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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



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FORM 10-Q



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(Mark One)

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

For the Quarterly Period Ended September 28, 2001

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)

|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 77-0402448
(I.R.S. employer
identification no.)

3940 Freedom Circle, Santa Clara, CA 95054
(Address of principal executive offices, including zip code)

(408) 919-3000
(Registrants telephone number, including area code)



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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  [   ]

There were 134,634,048 shares of the Companys common stock, par value
$0.00001 per share, outstanding on September 28, 2001.



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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Condensed Consolidated Financial Statements                                          
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|PART II. OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 2. Changes in Securities and Use of Proceeds                                            
|                              | Item 3. Defaults upon Senior Securities                                                      
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 5. Other Information                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   



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##### Table of Contents



TRANSMETA CORPORATION

FORM 10-Q
Quarterly Period Ended September 28, 2001

TABLE OF CONTENTS

|                              |                                                                                                                                                          |    |     
|----------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ----
|                              |                                                                                                                                                          |    | Page
|                              |                                                                                                                                                          |    |     
|PART I. FINANCIAL INFORMATION |                                                                                                                                                          |   
|                             
|Item 1.                       | Condensed Consolidated Financial Statements                                                                                                              |    | 3   
|                              | Condensed Consolidated Balance Sheets as of September 28, 2001 (unaudited) and December 29,
2000                                                         |    | 3   
|                              | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 28, 2001    (unaudited) and September 29, 2000 (unaudited) |    | 4   
|                              | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 28, 2001
    (unaudited) and September 29, 2000 (unaudited)          |    | 5   
|                              | Notes to Condensed Consolidated Financial Statements (unaudited)                                                                                         |    | 6   
|Item 2.                       | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                    |    | 8   
|Item 3.                       | Quantitative and Qualitative Disclosures about Market Risk                                                                                               |    | 24  
|                             
|PART II. OTHER INFORMATION    |                                                                                                                                                          |   
|                             
|Item 1.                       | Legal Proceedings                                                                                                                                        |    | 25  
|Item 2.                       | Changes in Securities and Use of Proceeds                                                                                                                |    | 26  
|Item 3.                       | Defaults Upon Senior Securities                                                                                                                          |    | 26  
|Item 4.                       | Submission of Matters to a Vote of Security Holders                                                                                                      |    | 26  
|Item 5.                       | Other Information                                                                                                                                        |    | 26  
|Item 6.                       | Exhibits and Reports on Form 8-K                                                                                                                         |    | 26  
|Signatures                    |                                                                                                                                                          | 27

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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 per share amounts)

ASSETS

|                                                                     |                                                               |                                            |        |               |         |              |        |          |         | 
|-------------------------------------------------------------------- | ------------------------------------------------------------- | ------------------------------------------ | ------ | ------------- | ------- | ------------ | ------ | -------- | ------- | 
|                                                                     |                                                               |                                            |        | September 28, |         | December 29,
|                                                                     |                                                               |                                            |        | 2001          |         | 2000(1)     
|                                                                     |                                                               |                                            |        |               |         |             
|                                                                     |                                                               |                                            |        | (unaudited)   |         |              |        |         
|Current assets:                                                      |                                                               |                                            |        |               |         |              |        |         
|                                                                     | Cash and cash equivalents                                     |                                            | $      | 36,965        |         |              | $      | 259,744  |        
|                                                                     | Short-term investments                                        |                                            |        | 225,873       |         |              |        | 83,358   |        
|                                                                     | Accounts receivable, net                                      |                                            |        | 4,167         |         |              |        | 3,298    |        
|                                                                     | Inventories                                                   |                                            |        | 2,006         |         |              |        | 15,453   |        
|                                                                     | Prepaid expenses and other current assets                     |                                            |        | 7,495         |         |              |        | 7,821    |        
|                                                                     |                                                               |                                            |        |               |         |              |        |         
|                                                                     |                                                               | Total current assets                       |        |               | 276,506 |              |        |          | 369,674 | 
|                                                                     | Property and equipment, net                                   |                                            |        | 12,029        |         |              |        | 10,482   |        
|                                                                     | Deferred charges under license agreements                     |                                            |        | 18,880        |         |              |        | 26,097   |        
|                                                                     | Loans to founders                                             |                                            |        |              |         |              |        | 5,446    |        
|                                                                     | Intangible and other assets                                   |                                            |        | 46,305        |         |              |        | 837      |        
|                                                                     |                                                               |                                            |        |               |         |              |        |         
|                                                                     |                                                               | Total assets                               |        | $             | 353,720 |              |        | $        | 412,536 | 
|                                                                     |                                                               |                                            |        |               |         |              |        |         
|LIABILITIES AND STOCKHOLDERS EQUITY                                 |                                                               |                                            |        |               |         |              |        |         
|Current liabilities:                                                 |                                                               |                                            |        |               |         |              |        |         
|                                                                     | Accounts payable                                              |                                            | $      | 5,803         |         |              | $      | 7,237    |        
|                                                                     | Accrued compensation and related compensation liabilities     |                                            |        | 2,857         |         |              |        | 2,215    |        
|                                                                     | Other accrued liabilities                                     |                                            |        | 7,607         |         |              |        | 7,926    |        
|                                                                     | Long-term debt and capital lease obligations, current portion |                                            |        | 3,895         |         |              |        | 5,292    |        
|                                                                     | Long-term payables, current portion                           |                                            |        | 9,000         |         |              |        | 4,000    |        
|                                                                     |                                                               |                                            |        |               |         |              |        |         
|                                                                     |                                                               | Total current liabilities                  |        |               | 29,162  |              |        |          | 26,670  | 
|Long-term debt and capital lease obligations, net of current portion |                                                               |                                            | 639    |               |         |              | 3,046  |         
|Deposits received under subleasing agreements                        |                                                               |                                            |       |               |         |              | 138    |         
|Long-term payables, net of current portion                           |                                                               |                                            | 33,888 |               |         |              | 17,766 |         
|Commitments
and contingencies                                       
|Stockholders equity:                                                |                                                               |                                            |        |               |         |              |        |         
|                                                                     | Preferred stock, $0.00001 par value (none issued)             |                                            |        |              |         |              |        |         |        
|                                                                     | Common stock, $0.00001 par value, at amounts paid in          |                                            |        | 617,312       |         |              |        | 589,220  |        
|                                                                     | Notes receivable from stockholders                            |                                            |        | (17,382       | )       |              |        | (17,752  | )      
|                                                                     | Deferred stock compensation                                   |                                            |        | (15,666       | )       |              |        | (32,988  | )      
|                                                                     | Accumulated other comprehensive income                        |                                            |        | 1,021         |         |              |        | 147      |        
|                                                                     | Accumulated deficit                                           |                                            |        | (295,254      | )       |              |        | (173,711 | )      
|                                                                     |                                                               |                                            |        |               |         |              |        |         
|                                                                     |                                                               | Total stockholders equity                 |        |               | 290,031 |              |        |          | 364,916 | 
|                                                                     |                                                               |                                            |        |               |         |              |        |         
|                                                                     |                                                               | Total liabilities and stockholders equity |        | $             | 353,720 |              |        | $        | 412,536 | 
|                                                                     |                                                               |                                            |        |               |         |              |        |         



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|(1) |  | Derived from the Companys audited financial statements as of December
29, 2000, included in the Companys Form 10-K filed with the Securities
and Exchange Commission.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

(See accompanying notes)

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TRANSMETA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

|                                                        |                                                              |                          |         |                    |        |                   |         |               |        |               |          |        |         |   |         |        |        | 
|------------------------------------------------------- | ------------------------------------------------------------ | ------------------------ | ------- | ------------------ | ------ | ----------------- | ------- | ------------- | ------ | ------------- | -------- | ------ | ------- | - | ------- | ------ | ------ | 
|                                                        |                                                              |                          |         | Three Months Ended |        | Nine Months Ended
|                                                        |                                                              |                          |         |                    |        |                  
|                                                        |                                                              |                          |         | September 28,      |        | September 29,     |         | September 28, |        | September 29,
|                                                        |                                                              |                          |         | 2001               |        | 2000              |         | 2001          |        | 2000         
|                                                        |                                                              |                          |         |                    |        |                   |         |               |        |              
|Net revenue                                             |                                                              | $                        | 5,027   |                    |        | $                 | 3,459   |               |        | $             | 34,129   |        |         | $ | 3,817   |       
|Cost of revenue                                         |                                                              |                          | 2,837   |                    |        |                   | 2,082   |               |        |               | 47,244   |        |         |   | 2,305   |       
|                                                        |                                                              |                          |         |                    |        |                   |         |               |        |               |          |        |         |   |         |       
|Gross profit (loss)                                     |                                                              |                          | 2,190   |                    |        |                   | 1,377   |               |        |               | (13,115  | )      |         |   | 1,512   |       
|Operating expenses:                                     |                                                              |                          |         |                    |        |                   |         |               |        |               |          |        |         |   |         |       
|                                                        | Research and development(1)                                  |                          |         | 17,029             |        |                   |         | 17,100        |        |               |          | 51,388 |         |   |         | 43,649 |       
|                                                        | In-process research and development                          |                          |         |                   |        |                   |         |              |        |               |          | 13,600 |         |   |         |       |       
|                                                        | Selling, general and administrative(2)                       |                          |         | 8,776              |        |                   |         | 7,037         |        |               |          | 26,625 |         |   |         | 18,484 |       
|                                                        | Amortization of deferred charges and other intangible
assets |                          |         | 5,024              |        |                   |         | 2,567         |        |               |          | 12,512 |         |   |         | 7,430  |       
|                                                        | Amortization of deferred stock compensation                  |                          |         | 4,046              |        |                   |         | 3,967         |        |               |          | 15,823 |         |   |         | 7,107  |       
|                                                        |                                                              |                          |         |                    |        |                   |         |               |        |               |          |        |         |   |         |       
|                                                        |                                                              | Total operating expenses |         |                    | 34,875 |                   |         |               | 30,671 |               |          |        | 119,948 |   |         |        | 76,670 | 
|                                                        |                                                              |                          |         |                    |        |                   |         |               |        |               |          |        |         |   |         |       
|Operating loss                                          |                                                              |                          | (32,685 | )                  |        |                   | (29,294 | )             |        |               | (133,063 | )      |         |   | (75,158 | )     
|                                                        | Interest income                                              |                          |         | 3,332              |        |                   |         | 2,022         |        |               |          | 12,362 |         |   |         | 4,967  |       
|                                                        | Interest expense                                             |                          |         | (227               | )      |                   |         | (397          | )      |               |          | (820   | )       |   |         | (1,273 | )     
|                                                        |                                                              |                          |         |                    |        |                   |         |               |        |               |          |        |         |   |         |       
|Loss before income taxes                                |                                                              |                          | (29,580 | )                  |        |                   | (27,669 | )             |        |               | (121,521 | )      |         |   | (71,464 | )     
|                                                        | Provision for income taxes                                   |                          |         | 5                  |        |                   |         |              |        |               |          | 22     |         |   |         |       |       
|                                                        |                                                              |                          |         |                    |        |                   |         |               |        |               |          |        |         |   |         |       
|Net loss                                                |                                                              | $                        | (29,585 | )                  |        | $                 | (27,669 | )             |        | $             | (121,543 | )      |         | $ | (71,464 | )     
|                                                        |                                                              |                          |         |                    |        |                   |         |               |        |               |          |        |         |   |         |       
|Net loss per share  basic and diluted                  |                                                              | $                        | (0.22   | )                  |        | $                 | (0.82   | )             |        | $             | (0.95    | )      |         | $ | (2.26   | )     
|                                                        |                                                              |                          |         |                    |        |                   |         |               |        |               |          |        |         |   |         |       
|Weighted average shares outstanding  basic and diluted |                                                              |                          | 131,560 |                    |        |                   | 33,688  |               |        |               | 128,582  |        |         |   | 31,652  |       
|                                                        |                                                              |                          |         |                    |        |                   |         |               |        |               |          |        |         |   |         |       



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|(1) |  | Excludes $1,237 and $1,797 in amortization of deferred stock compensation
for the three months ended September 28, 2001 and September 29, 2000,
respectively, and $8,289 and $2,304 for the nine months ended September
28, 2001 and September 29, 2000, respectively.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Excludes $2,809 and $2,170 in amortization of deferred stock compensation
for the three months ended September 28, 2001 and September 29, 2000,
respectively, and $7,534 and $4,803 for the nine months ended September
28, 2001 and September 29, 2000, respectively.

(See accompanying notes)

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TRANSMETA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

|                                                       |                                                                  |                                                     |          |                   |          |               |         |          |         |  
|------------------------------------------------------ | ---------------------------------------------------------------- | --------------------------------------------------- | -------- | ----------------- | -------- | ------------- | ------- | -------- | ------- | -
|                                                       |                                                                  |                                                     |          | Nine Months Ended
|                                                       |                                                                  |                                                     |          |                  
|                                                       |                                                                  |                                                     |          | September 28,     |          | September 29,
|                                                       |                                                                  |                                                     |          | 2001              |          | 2000         
|                                                       |                                                                  |                                                     |          |                   |          |              
|Net cash used in operating activities                  |                                                                  | $                                                   | (62,333  | )                 |          | $             | (53,834 | )       
|                                                       |                                                                  |                                                     |          |                   |          |               |         |         
|Cash flows (used in) investing activities:             |                                                                  |                                                     |          |                   |          |               |         |         
|                                                       | Purchase of available-for-sale investments                       |                                                     |          | (221,806          | )        |               |         | (234,793 | )      
|                                                       | Proceeds from sale or maturity of available-for-sale investments |                                                     |          | 80,166            |          |               |         | 229,335  |        
|                                                       | Purchase of property and equipment                               |                                                     |          | (6,747            | )        |               |         | (3,900   | )      
|                                                       | Loans to founders                                                |                                                     |          | 5,446             |          |               |         | (5,250   | )      
|                                                       | Payment to development partner                                   |                                                     |          | (3,500            | )        |               |         |         |        
|                                                       | Purchase of intellectual property and other assets               |                                                     |          | (12,504           | )        |               |         | (284     | )      
|                                                       |                                                                  |                                                     |          |                   |          |               |         |         
|                                                       |                                                                  | Net cash (used in) investing activities             |          |                   | (158,945 | )             |         |          | (14,892 | )
|                                                       |                                                                  |                                                     |          |                   |          |               |         |         
|Cash flows (used in)/provided by financing activities: |                                                                  |                                                     |          |                   |          |               |         |         
|                                                       | Net proceeds from issue of preferred stock                       |                                                     |          |                  |          |               |         | 87,942   |        
|                                                       | Expenses related to initial public offering of common stock      |                                                     |          | (256              | )        |               |         |         |        
|                                                       | Common stock issued under stock option and ESPP plans            |                                                     |          | 2,558             |          |               |         | 222      |        
|                                                       | Issuance of common stock upon exercise of warrant                |                                                     |          |                  |          |               |         | 50       |        
|                                                       | Issuance of debt and capital lease obligations                   |                                                     |          |                  |          |               |         | 1,223    |        
|                                                       | Repayment of debt and capital lease obligations                  |                                                     |          | (3,803            | )        |               |         | (3,280   | )      
|                                                       |                                                                  |                                                     |          |                   |          |               |         |         
|                                                       |                                                                  | Net cash (used in)/provided by financing activities |          |                   | (1,501   | )             |         |          | 86,157  |  
|                                                       |                                                                  |                                                     |          |                   |          |               |         |         
|Change in cash and cash equivalents                    |                                                                  |                                                     | (222,779 | )                 |          |               | 17,431  |         
|Cash and cash equivalents at beginning of period       |                                                                  |                                                     | 259,744  |                   |          |               | 46,645  |         
|                                                       |                                                                  |                                                     |          |                   |          |               |         |         
|Cash and cash equivalents at end of period             |                                                                  | $                                                   | 36,965   |                   |          | $             | 64,076  |         
|                                                       |                                                                  |                                                     |          |                   |          |               |         |         

(See accompanying notes)

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TRANSMETA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission and generally accepted accounting principles. However,
certain information or footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed, or omitted, pursuant to such rules and regulations. In the
opinion of management, the statements include all adjustments (which are of a
normal and recurring nature) necessary for the fair presentation of the results
of the interim periods presented. These financial statements should be read in
conjunction with our audited consolidated financial statements and the notes
thereto for the year ended December 29, 2000. The results of operations for the
three months and nine months ended September 28, 2001 are not necessarily
indicative of the operating results for the full fiscal year or any future
period.

The Companys fiscal year ends on the last Friday in December, and each
fiscal quarter ends on the last Friday of each calendar quarter. The first
three quarters of fiscal 2001 and fiscal 2000 each consisted of 39 weeks.

2. Recent Accounting Pronouncement

In August 2001, the FASB issued Statements of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, effective for fiscal years beginning after December 15, 2001. The
Company is currently assessing the impact of the new rules and will apply them
on January 1, 2002. The Company does not anticipate that the adoption of the
new rules will have a material impact on its earnings or financial position.

3. Net Loss per Share

Basic and diluted net loss per share is presented in conformity with the
Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 128, Earnings Per Share, for all periods presented. Basic and
diluted net loss per share has been computed using the weighted-average number
of shares of common stock outstanding during each period, less weighted-average
shares subject to repurchase.

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

|                                       |                                                                                |  |                                          |  |                   |   |               |         |               |   |       |         |   |  |  |  |  |   |       |          |   |   |       |         |   |  |  |  | 
|-------------------------------------- | ------------------------------------------------------------------------------ |  | ---------------------------------------- |  | ----------------- | - | ------------- | ------- | ------------- | - | ----- | ------- | - |  |  |  |  | - | ----- | -------- | - | - | ----- | ------- | - |  |  |  | 
|                                       |                                                                                |  | Three Months Ended                       |  | Nine Months Ended
|                                       |                                                                                |  |                                          |  |                  
|                                       |                                                                                |  | September 28,                            |  | September 29,     |   | September 28, |         | September 29,
|                                       |                                                                                |  | 2001                                     |  | 2000              |   | 2001          |         | 2000         
|                                       |                                                                                |  |                                          |  |                   |   |               |         |              
|                                       |                                                                                |  | (In thousands, except per share amounts)
|Basic and diluted:                     |                                                                                |  |                                          |  |                   |   |               |         |               |   |       |         |   |  |  |  |  |   |       |          |   |   |       |        
|                                       | Net loss                                                                       |  |                                          |  |                   |   | $             | (29,585 | )             |   | $     | (27,669 | ) |  |  |  |  |   | $     | (121,543 | ) |   | $     | (71,464 | )
|                                       |                                                                                |  |                                          |  |                   |   |               |         |               |   |       |         |   |  |  |  |  |   |       |          |   |   |       |        
|Basic and diluted:                     |                                                                                |  |                                          |  |                   |   |               |         |               |   |       |         |   |  |  |  |  |   |       |          |   |   |       |        
|                                       | Weighted average shares outstanding                                            |  |                                          |  |                   |   |               | 135,147 |               |   |       | 39,762  |   |  |  |  |  |   |       | 132,865  |   |   |       | 37,984  |  
|                                       | Less: Weighted average shares subject to
repurchase                            |  |                                          |  |                   |   |               | (3,587  | )             |   |       | (6,074  | ) |  |  |  |  |   |       | (4,283   | ) |   |       | (6,332  | )
|                                       |                                                                                |  |                                          |  |                   |   |               |         |               |   |       |         |   |  |  |  |  |   |       |          |   |   |       |        
|                                       | Weighted average shares used in computing
basic and diluted net loss per share |  |                                          |  |                   |   |               | 131,560 |               |   |       | 33,688  |   |  |  |  |  |   |       | 128,582  |   |   |       | 31,652  |  
|                                       |                                                                                |  |                                          |  |                   |   |               |         |               |   |       |         |   |  |  |  |  |   |       |          |   |   |       |        
|Net loss per share  basic and diluted |                                                                                |  |                                          |  |                   | $ | (0.22         | )       |               | $ | (0.82 | )       |   |  |  |  |  | $ | (0.95 | )        |   | $ | (2.26 | )      
|                                       |                                                                                |  |                                          |  |                   |   |               |         |               |   |       |         |   |  |  |  |  |   |       |          |   |   |       |        

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 21,878,568 and 12,112,503 shares of common stock at
September 28, 2001 and September 29, 2000, 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.

4. Accumulated Other Comprehensive Loss

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Net accumulated comprehensive loss was $29.3 million for the third quarter
of fiscal 2001 compared to $27.7 million for the same period last year. Net
accumulated comprehensive loss for the third quarter of fiscal 2001 and fiscal
2000 includes $250,000 and $16,000, respectively, of comprehensive income due
to unrealized gains on available-for-sale investments. Net accumulated comprehensive loss
was $120.5 million for the first nine months of fiscal 2001 compared to $71.4
million for the same period last year. Net accumulated comprehensive loss for
the first nine months of fiscal 2001 and 2000 includes $1.0 million and
$16,000, respectively, of comprehensive income due to unrealized gains on
available-for-sale securities. Increases in other comprehensive income are due
to larger average cash balances as a result of the Companys initial public
offering, which closed in November 2000.

5. Segment Information

Transmeta operates solely in one segment, the development and marketing
and selling of hardware and software technologies for the mobile computing
market. The Company also currently operates in one geographic region and is
evaluated by management on a single segment basis. Sales to Japan, Taiwan and
the United States in the first nine months of fiscal 2001 accounted for 65%,
26% and 9% of net revenue, respectively. Sales to four customers accounted for
28%, 18%, 12% and 11% of net revenue in the first nine months of fiscal 2001.

6. Inventories

During the second quarter of fiscal 2001, Transmeta recorded a charge to
cost of product revenue totaling $28.1 million. This amount included $24.4
million related to excess inventory and related non-cancelable purchase
commitments due to a sudden and significant decrease in actual and forecasted
demand for specific products. In addition, the $28.1 million charge included
$3.7 million primarily related to the write-off of obsolete inventory and
related estimated non-cancelable purchase commitments incurred during the
second quarter of fiscal 2001. During the third quarter of fiscal 2001,
Transmeta sold and scrapped a portion of the inventory that was included in the
second quarter charge. In addition, certain purchase commitments were settled
which were also included in the second quarter charge.

Inventories are stated at the lower of cost (first-in, first-out) or
market. The components of inventories consist of the following (in thousands):

|                 |  |               |       |              |  |   |        | 
|---------------- |  | ------------- | ----- | ------------ |  | - | ------ | 
|                 |  | September 28, |       | December 29,
|                 |  | 2001          |       | 2000        
|                 |  |               |       |             
|Work in progress |  | $             | 1,319 |              |  | $ | 6,680  | 
|Finished goods   |  |               | 687   |              |  |   | 8,773  | 
|                 |  |               |       |              |  |   |        | 
|                 |  | $             | 2,006 |              |  | $ | 15,453 | 
|                 |  |               |       |              |  |   |        | 

7. Legal Proceedings

During the period June through August 2001, the Company, its directors, and
certain of its officers were served with twelve purported shareholder class
action complaints. Eleven of those complaints, identified in the footnote
below,1 were filed in the United States District Court for the Northern
District of California. The other complaint was filed in the United States
District Court for the Southern District of New York with the caption Schwarz
v. Transmeta Corp., et al. (Case No. 01-CV-6492, S.D.N.Y.).

These complaints purport to be class actions filed on behalf of purchasers
of the Companys common stock. Although there is some variation in their
specific allegations and purported class periods (the earliest date alleged for
the onset of the class period is November 7, 2000, and the latest date alleged
for the close of the class period is July 19, 2001), all of the complaints
essentially allege that the defendants made materially misleading statements or
material omissions in various contexts, including the prospectus and
registration statement for the initial public offering of the Companys common
stock on November 7, 2000. The complaints also allege that certain individual
defendants intentionally engaged in this alleged conduct in order to inflate
the value of the Companys common stock and thereby obtain alleged illegal
insider trading proceeds. These complaints allege various violations of federal
securities law, including violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and
Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. The complaints
seek unspecified damages, unspecified injunctive relief, interest, attorney and
expert fees, and other litigation costs.

All eleven cases filed in the Northern District of California have been
consolidated into a single action by an order of the court dated October 3,
2001. By an order dated October 18, 2001, the court in the Southern District of
New York dismissed all claims



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against the Company and its directors and officers in the Schwarz case
without prejudice to plaintiffs right to pursue such claims in the
consolidated class action pending in the Northern District of California. The
court in the Northern District of California has not selected class
counsel, and no consolidated amended complaint has been filed. The Company
has not yet made any responsive filings, and discovery has not commenced.
Transmeta believes that the allegations in these purported class actions are
without merit and intends to defend the actions vigorously. Based upon
information presently known to management, the Company does not believe that
the ultimate resolution of these lawsuits will have a material adverse effect
on its business.

During June and July 2001, the directors and certain officers of the
Company were served with two purported shareholder derivative complaints filed
in California Superior Court for Santa Clara County: Pereira v. David Ditzel,
et al. (Case No. CV 799491) and Sweeney v. Mark Allen, et al. (Case No. CV
799667). In October 2001, the directors and certain officers of the Company
were served with a third purported shareholder derivative complaint: Krim v. David R. Ditzel, et al.
Case No. 418524, filed in
California Superior Court for San Mateo County. The Company is named as a nominal defendant in these three
complaints, which are based upon the same general allegations made in the
purported shareholder class actions described above. These three complaints
allege that certain of the individual defendants sold shares of Transmeta
common stock while in possession of material inside information, purportedly in
breach of their fiduciary duties to the Company, and that those so-called
selling defendants were aided and abetted by the other individual defendants.
The complaints also allege corporate waste, mismanagement, and abuse of
control, all based upon the same general allegations. The Pereira and Sweeney
complaints have been consolidated into a single action by an order of the court
dated October 10, 2001. The Company has not yet responded to any of these
complaints, and no discovery has been taken. The Company believes that the
allegations in these purported derivative actions are without merit and intends
to defend the actions vigorously. Based upon information presently known to
management, the Company does not believe that the ultimate resolution of these
lawsuits will have a material adverse effect on its business.




Item 2.Managements Discussion and Analysis of Financial Condition and Results
of Operations

Caution Regarding Forward-Looking Statements

The following
discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and the related notes
contained in this Report and with the information included in the
Companys Annual Report on Form 10-K for the year ended
December 29, 2000 and subsequent reports filed with the
Securities and Exchange Commission. The information contained in this
Report is not a complete description of our business or the risks
associated with an investment in our common stock. We urge you to
carefully review and consider the various disclosures made by us in
this Report and in our other reports filed regularly with the SEC,
some of which reports discuss our business in greater detail.

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

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

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, test and warehouse functions.

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From our inception in March 1995 until September 2000, we were in the
development stage and engaged primarily in research and development activities.
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 began volume shipments of production units in the
third quarter of 2000 and emerged from the development stage during that
period. We expect to be dependent on sales of Crusoe microprocessors and
successive generations of these products for the foreseeable future.

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. In September 2000, we appointed All American Semiconductor as the
exclusive distributor of our products in North America until December 31, 2002.
Both distributor agreements exclude the right to sell products to OEMs and
major notebook computer and high-density server manufacturers. These agreements
also specify inventory levels and price protection and contain provisions
regarding rights of return.

We currently sell our products primarily to OEMs and, to a lesser extent,
through distributors. Sales to four customers accounted for 28%, 18%, 12% and
11% of net revenue in the first nine months of fiscal 2001. The loss of a major
customer or delay or cancellation of significant orders from these customers
for economic or other reasons could continue to reduce or delay our recognition
of revenue. 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 the first nine months of
fiscal 2001 were for the notebook computer market. If our Crusoe products fail
to achieve widespread acceptance, we may not achieve revenue sufficient to
sustain our business.

We generally recognize revenue from product sales upon transfer of title,
typically upon shipment, and provide for expected returns at that time. With
respect to products shipped to distributors, we defer recognition of product
revenue if the product is subject to price protection or stock rotation 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.
During the second quarter of fiscal 2001, cost of product revenue included a
$28.1 million charge primarily related to the write-off of excess inventory and
related purchase commitments. 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 will also
include commissions paid to external representatives once volume shipments
increase.

In connection with the grant of stock options to our employees in 2000, we
recorded deferred stock compensation of approximately $44.1 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 using the graded vesting method. We will incur
substantial but declining expense in future periods as a result of the
amortization of the deferred stock compensation.

Historically, we have incurred significant losses. As of September 28,
2001, we had an accumulated deficit of $295.3 million. We expect to incur
substantial losses for the foreseeable future. We also expect to incur
significant research and development and selling, general and administrative
expenses. As a result, if our revenue does not increase substantially, our
operating results will be adversely affected, and we will not achieve
profitability. A downturn in the semiconductor industry and in the general
economy has occurred in the first nine months of fiscal 2001 and is expected to
continue at least through the first half of calendar 2002. Our net revenue
decreased by 52.4% in the third quarter of fiscal 2001 compared to the second
quarter of fiscal 2001 due to several reasons including the declining worldwide
and Japanese economies and delays in shipping our .13 micron TM5800 in
production unit volumes. If our unit volumes do not increase and the economic
conditions in Japan and worldwide do not improve, or worsen, we would continue
to experience material adverse effects upon our operating results.

Results of Operations

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Net Loss.Net loss for the third quarter of fiscal 2001 was $29.6 million
compared to a net loss of $27.7 million for the third quarter of fiscal 2000.
Net loss for the first nine months of fiscal 2001 was $121.5 million compared
to a net loss of $71.5 million for the first nine months of fiscal 2000.

As opposed to actual results, pro forma net loss for the third quarter of
fiscal 2001, which excludes $9.1 million of amortization of intangible assets
and deferred stock compensation, was $20.5 million, or $0.16 per share. By also
excluding the excess inventory benefit of $1.7 million from the sale of
previously fully reserved inventory and the favorable settlement of purchase
commitments of $807,000, net loss for the third quarter of fiscal 2001 was
$23.1 million, or $0.18 per share. This compares to pro forma net loss for the
third quarter of fiscal 2000 of $21.1 million, or $0.63 per share, which
excludes $6.5 million of amortization of intangible assets and deferred stock
compensation.

Pro forma net loss for the first nine months of fiscal 2001 was $54.0
million, or $0.42 per share, which excludes $28.3 million of amortization of
intangible assets and deferred stock compensation, $13.6 million of in-process
research and development charges and a net excess inventory charge of $25.6
million. Pro forma net loss for the first nine months of fiscal 2000 was $56.9
million, or $1.80 per share, which excludes $14.5 million of amortization of
intangible assets and deferred stock compensation.

Net Revenue.Net revenue in the third quarter of fiscal 2001 was $5.0
million, compared with $3.5 million in the third quarter of fiscal 2000. Net
revenue in the first nine months of fiscal 2001 was $34.1 million, compared
with $3.8 million in the first nine months of fiscal 2000. These increases
reflect the commencement of volume shipments of our products in the third
quarter of fiscal 2000. Net revenue in the third quarter of fiscal 2001
decreased 52.4% from net revenue of $10.5 million in the second quarter of
fiscal 2001. The decrease in revenue from the prior quarter is due in
part to
delays in shipping our .13 micron TM5800 units in volume production. In
addition, we continue to be impacted by the sluggish worldwide and Japanese
economies causing many of our customers to reduce their unit shipments
forecasts. Demand for our products continues to depend in large part upon sales
by our OEM customers of notebook computers that incorporate our products; the
slowing economy has also impacted their abilities to sell devices that
incorporate our products. Sales to four customers accounted for 28%, 18%, 12%
and 11% of net revenue in the first nine months of fiscal 2001.

Gross Profit (Loss).Gross margin is the percentage derived from dividing
gross profit by net revenue. Gross margin in the third quarter of fiscal 2001
was 43.6%, compared with 39.8% in the third quarter of fiscal 2000. Gross
margin in the first nine months of fiscal 2001 was (38.4)%, compared with 39.6%
in the first nine months of fiscal 2000. Gross margin for the first nine months
of fiscal 2001 includes a charge of $28.1 million primarily to write-off excess inventory as discussed below.

Gross margin is influenced by many factors, including lower shipment
volumes and related manufacturing overhead, higher production-related
costs,
and ASP pressure due to an unanticipated product mix. Recently, our gross
margin has been impacted as a result of an excess inventory charge recorded
during the second quarter of fiscal 2001 of $28.1 million dollars, of which
$27.8 million is related to excess inventory and related purchase commitments. The
entire charge was recorded against cost of goods sold during the second quarter
of fiscal 2001, negatively impacting our gross margin. During the third quarter
we recognized 100% gross profit on sales of $1.7 million relating to
inventories that had been previously written-off in the second quarter. In
addition, during the third quarter we settled certain accrued purchase
commitments at amounts less than originally accrued, resulting in $0.8 million
of reduced cost to product revenues.

Inventory purchases and commitments are based upon product demand
forecasts. We built inventory levels for certain components with long lead
times and entered into commitments for certain components. Due to a sudden and
significant decrease in demand for our products, inventory levels exceeded our
estimated requirements based on demand forecasts. This additional excess
inventory charge was calculated in accordance with our accounting policy. We
anticipate that a significant part of the inventory included in this charge
will not be used at a later date, based upon our current demand forecast.

Research and Development.Research and development (R&D) expenses in the
third quarter of fiscal 2001 were $17.0 million and remained relatively flat
compared to R&D expenses of $17.1 million in the third quarter of fiscal 2000.
R&D expenses in the first nine months of fiscal 2001 were $51.4 million,
compared to $43.6 million in the first nine months of fiscal 2000, an increase
of 17.9%. These increases were primarily a result of hiring additional
development personnel. In addition, R&D expenses have increased due to the
increased volume of prototype wafers and services, as well as additional
depreciation and amortization expenses arising from significant purchases of
computer aided design and other software tools. R&D expenses for the third
quarter of fiscal 2001 were relatively flat compared to the second quarter of
fiscal 2001 R&D expenses of $17.2 million. We expect research and development
expenses will remain flat through the fourth quarter of fiscal 2001.

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In-Process Research and Development.In April 2001, we licensed certain
computing technologies and intellectual property from Advanced Micro Devices,
Inc. (AMD), including AMDs HyperTransport interconnect technology for our
future products and technology initiatives. As initial consideration for the
patents and patent rights licensed under the agreement, we issued unregistered
shares of our common stock valued at $13.6 million. This amount has been
expensed as in-process research and development during the second quarter of
fiscal 2001 because the HyperTransport technology is designed for use in
products that are currently in research and development that are not
anticipated to be available until late fiscal 2002.

Selling, General and Administrative.Selling, general and administrative
(SG&A) expenses in the third quarter of fiscal 2001 were $8.8 million, compared
to $7.0 million in the third quarter of fiscal 2000, an increase of 25.7%. SG&A
expenses in the first nine months of fiscal 2001 were $26.6 million, compared
to $18.5 million in the nine months of fiscal 2000, an increase of 43.8%. These
increases were largely due to additional costs related to recruiting personnel,
additional marketing expenses for tradeshows and branding efforts and the
overall expansion in our level of operations. SG&A expenses for the third
quarter of fiscal 2001 remained relatively flat compared to the second quarter
of fiscal 2001 SG&A expenses of $8.9 million. We anticipate that selling,
general and administrative expenses will remain relatively consistent through
the fourth quarter of fiscal 2001.

Amortization of Deferred Charges and Other Intangible Assets.In
connection with the renegotiations of technology license agreements, which we
previously entered into with IBM and Toshiba, and amortization of other
intangible assets, we recorded amortization of $5.0 million in the third
quarter of fiscal 2001, compared to $2.6 million in the third quarter of fiscal
2000. Amortization expense in the first nine months of fiscal 2001 was $12.5
million, compared to $7.4 million in the first nine months of fiscal 2000.
Amortization increased in the first nine months of fiscal 2001, compared to the
same period last year due to recent acquisitions of patents and patent rights,
resulting in approximately $2.0 million of additional amortization expense per
quarter. Future amortization will be $5.0 million in the remainder of 2001,
$20.7 million in 2002, $17.9 million in 2003, $9.9 million in 2004, $6.8
million in 2005 and the remaining balance in future years.

Amortization of Deferred Stock Compensation.Amortization of deferred
stock compensation in the third quarter of fiscal 2001 was $4.0 million,
compared to $4.0 million in the third quarter of fiscal 2000. Amortization
expense in the first nine months of fiscal 2001 was $15.8 million, compared to
$7.1 million in the first nine months of fiscal 2000. The increases are a
result of the additional options granted to employees during the second half of
fiscal 2000. We expect to record an additional amortization expense of $3.3
million during the remainder of 2001, $8.0 million in 2002, $3.5 million in
2003 and $589,000 in 2004.

Interest Income.Interest income in the third quarter of fiscal 2001 was
$3.3 million, compared to $2.0 million in the third quarter of fiscal 2000.
Interest income in the first nine months of fiscal 2001 was $12.4 million,
compared to $5.0 million in the first nine months of fiscal 2000. These
increases are primarily due to larger average invested cash balances resulting
from the closing of our initial public offering in November 2000. Interest
income in the third quarter of fiscal 2001 decreased 17.5% from $4.0 million in
the second quarter of fiscal 2001. The decrease is primarily due to lower cash
balances as a result of funding operations and lower interest rates. We invest
in highly liquid securities, which have been affected by declining interest
rates. We expect that returns on future investments will also yield a lower
return due primarily to the lower cash balances in addition to declining
interest rates.

Interest Expense.Interest expense for the third quarter of fiscal 2001
was $227,000, compared to $397,000 for the third quarter of fiscal 2000, a
decrease of 42.8%. Interest expense for the first nine months of fiscal 2001
was $820,000, compared to $1.3 million for the first nine months of fiscal
2000, a decrease of 36.9%. The decrease is due to lower average debt balances
due to the expiration of several lease-financing arrangements during late 2000
and throughout fiscal 2001.

Provision for Income Taxes.We recorded a provision for income taxes of
$5,000 in the third quarter of fiscal 2001 and a $22,000 provision in the first
nine months of fiscal 2001, in each case relating to foreign taxes in Taiwan
withheld for local taxes imposed on local non-revenue income. We did not record
a tax provision in 2000.

Liquidity and Capital Resources

Prior to our initial public offering on November 6, 2000, we funded our
operations primarily through sales of equity securities and, to a lesser
extent, from license revenue and lease financing. Net proceeds from our initial
public offering were approximately $289.4 million. As of September 28, 2001 we
had $262.8 million in cash and cash equivalents and short-term investments, a
decrease of $80.3 million from December 29, 2000.

Net cash used in operating activities during the first nine months of
fiscal 2001 was $62.3 million, compared to $53.8 million used during the first
nine months of fiscal 2000, an increase of 15.8%. Net cash used in operating
activities was attributable to our net

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losses net of our non-cash charges, the increases in accounts receivable
and prepaid expenses, partially offset by increases in accounts payable and
other accrued liabilities. Increases in accounts payable, prepaid expenses and
accrued liabilities were due to the general continued growth in business
activity from the first nine months of fiscal 2000 through the first nine
months of fiscal 2001. Net loss of $121.5 million for the first nine months of
fiscal 2001 includes non-cash charges of $28.3 million of amortization of
intangibles and deferred stock compensation, $13.6 million of in-process
research and development charges and a net excess inventory charge of $25.6
million.

Net cash used for investing activities during the first nine months of
fiscal 2001 was $158.9 million, compared to $14.9 million provided during the
first nine months of fiscal 2000. Net cash used for investing activities in the
first nine months of fiscal 2001 consisted primarily of the purchase of
available-for-sale investments and the purchase of intellectual property and
related assets. Net cash provided during the first nine months of fiscal 2000
was primarily the result of the proceeds from the sales and maturities of our
investments.

Net cash used for financing activities during the first nine months of
fiscal 2001 was $1.5 million, compared to $86.2 million provided during the
first nine months of fiscal 2000. Net cash used during the first nine months of
fiscal 2001 was primarily due to the repayment of debt and capital lease
obligations partially offset by proceeds from option exercises. Net cash
provided during the first nine months of fiscal 2000 is primarily attributable
to proceeds from the issuance of convertible preferred stock of $87.9 million,
which closed in April 2000.

At September 28, 2001, we had $37.0 million in cash and cash equivalents
and $225.9 million in available-for-sale 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 September 28, 2001, we had total minimum lease payments of $29.4
million under our operating leases and $3.4 million under our capital leases.
We are obligated to pay $9.0 million in 2002, $9.0 million in 2003 and $7.5
million in 2004 in connection with patent and patent right acquisitions. We
also are obligated to pay IBM a total of $29.0 million  $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
Taiwan Semiconductor Manufacturing Co. (TSMC) allows us to 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 September 28, 2001, TSMC had incurred approximately $2.6
million of manufacturing expenses on our outstanding purchase orders. We also
had minimum aggregate principal payments of $1.4 million under our long-term
debt. 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. After this period, capital requirements will depend on many
factors, including general economic conditions, the rate of sales growth,
market acceptance of our products, costs of securing access to adequate
manufacturing capacity, the timing and extent of research and development
projects 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 business combination, we may enter into
acquisitions or business combinations in the future, which also could require
us to seek additional equity or debt financing. Additional funds may not be
available on terms favorable to us or at all.

Recent Accounting Pronouncement

In August 2001, the FASB issued Statements of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, effective for fiscal years beginning after
December 15, 2001. We are currently assessing the impact of the new rules and will apply them
on January 1, 2002. We are currently assessing the impact of the new
rules on our earnings and financial position, but do not anticipate that they
will have a material impact.

Risks That May 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-Q. If any
of the following risks actually occurs, our business, financial condition and
results of operations would suffer. In that case, the trading price of our
common stock could decline and investors might lose all or part of their
investment in our common stock.

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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 $121.5 million in the first nine months of
fiscal 2001, $97.7 million in 2000, $41.1 million in 1999 and $10.1 million in
1998. As of September 28, 2001, we had an accumulated deficit of approximately
$295.3 million. We intend to increase our research and development, sales and
marketing, and administrative expenses over time. We also expect to incur
substantial non-cash charges relating to the amortization of deferred charges,
intellectual property and deferred stock compensation, which will serve to
increase our net losses further. Our net revenue must increase if we are to
achieve profitability under our current business model. Our revenue of $5.0
million in the third quarter of fiscal 2001 decreased by 52.4% from our revenue
of $10.5 million in the second quarter of fiscal 2001. We cannot assure you
that our revenue will increase, so we may never achieve profitability. Even if
we achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or an annual basis.

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

We introduced our first Crusoe microprocessors in January 2000 and
recognized our first product revenue from these products in the first half of
2000. Through June 30, 2000, we had manufactured only limited quantities of our
products. In September 2000, we began volume shipments. Thus, we have only a
very limited operating history with our products. This limited history makes it
difficult to evaluate our business. Until 2000, we derived substantially all of
our revenue from license fees, but we do not expect any license fee revenue in
the foreseeable future. We need to generate substantial future revenue from
product sales, but our ability to manufacture our products in production
quantities and the revenue and income potential of our products and business
are unproven. You should consider our chances of financial and operational
success in light of the risks, uncertainties, expenses, delays and difficulties
associated with new businesses in highly competitive technology fields, many of
which may be beyond our control. If we fail to address these risks,
uncertainties, expenses, delays and difficulties, the value of an investment in
our common stock would decline further.

We Depend Upon Increasing Demand for Our Crusoe Microprocessors.

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

We Are Subject to General Economic and Market Conditions.

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

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

We are currently producing our products using a new .13 micron
manufacturing process, rather than the established .18 micron process. This
transition involved redesigning the product and modifying the manufacturing
processes for the product. Difficulties in shifting to smaller geometry process
technologies and other new manufacturing processes have led to delays in
product deliveries and increased expenses. In addition, if we experience
continued delays in product deliveries, our target customers could design a
competitors microprocessor into their product, which would lead to lost sales
and impede our ability to increase our revenue. If our third-party
manufacturers or we experience significant delays in this transition or fail to
efficiently implement this transition, our

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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.

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

Our success depends upon our ability to sell our Crusoe microprocessors in
volume to the small number of OEMs that manufacture notebook computers. Due to
our software-based approach to microprocessor design, we have been required,
and expect to continue to be required, to devote substantial resources to
educate prospective customers in the notebook computer market about the
benefits of our Crusoe products and to assist potential customers with their
designs. In addition, since computer products generally are designed to
incorporate a specific microprocessor, OEMs must design new products to utilize
different microprocessors such as our Crusoe products. Given the complexity of
these computer products and their many components, designing new products
requires significant investments. For instance, OEMs may need to design new
computer casings, basic input/output system software and motherboards. Our
target customers may not choose our products for technical, performance,
packaging, novelty, design cost or other reasons. If our Crusoe products fail
to achieve widespread acceptance in the notebook computer market, we would
likely never achieve revenue sufficient to sustain our business and the value
of an investment in our common stock would likely decline significantly.

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

The growth of our business depends in part on acceptance and use of our
products in new markets such as the high-density server and Internet appliance
markets. We depend on the ability of our target customers to develop new
products and enhance existing products for these markets that incorporate our
products and to introduce and promote their products successfully. The market
for high-density servers depends in part upon the success of our target
customers and development partners to successfully incorporate recent
technologies into their servers. In addition, the infancy of these recent
technologies will require additional development and marketing before
widespread acceptance is achieved. The market for Internet appliances depends
in part upon the deployment of wireless technologies that enable the delivery
of Internet content at a speed comparable to that of a desktop computer. The
wireless technologies currently under development might not fully address the
needs of mobile Internet users. If the use of high-density servers and Internet
appliances does not grow as we anticipate, our target customers do not
incorporate our products into theirs, or our products are not widely accepted
by end users, our growth would be impeded and we will not be able to factor the
related revenues into our growth in the future. In addition, the high-density
server and Internet appliance markets are new and evolving slowly. Internet
appliance manufacturers have widely varying requirements. To meet the
requirements of different manufacturers and markets, we may be required to
change our product design or features, sales methods or pricing policies. The
costs of addressing these requirements could be substantial and could delay or
prevent any improvement in our operating results.

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

The semiconductor industry has historically been cyclical, and
characterized by wide fluctuations in product supply and demand. From time to
time, the industry has also experienced significant downturns, often in
connection with, or in anticipation of, maturing product cycles and declines in
general economic conditions. Industry downturns have been characterized by
diminished product demand, production overcapacity and accelerated decline of
average selling prices, and in some cases have lasted for more than a year. A
downturn of this type occurred in 1997 and 1998. A general downturn in the
semiconductor industry has occurred in the first three quarters of 2001 and is
expected to continue through at least the first half of 2002. Our net revenue
has decreased in response to industry-wide fluctuations, and could decrease
further. In addition, we may determine to lower our prices of our products to
increase or maintain market share, which would likely decrease our operating
results.

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

There is little historical financial information that is useful in
evaluating our business, prospects or future operating results. You should not
rely on quarter-to-quarter comparisons of our results of operations as an
indication of our future performance. Our operating results fluctuate
significantly from quarter to quarter and we expect our results to fluctuate in
the future. Our stock price declined substantially after our preliminary
announcement of our results for the second quarter of fiscal 2001. If our
future operating results fail to meet or exceed the expectations of securities
analysts or investors, our stock price would likely decline further in the
future.

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



| |  |  | the gain or loss of significant customers, or significant changes in their purchasing volume;                                                             
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the amount and timing of our operating expenses and capital expenditures;                                                                                 
|
| |  |  | pricing concessions that we might grant on volume sales;                                                                                                  
|
| |  |  | the effectiveness of our product cost reduction efforts and those of our suppliers;                                                                       
|
| |  |  | changes in the average selling prices of our microprocessors or the products that incorporate them;                                                       
|
| |  |  | our ability to specify, develop, complete, introduce and market new
products and technologies, and bring them to volume production in a
timely manner; and
|
| |  |  | changes in the mix of products that we sell.                                                                                                              

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



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

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



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

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| |  |  | economic and market conditions in the semiconductor industry and in the industries served by our customers.
| | - |  | -----------------------------------------------------------------------------------------------------------

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

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

Our success depends heavily upon the contributions of our key management and
technical personnel, whose knowledge, leadership and technical expertise would
be difficult to replace. Many of these individuals have been with us for
several years and have developed specialized knowledge and skills relating to
our technology and business. Others, including our chief executive officer,
president and chief operating officer, and senior vice president for worldwide
sales, have joined us in these management roles only very recently. Effective
October 16, 2001, our chairman, Murray A. Goldman, assumed management duties as
chief executive officer, and R. Hugh Barnes assumed management duties as
president and chief operating officer. Although Dr. Goldman and Mr. Barnes have
served on our Board of Directors since 1998, they have only recently assumed
these management roles, replacing Mark K. Allen, our former president and chief
executive officer. On October 18, 2001, Fred Brown joined us as senior vice
president of worldwide sales. Our success will depend in part upon the ability
of these new executives to work effectively together and with the rest of our
employees to continue to develop our technology and manage the operation and
growth of our business. All of our executive officers and key personnel are
employees at will. We have no employment contracts and do not maintain key
person insurance on any of our personnel. We might not be able to execute on
our business plan if we were to lose the services of any of our key personnel.
If any of these individuals were to leave Transmeta unexpectedly, we could face
substantial difficulty in hiring qualified successors and could experience a
loss in productivity while any such successor develops the necessary training
and experience.

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

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



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

In addition, the stock market generally and the market for semiconductor
and other 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 or financial condition. The market price of our stock
also might decline in reaction to events that affect other companies in our
industry even if these events do not directly affect us. Accordingly, you

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may not be able to resell your shares of common stock at or above the
price you paid. 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, and as noted in the discussion of Legal
Proceedings, we
have recently been sued in several purported securities class action lawsuits,
which we anticipate will be consolidated. Further, certain of our management
and directors have also been sued in purported shareholder derivative actions.
Although we believe that the lawsuits lack merit, an adverse determination
could have a significant effect upon our business and materially affect the
price of our stock. Moreover, regardless of the ultimate result, it is likely
that the lawsuits will divert managements attention and resources from other
matters, which could also adversely affect the price of our stock.

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

The market for microprocessors is dominated by established firms and
subject to rapid technological change. We have not yet succeeded in selling our
products to companies based in the U.S., where we face particularly strong
competitive pressure. We believe that such pressure is increasing worldwide.
Competition may cause price reductions, reduced gross margins and loss of
market share, any one of which could significantly reduce our future revenue
and increase our losses. For example, we may determine to lower our prices of
our products in order to increase or maintain market share, which would likely
decrease our operating results. Significant competitors that offer
microprocessors for the notebook computer market include Advanced Micro Devices
and Intel. Significant competitors that offer microprocessors for the Internet
appliance market include licensees of technology from ARM Holdings and MIPS
Technologies. We also face competition from providers of x86 compatible
microprocessors from Intel for the high-density server market.

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

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

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

Highly complex products such as our microprocessors may contain hardware
or software defects or bugs for many reasons, including design issues or
defective materials or manufacturing processes. Often, these defects and bugs
are not detected until after the products have been shipped. 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
Were to Cancel, Reduce or Delay a Purchase of Our Products.

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Sales to four customers accounted for 28%, 18%, 12% and 11% of net revenue
in the first nine months of fiscal 2001. These customers are located in Japan
and Taiwan, which subjects us to economic cycles in those countries. We expect
that a small number of OEM customers and distributors will continue to account
for a significant portion of our revenue. Our future success will depend upon
the timing and size of future purchase orders, if any, from these customers and
new customers and, in particular:



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

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

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

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

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

Our Dependence on a Third Party to Fabricate Wafers Limits Our Control Over the
Production, Supply and Delivery of Our Products.

The cost, quality and availability of third-party manufacturing operations
are essential elements to the successful production of our products. We
currently rely exclusively on TSMC to fabricate our wafers. We do not have a
manufacturing agreement with TSMC or a guaranteed level of production capacity
or any particular price from TSMC. We place orders on a purchase order basis
and TSMC may allocate capacity to other companies products while reducing
deliveries to us on short notice. The absence of dedicated capacity means that,
with little or no notice, TSMC could refuse to continue to fabricate all or
some of the wafers that we require or change the terms under which it
fabricates wafers. If TSMC were to stop manufacturing for us, we would likely
be unable to replace the lost

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capacity in a timely manner. Transferring to another manufacturer would
require a significant amount of time and money, and a smooth and timely
transition would be unlikely. As a result, we could lose potential sales and
fail to meet existing obligations to our customers. In addition, if TSMC were
to change the terms under which it manufactures for us, our manufacturing costs
could increase.

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



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

TSMC May Not Achieve Acceptable Manufacturing Yields, Which Could Increase the
Cost and Reduce the Supply of Our Products.

The fabrication of wafers for our microprocessors is a highly complex and
precise process that requires production in a tightly controlled, clean room
environment. Minute impurities, difficulties in the fabrication process,
defects in the masks used to print circuits on a wafer or other factors can
cause numerous die on each wafer to be nonfunctional. The proportion of
functional die expressed as a percentage of total die on a wafer is referred to
as product yield. Semiconductor companies frequently encounter difficulties
in achieving expected product yields. If TSMC, which currently fabricates all
of our wafers, does not achieve expected yields, our product costs could
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 have experienced lower
yield problems as we initially migrated 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.

Our Dependence on a Third Party to Provide Assembly and Test Services Limits
Our Control Over Production Costs and Product Supply.

We rely on ASE for substantially all of our assembly and test services. As
a result, we do not directly control our product delivery schedules. This lack
of control could result in product shortages as ASE assembles and tests our
current and future products. Product shortages could increase our costs or
delay delivery of our products. We do not have a contract with ASE for test and
assembly services, and we typically procure these services from ASE on a per
order basis. 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.

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

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

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

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

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

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

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

Suppliers of other components incorporated into our customers systems may
experience shortages, which could reduce the demand for our products. For
example, from time to time, the semiconductor industry has experienced
shortages of some materials and devices, including TFT screens. Our customers
could defer or cancel purchases of our products if they are not able to obtain
the other components necessary to build their systems.

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

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

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

Our ability to implement our business plan in a rapidly evolving market
requires an effective planning and management process. Until 2000, we focused
primarily on the development of our products. As we grow, we plan to increase
the scope of our operations and the size of our direct sales force domestically
and internationally. We expect to expand our facilities in proportion to any
expansion in the number of our employees. 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.

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

We depend upon other companies designing our microprocessors into their
products, which we refer to as design wins. Many of our targeted customers
consider the choice of a microprocessor to be a strategic decision. Thus our
targeted customers may take a long time to evaluate our products, and many
individuals may be involved in the evaluation process. We anticipate that the
length of time between our initial contact with a customer and the time when we
recognize revenue from that customer will vary. We expect our

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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 ultimately be introduced or
will, if introduced, be commercially successful.

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

The semiconductor industry is characterized by rapid technological change,
frequent new product introductions and enhancements, and ongoing customer
demands for greater performance. In addition, the average selling price of any
particular microprocessor product has historically decreased substantially over
its life, and we expect that trend to continue. As a result, our products may
not be competitive if we fail to introduce new products or product enhancements
that meet evolving customer demands. Further, we may not achieve further design
wins with current customers unless we continue to meet their evolving needs by
developing new products. The development of new products is complex, and we may
not be able to complete development in a timely manner, or at all. To introduce
products on a timely basis, we must:



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

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

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.

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

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

We believe that our success will depend in part upon our proprietary
technology. We rely on a combination of patents, copyrights, trademarks, trade
secret laws and contractual obligations with employees and third parties to
protect our proprietary rights. These legal protections provide only limited
protection and may be time consuming and expensive to obtain and enforce. If we
fail to protect our proprietary rights adequately, our competitors might gain
access to our technology. As a result, our competitors might offer similar
products and we might not be able to compete successfully in our market.
Moreover, despite our efforts to protect our proprietary rights, unauthorized
parties may copy aspects of our products and obtain and use information that we
regard as proprietary. Also, our competitors may independently develop similar,
but not infringing, technology, duplicate our products, or design around our
patents or our other intellectual property. In addition, other parties may
breach confidentiality agreements or other protective contracts with us, and we
may not be able to enforce our rights in the event of these breaches.
Furthermore, we expect that we will increase our international operations in
the future, and the laws of many foreign countries do not protect our
intellectual property rights to the same extent as the laws of the United
States. We may be required to spend significant resources to monitor and
protect our intellectual property rights.

Our pending patent and trademark applications may not be approved. 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 from our business operations.

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

To grow our business successfully and maintain a high level of quality, we
will need to recruit, train, retain and motivate additional highly skilled
sales, marketing, engineering and finance personnel. 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.

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

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

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

We believe that we must expand our international sales and distribution
operations to be successful. We expect to sell a significant portion of our
products to customers overseas. As part of our international expansion, we have
personnel in Taiwan and in Japan, who provide sales and customer support. In
addition, we have appointed a distributor to sell products in Taiwan, Hong Kong
and China. In

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attempting to conduct and expand business internationally, we are exposed
to various risks that could adversely affect our international operations and,
consequently, our operating results, including:



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

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

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

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



| |  |  | establishing a classified board of directors so that not all members of our board may be elected at one time;                                                              
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | providing that directors may be removed only for cause and only with the vote of 66 2/3% of our outstanding shares;                                                      
|
| |  |  | requiring super-majority voting to amend some provisions in our certificate of incorporation and bylaws;                                                                   
|
| |  |  | authorizing the issuance of blank check preferred stock that our
board could issue to increase the number of outstanding shares and to
discourage a takeover attempt;    
|
| |  |  | limiting the ability of our stockholders to call special meetings of
stockholders;                                                                                         
|
| |  |  | prohibiting stockholder action by written consent, which requires all
stockholder actions to be taken at a meeting of our stockholders;                                    
|
| |  |  | eliminating cumulative voting in the election of directors; and                                                                                                            
|
| |  |  | establishing advance notice requirements for nominations for election
to our board or for proposing matters that can be acted upon by
stockholders at stockholder meetings.

In addition, 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:
23Table of Contents



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

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




Item 3.Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk.Our cash equivalents and available-for-sale
investments are exposed to financial market risk due to fluctuations in
interest rates, which may affect our interest income. As of September 28, 2001,
our cash equivalents and available-for-sale investments included money market
funds and short and medium term corporate bonds and earned interest at an
average rate of 4.0%. Due to the relative short-term nature of our investment
portfolio, our interest income is extremely vulnerable to sudden changes in
market interest rates. Assuming a decline of 10% in the market interest rates
at September 28, 2001, with consistent cash equivalents and available-for-sale
investment balances, interest income for the remaining quarter of fiscal 2001
would be adversely affected by approximately $130,000. 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.

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PART II. OTHER INFORMATION




Item 1.Legal Proceedings

During the period June through August 2001, the Company, its directors, and
certain of its officers were served with twelve purported shareholder class
action complaints. Eleven of those complaints, identified in the footnote
below,1 were filed in the United States District Court for the Northern District
of California. The other complaint was filed in the United States District
Court for the Southern District of New York with the caption Schwarz v.
Transmeta Corp., et al. (Case No. 01-CV-6492, S.D.N.Y.).

These complaints purport to be class actions filed on behalf of purchasers
of the Companys common stock. Although there is some variation in their
specific allegations and purported class periods (the earliest date alleged for
the onset of the class period is November 7, 2000, and the latest date alleged
for the close of the class period is July 19, 2001), all of the complaints
essentially allege that the defendants made materially misleading statements or
material omissions in various contexts, including the prospectus and
registration statement for the initial public offering of the Companys common
stock on November 7, 2000. The complaints also allege that certain individual
defendants intentionally engaged in this alleged conduct in order to inflate
the value of the Companys common stock and thereby obtain alleged illegal
insider trading proceeds. These complaints allege various violations of federal
securities law, including violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and
Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. The complaints
seek unspecified damages, unspecified injunctive relief, interest, attorney and
expert fees, and other litigation costs.

All eleven cases filed in the Northern District of California have been
consolidated into a single action by an order of the court dated October 3,
2001. By an order dated October 18, 2001, the court in the Southern District of
New York dismissed all claims against the Company and its directors and
officers in the Schwarz case without prejudice to plaintiffs right to pursue
such claims in the consolidated class action pending in the Northern District
of California. The court in the Northern District of California has
not selected class counsel, and no consolidated amended complaint has been
filed. The Company has not yet made any responsive filings, and discovery has
not commenced. We believe that the allegations in these purported class actions
are without merit and intend to defend the actions vigorously. Based upon
information presently known to management, we do not believe that the ultimate
resolution of these lawsuits will have a material adverse effect on our
business.

During June and July 2001, the directors and certain officers of the Company
were served with two purported shareholder derivative complaints filed in
California Superior Court for Santa Clara County: Pereira v. David Ditzel, et
al. (Case No. CV 799491) and Sweeney v. Mark Allen, et al. (Case No. CV
799667). In October 2001, the directors and certain officers of the Company
were served with a third purported shareholder derivative complaint: Krim v. David R.
Ditzel, et al. Case No. 418524, which was
filed in California Superior Court for San Mateo County. The Company is named as a nominal defendant
in these three complaints, which are based upon the same general allegations
made in the purported shareholder class actions described above. These three
complaints allege that certain of the individual defendants sold shares of
Transmeta common stock while in possession of material inside information,
purportedly in breach of their fiduciary duties to the Company, and that those
so-called selling defendants were aided and abetted by the other individual
defendants. The complaints also allege corporate waste, mismanagement, and
abuse of control, all based upon the same general allegations. The Pereira and
Sweeney complaints have been consolidated into a single derivative action by an
order of the court dated October 10, 2001. The Company has not yet responded to
any of these complaints, and no discovery has been taken. We believe that the
allegations in these purported derivative actions are without merit and intend
to defend the actions vigorously. Based upon information presently known to
management, we do not believe that the ultimate resolution of these lawsuits
will have a material adverse effect on our business.




Item 2.Changes in Securities and Use of Proceeds



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Recent Sales of Unregistered Securities

None

Use of Proceeds From Sales of Registered Securities

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

As of September 28, 2001, we had paid $5.0 million of the net proceeds to
IBM under the terms of our amended license agreement, $3.5 million to IBM under
the terms of our original license agreement, $1.1 million to Quickturn Design
Systems to repay indebtedness incurred in conjunction with equipment purchases
in 1998, and $11.5 million for the purchase of intellectual property and
related assets from Seiko Epson and other intellectual property owners. We have
also paid approximately $78.4 million in ordinary operating expenses. The
remaining net proceeds have been invested in short-term interest bearing,
investment-grade securities.




Item 3.Defaults upon Senior Securities

Not Applicable.




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

Not Applicable.




Item 5.Other Information

On October 16, 2001, Transmetas Board of Directors named Chairman Murray
A. Goldman as Transmetas new chief executive officer and R. Hugh Barnes as
president and chief operating officer. Dr. Goldman and Mr. Barnes have both
served on Transmetas Board of Directors since November 1998. Dr. Goldman and
Mr. Barnes assumed the management responsibilities of Mark K. Allen, who had
previously served as Transmetas president and chief executive officer.

On October 18, 2001, Transmeta announced that Fred Brown had joined
Transmeta as senior vice president of worldwide sales.




Item 6.Exhibits and Reports on Form 8-K

(a)  Exhibits.

Not applicable.



(b)  Reports on Form 8-K

We did not file any reports on Form 8-K during the quarter ended on
September 28, 2001.

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SIGNATURES

Pursuant to the requirements 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.

|                       |                                                                                                     |                       
|---------------------- | --------------------------------------------------------------------------------------------------- | ----------------------
|Date: October 31, 2001 | TRANSMETA CORPORATION                                                                              
|                      
|                       | By:                                                                                                 | /s/ MERLE A. MCCLENDON
|                       |                                                                                                    
|                       | Merle A. McClendonChief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)

27