
    
    
    0
    %Total cost of revenue
    
    
    74
    %
    
    
    57
    %Gross profit
    
    
    26
    %
    
    
    43
    %Operating expenses:Research and development
    
    
    231
    %
    
    
    17
    %Selling, general and administrative
    
    
    285
    %
    
    
    28
    %Restructuring charges
    
    
    312
    %
    
    
    0
    %Amortization of patents and patent rights
    
    
    80
    %
    
    
    9
    %Impairment charge on long-lived and other assets
    
    
    14
    %
    
    
    0
    %Total operating expenses
    
    
    922
    %
    
    
    54
    %Operating loss
    
    
    (896
    %)
    
    
    (11
    %)Interest income and other, net
    
    
    23
    %
    
    
    3
    %Interest expense
    
    
    (3
    %)
    
    
    0
    %Net loss
    
    
    (876
    %)
    
    
    (8
    %)
 Total Revenue
  Three Months EndedMarch 31,
    
    
    March 31,(In thousands)
    
    2007
    
    
    2006Product
    
    $
    142
    
    
    $
    589License
    
    
    
    
    
    
    Service
    
    
    1,997
    
    
    
    18,920Total revenue
    
    $
    2,139
    
    
    $
    19,509
  Product
Revenue.
 20




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##### Table of Contents



License Revenue.
 Service Revenue.
  Services Revenue
 Three Months EndedMarch 31,
    
    
    March 31,(In thousands)
    
    2007
    
    
    2006Time & materials based contracts
    
    $
    1,997
    
    
    $
    9,829Fixed fee development service
    
    
    
    
    
    
    9,091Maintenance & technical support services for license
    
    
    
    
    
    
    Total services revenue
    
    $
    1,997
    
    
    $
    18,920
 Maintenance and Technical Support Services Revenue.
 Fixed Fee Development Service Revenue and Cost of Services
 Time and Materials Based Design Service Revenue.
 21




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##### Table of Contents



Costs of Revenues
  Products:
  Three Months EndedMarch 31,
    
    
    March 31,(In thousands)
    
    2007
    
    
    2006Cost of product revenue
    
    $
    80
    
    
    $
    162Impairment charge on inventory
    
    
    364
    
    
    
    Total cost of product revenue
    
    $
    444
    
    
    $
    162
   Licenses:
  Services:
   22




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Three Months EndedMarch 31,
    
    
    March 31,(In thousands)
    
    2007
    
    
    2006Time & materials based contracts
    
    $
    1,138
    
    
    $
    6,220Fixed fee development service
    
    
    
    
    
    
    4,661Maintenance & technical support services for license
    
    
    
    
    
    
    Total cost of services revenue
    
    $
    1,138
    
    
    $
    10,881
 Research and Development
  Three Months EndedMarch 31,
    
    
    March 31,(In thousands)
    
    2007
    
    
    2006Research and development expenses
    
    $
    4,936
    
    
    $
    3,252Amount classified to costs of service and deferred costs (1)
    
    $
    1,055
    
    
    $
    6,196
 
 (1)
    
    In fiscal 2006, we classified costs directly attributable to the design and development
services agreements to costs of service revenues.   Selling, General and Administrative
 Three Months EndedMarch 31,
    
    
    March 31,(In thousands)
    
    2007
    
    
    2006Selling, general and administrative expenses
    
    $
    6,106
    
    
    $
    5,544
  23




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##### Table of Contents



Restructuring Charges, net
  Amortization of Patents and Patent Rights
  Impairment Charge on Long-Lived and Other Assets
  Stock Compensation
 Three Months EndedMarch 31,
    
    
    March 31,(In thousands)
    
    2007
    
    
    2006Stock compensation expense
    
    $
    303
    
    
    $
    1,317
  Interest Income and Other, Net
  Interest Expense
  Liquidity and Capital Resources
  24




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##### Table of Contents



Three Months EndedMarch 31,
    
    
    March 31,(In thousands)
    
    2007
    
    
    2006Net cash used in operating activities
    
    $
    (17,212
    )
    
    $
    (2,039
    )Net cash provided by (used in) investing activities
    
    
    10,976
    
    
    
    (1,115
    )Net cash provided by financing activities
    
    
    1,504
    
    
    
    3,017Decrease in cash and cash equivalents
    
    $
    (4,732
    )
    
    $
    (137
    )
        25




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##### Table of Contents



Restructuring
  Contractual Obligations
  Payments Due by PeriodRemainder of(In thousands)
    
    Total
    
    
    2007
    
    
    2008
    
    
    2009Operating Leases(1)
    
    $
    5,927
    
    
    $
    3,541
    
    
    $
    2,386
    
    
    $
    Unconditional
Contractual Obligations(2)
    
    
    1,866
    
    
    
    400
    
    
    
    666
    
    
    
    800Less Income from Sub-Lease
    
    
    (742
    )
    
    
    (443
    )
    
    
    (299
    )
    
    
    Total
    
    $
    7,051
    
    
    $
    3,498
    
    
    $
    2,753
    
    
    $
    800
 
 (1)
    
    Operating leases include agreements for building facilities.(2)
    
    Contractual obligations include agreements to purchase goods or services that are enforceable
and legally binding on Transmeta and that specify all significant terms, including: fixed or
minimum quantities to be purchased; fixed, minimum or variable price provisions; and the
approximate timing of the transaction. Purchase obligations also include agreements for design
tools and software for use in product development. Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
 -
   26




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Interest Rate Risk.
 Foreign Currency Exchange Risk.
 
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
  Inherent Limitations on Effectiveness of Controls
  Changes in Internal Control over Financial Reporting
  27




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 In
re Transmeta Corporation Initial Public Offering Securities Litigation In re
Initial Public Offering Securities Litigation
  
 Item 1A. Risk Factors
 The factors discussed below are cautionary statements that identify important risk factors
that could cause actual results to differ materially from those anticipated in the forward-looking
statements in this quarterly report on Form 10Q . If any of the following risks actually occurs, our
business, financial condition and results of operations would suffer. In this case, the trading
price of our common stock could decline and investors might lose all or part of their investment in
our common stock.
 We have a history of losses, and we must successfully execute on our modified business model and
restructuring plan if we are to sustain our operations.
  28




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##### Table of Contents



We might fail to execute our restructuring plan or to operate successfully under our modified
business model.
  We need additional financing under our restructuring plan, but we may not be able to raise any more
financing, or financing may only be available on terms unfavorable to us or our stockholders.
  
    
    fund expansion;
    
    fund marketing expenditures;
    
    develop or enhance our products or technologies;
    
    enhance our operating infrastructure;
 29




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##### Table of Contents




    
    hire additional personnel;
    
    respond to customer concerns about our viability;
    
    respond to competitive pressures; or
    
    acquire complementary businesses or technologies.
  We might not be able to execute under our restructuring plan if we lose key management or
technical personnel, on whose knowledge, leadership and technical expertise we rely.
  Our lawsuit against Intel for patent infringement will be costly to litigate, could be
delayed, could be decided adversely to us, and could adversely affect our intellectual property
rights, distract our management and technical staff, and cause our stock price to decline.
  30




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##### Table of Contents



We may fail to meet the continued listing requirements of the Nasdaq Stock Market, which may cause
our stock to be delisted and result in reduced liquidity of our stock, reduce the trading price of
our stock, and impair our ability to raise financing.
  Our licensing business depends on maintaining and increasing our LongRun2 licensing revenue,
and we might be unsuccessful in our efforts to license our LongRun2 technology to other parties.
  We have limited visibility regarding when and to what extent our licensees will use our
LongRun2 or other licensed technologies.
  
    
    the competition these companies face and the market acceptance of their products;
 31




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##### Table of Contents




    
    the pricing policies of our licensees for their products incorporating our
technology and whether those products are competitively priced;
    
    the engineering, marketing and management capabilities of
these companies and technical challenges unrelated to our
technology that they face in developing their products; and
    
    the financial and other resources of our licensees.
  We face intense competition in the power management market. Many of our competitors are much
larger than we are and have significantly greater resources. We may not be able to compete
effectively.
  If we do not keep pace with technological change, our technology offerings may not be
competitive and our revenue and operating results may suffer.
  We might experience payment disputes for amounts owed to us under our LongRun2 licensing
agreements, and this may harm our results of operations.
  We currently derive a substantial portion of our revenue from a small number of customers and
licensees, and our revenue would decline significantly if any major customer were to cancel, reduce
or delay a transaction relating to our products, licenses and services.
   32




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##### Table of Contents



Our technologies 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.
   Any dispute regarding our intellectual property may require us to indemnify certain licensees or
third parties, the cost of which could severely hamper our business operations and financial
condition.
  If we are unable to protect our proprietary rights adequately, our competitors might gain access to
our technology and we might not compete successfully in our markets.
   The evolution of our business could place significant strain on our management systems,
infrastructure and other resources, and our business may not succeed if we fail to manage it
effectively.
  33




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##### Table of Contents



We have significant international business relationships, which expose us to risk and uncertainties.
  
    
    difficulties and costs of serving international customers;
    
    fluctuations in currency exchange rates;
    
    unexpected changes in regulatory requirements, including imposition of currency exchange controls;
    
    longer accounts receivable collection cycles;
    
    import or export licensing requirements;
    
    potentially adverse tax consequences;
    
    major health concerns, such as SARS;
    
    political and economic instability, for example as a result of tensions between Taiwan and the
Peoples Republic of China; and
    
    potentially reduced protection for intellectual property rights.
 Our operating results are difficult to predict and fluctuate significantly. A failure to meet the
expectations of securities analysts or investors could result in a substantial decline in our stock
price.
   The price of our common stock has been volatile and is subject to wide fluctuations.
  
    
    variations in our quarterly results;
    
    market conditions in our industry, the industries of our customers and the economy as a whole;
    
    announcements of technological innovations by us or by our competitors;
    
    introductions of new products or new pricing policies by us or by our competitors;
    
    acquisitions or strategic alliances by us or by our competitors;
    
    recruitment or departure of key personnel;
    
    the gain or loss of significant orders;
 34




---



##### Table of Contents




    
    the gain or loss of significant customers; and
    
    changes in the estimates of our operating performance or changes in recommendations by securities analysts.
  Our certificate of incorporation and bylaws, stockholder rights plan and Delaware law contain
provisions that could discourage or prevent a takeover, even if an acquisition would be beneficial
to our stockholders.
  
    
    establishing a classified board of directors so that not all members of our board may be elected at one time;
    
    providing that directors may be removed only for cause and only with the vote of 66 2/3% of our
outstanding shares;
    
    requiring super-majority voting to amend some provisions in our certificate of incorporation and bylaws;
    
    authorizing the issuance of blank check preferred stock that our board could issue to increase the number
of shares outstanding 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; and
    
    establishing advance notice requirements for nominations for election to our board or
for proposals that can be acted upon by stockholders at stockholder meetings.
  35




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We may develop or identify material weaknesses in our internal control over financial reporting.
  36




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##### Table of Contents



Item 6. Exhibits
 Exhibits.
 ExhibitNumber
    
    Exhibit Title10.30
    
    Offer of Employment as President and Chief Executive Officer, dated January 31, 2007, from Transmeta Corporation to
Lester M. Crudele.**10.31
    
    Separation and Release Agreement and Consulting Agreement, entered February 1, 2007, between Transmeta Corporation
and Arthur L. Swift. **10.32
    
    Incentive Retention Agreement, entered February 27, 2007, between Transmeta Corporation and John OHara Horsley.**
+31.01
    
    Certification by Lester M. Crudele pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.31.02
    
    Certification by Ralph J. Harms pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.32.01*
    
    Certification by Lester M. Crudele pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.02*
    
    Certification by Ralph J. Harms pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
  
 *
    
    As contemplated by SEC Release No. 33-8212, these exhibits are
furnished with this quarterly report on Form 10-Q and are not
deemed filed with the Securities and Exchange Commission and are
not incorporated by reference in any filing of Transmeta
Corporation under the Securities Act of 1933 or the Securities
Exchange Act of 1934, including this quarterly report, whether made
before or after the date hereof and irrespective of any general
incorporation language in any filings.**
    
    Management contract or compensatory arrangement.+
    
    Confidential treatment has been requested for portions of this
exhibit. These portions have been omitted from this Report and have
been filed separately with the Securities and Exchange Commission. 37




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##### Table of Contents



SIGNATURES
  TRANSMETA CORPORATIONBy
    /s/ Ralph J. HarmsRalph J. HarmsDate: May 15, 2007
    Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer) 38




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Exhibit Title10.30
    
    Offer of Employment as President and Chief Executive Officer, dated January 31, 2007,
from Transmeta Corporation to Lester M. Crudele.**10.31
    
    Separation and Release Agreement and Consulting Agreement, entered February 1, 2007,
between Transmeta Corporation and Arthur L. Swift. **10.32
    
    Incentive Retention Agreement, entered February 27, 2007, between Transmeta Corporation
and John OHara Horsley.** +31.01
    
    Certification by Lester M. Crudele pursuant to Rule 13a-14(a) promulgated under the
Securities Exchange Act of 1934.31.02
    
    Certification by Ralph J. Harms pursuant to Rule 13a-14(a) promulgated under the
Securities Exchange Act of 1934.32.01*
    
    Certification by Lester M. Crudele pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.02*
    
    Certification by Ralph J. Harms pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    As contemplated by SEC Release No. 33-8212, these exhibits are
furnished with this quarterly report on Form 10-Q and are not deemed
filed with the Securities and Exchange Commission and are not
incorporated by reference in any filing of Transmeta Corporation under
the Securities Act of 1933 or the Securities Exchange Act of 1934,
including this quarterly report, whether made before or after the date
hereof and irrespective of any general incorporation language in any
filings.**
    
    Management contract or compensatory arrangement.+
    
    Confidential treatment has been requested for portions of this
exhibit. These portions have been omitted from this Report and have
been filed separately with the Securities and Exchange Commission.