##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period from                      to
 Commission File Number 000-31803
 TRANSMETA CORPORATION
 (Exact name of Registrant as specified in its charter)
 Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    77-0402448
(I.R.S. employer
identification no.)
 2540 Mission College Boulevard, Santa Clara, CA 95054
(Address of principal executive offices, including zip code)
(408) 919-3000
(Registrants telephone number, including area code)
 
 þ o
  o þ o
 Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ




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##### 



TRANSMETA CORPORATION
FORM 10-Q
Quarterly Period Ended September 30, 2007
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1.
    
    Unaudited Condensed Consolidated Financial StatementsUnaudited Condensed Consolidated Balance Sheets as of  September 30, 2007 and December 31, 2006
    
    
    3Unaudited
Condensed Consolidated Statements of Operations for the Three and Nine months Ended September 30, 2007 and 2006
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Nine months Ended September 30, 2007 and 2006
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    29Item 4.
    
    Controls and Procedures
    
    
    30PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    31Item 1A.
    
    Risk Factors
    
    
    32Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    39Item 6.
    
    Exhibits
    
    
    41Signatures
    
    
    42EXHIBIT 10.33EXHIBIT 10.34EXHIBIT 10.35EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01EXHIBIT 32.02
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 TRANSMETA CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share amounts)
 September 30,
    
    
    December 31,2007
    
    
    2006(1)(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    19,629
    
    
    $
    11,595Short-term investments
    
    
    8,976
    
    
    
    29,955Accounts receivable
    
    
    45
    
    
    
    310Prepaid expenses and other current assets
    
    
    2,332
    
    
    
    2,729Total current assets
    
    
    30,982
    
    
    
    44,589Property and equipment, net
    
    
    376
    
    
    
    758Patents and patent rights, net
    
    
    4,100
    
    
    
    9,234Other assets
    
    
    1,010
    
    
    
    2,148Total assets
    
    $
    36,468
    
    
    $
    56,729LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,171
    
    
    $
    1,467Accrued compensation and related compensation liabilities
    
    
    834
    
    
    
    3,245Deferred income, net
    
    
    
    
    
    
    15Other accrued liabilities
    
    
    4,388
    
    
    
    3,015Advance from customers
    
    
    
    
    
    
    1,320Current portion of accrued restructuring costs
    
    
    2,592
    
    
    
    1,996Current portion of long-term payable
    
    
    600
    
    
    
    667Total current liabilities
    
    
    10,585
    
    
    
    11,725Long-term accrued restructuring costs, net of current portion
    
    
    
    
    
    
    988Long-term payables, net of current portion
    
    
    1,000
    
    
    
    1,333Total liabilities
    
    
    11,585
    
    
    
    14,046Commitments and contingencies (note 5)Stockholders equity:Convertible preferred stock, $0.00001 par value, at amounts
paid in; Authorized shares  5,000,000. Issued and
outstanding shares - 1,000,000 and none respectively;
Liquidation preference: $7.5 million and none, respectively
    
    
    6,966
    
    
    
    Common stock, $0.00001 par value, at amounts paid in;
Authorized shares  50,000,000; Issued and outstanding
shares  12,021,388 and 9,893,820 respectively
    
    
    738,625
    
    
    
    724,229Treasury stock  39,843 shares in 2007 and 2006
    
    
    (2,439
    )
    
    
    (2,439
    )Accumulated other comprehensive gain (loss)
    
    
    29
    
    
    
    (66
    )Accumulated deficit
    
    
    (718,298
    )
    
    
    (679,041
    )Total stockholders equity
    
    
    24,883
    
    
    
    42,683Total liabilities and stockholders equity
    
    $
    36,468
    
    
    $
    56,729
 
 (1)
    
    Derived from the Companys audited financial statements as of December 31, 2006 but does
not include all disclosures required by accounting principles generally accepted in the United
States of America.  3




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##### Table of Contents



TRANSMETA CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue:Product
    
    $
    
    
    
    $
    507
    
    
    $
    167
    
    
    $
    1,457License
    
    
    1
    
    
    
    10,000
    
    
    
    1
    
    
    
    10,000Service
    
    
    43
    
    
    
    6,810
    
    
    
    2,186
    
    
    
    34,700Total revenue
    
    
    44
    
    
    
    17,317
    
    
    
    2,354
    
    
    
    46,157Cost of revenue:Product
    
    
    
    
    
    
    9
    
    
    
    80
    
    
    
    109License
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    39Service
    
    
    18
    
    
    
    3,913
    
    
    
    1,236
    
    
    
    20,589Impairment charge on inventories
    
    
    
    
    
    
    
    
    
    
    364
    
    
    
    Total cost of revenue
    
    
    18
    
    
    
    3,961
    
    
    
    1,680
    
    
    
    20,737Gross profit
    
    
    26
    
    
    
    13,356
    
    
    
    674
    
    
    
    25,420Operating expenses:Research and development
    
    
    1,336
    
    
    
    4,838
    
    
    
    8,809
    
    
    
    12,859Selling, general and administrative
    
    
    6,107
    
    
    
    4,847
    
    
    
    17,857
    
    
    
    16,434Restructuring charges, net
    
    
    109
    
    
    
    107
    
    
    
    8,694
    
    
    
    277Amortization of patents and patent rights
    
    
    1,711
    
    
    
    1,711
    
    
    
    5,134
    
    
    
    5,134Impairment charge on long-lived and other assets
    
    
    
    
    
    
    
    
    
    
    302
    
    
    
    Total operating expenses
    
    
    9,263
    
    
    
    11,503
    
    
    
    40,796
    
    
    
    34,704Operating
(loss) income
    
    
    (9,237
    )
    
    
    1,853
    
    
    
    (40,122
    )
    
    
    (9,284
    )Interest income and other, net
    
    
    247
    
    
    
    708
    
    
    
    1,102
    
    
    
    1,801Interest expense
    
    
    (83
    )
    
    
    (42
    )
    
    
    (237
    )
    
    
    (114
    )Net income (loss)
    
    
    (9,073
    )
    
    
    2,519
    
    
    
    (39,257
    )
    
    
    (7,597
    )Deemed dividend for beneficial conversion
feature of preferred stock
    
    
    (3,630
    )
    
    
    
    
    
    
    (3,630
    )
    
    
    Net income (loss) attributable to common shareholders
    
    $
    (12,703
    )
    
    $
    2,519
    
    
    $
    (42,887
    )
    
    $
    (7,597
    )Net income (loss) per share attributable to common
shareholdersbasic
    
    $
    (1.24
    )
    
    $
    0.26
    
    
    $
    (4.26
    )
    
    $
    (0.78
    )Net income (loss) per share attributable to common
shareholders fully diluted
    
    $
    (1.24
    )
    
    $
    0.25
    
    
    $
    (4.26
    )
    
    $
    (0.78
    )Weighted average shares outstanding  basic
    
    
    10,236
    
    
    
    9,832
    
    
    
    10,066
    
    
    
    9,763Weighted average shares outstanding   diluted
    
    
    10,236
    
    
    
    9,990
    
    
    
    10,066
    
    
    
    9,763
  4




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TRANSMETA CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
(Unaudited)
 Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    (39,257
    )
    
    $
    (7,597
    )Adjustments to reconcile net loss to net cash
used in operating activities:Stock-based compensation expense
    
    
    970
    
    
    
    4,328Depreciation
    
    
    465
    
    
    
    801Amortization of patents and patent rights
    
    
    5,134
    
    
    
    5,134Non cash restructuring charges
    
    
    8,694
    
    
    
    277Impairment charge on long-lived and other assets
    
    
    302
    
    
    
    Loss on disposal of fixed assets, net
    
    
    23
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    265
    
    
    
    1,401Inventories
    
    
    
    
    
    
    (660
    )Prepaid expenses and other current assets
    
    
    51
    
    
    
    420Other assets
    
    
    1,138
    
    
    
    (8
    )Accounts payable and accrued liabilities
    
    
    (688
    )
    
    
    (969
    )Deferred income
    
    
    (15
    )
    
    
    (5,890
    )Advances from customers
    
    
    (1,320
    )
    
    
    (5,940
    )Accrued restructuring charges
    
    
    (9,086
    )
    
    
    (1,489
    )Net cash provided by (used in) operating activities
    
    
    (33,324
    )
    
    
    (10,192
    )Cash flows from investing activities:Purchase of available-for-sale investments
    
    
    (2,978
    )
    
    
    (22,000
    )Proceeds from sale or maturity of
available-for-sale investments
    
    
    24,000
    
    
    
    19,000Purchase of property and equipment
    
    
    (62
    )
    
    
    (379
    )Net cash provided by (used in) investing activities
    
    
    20,960
    
    
    
    (3,379
    )Cash flows from financing activities:Net proceeds
from direct placement offering of common
stock and warrants
    
    
    11,600
    
    
    
    Net proceeds from issuance of preferred stock
    
    
    6,966
    
    
    
    Proceeds from sales of common stock under
employee stock purchase and incentive option
plans
    
    
    1,832
    
    
    
    4,671Net cash provided by (used in) financing activities
    
    
    20,398
    
    
    
    4,671Change in cash and cash equivalents
    
    
    8,034
    
    
    
    (8,900
    )Cash and cash equivalents at beginning of period
    
    
    11,595
    
    
    
    27,659Cash and cash equivalents at end of period
    
    $
    19,629
    
    
    $
    18,759Supplemental disclosure of non-cash financing
activities during the period:Deemed dividend for beneficial conversion feature of
preferred stock
    
    $
    (3,630
    )
    
    $
    
  5




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##### Table of Contents



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




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##### Table of Contents



3. Balance Sheet Details
 September 30,
    
    
    December 31,(In thousands)
    
    2007
    
    
    2006Property and equipment, netLeasehold improvements
    
    $
    2,326
    
    
    $
    2,076Computer equipment
    
    
    3,520
    
    
    
    4,183Furniture and fixtures
    
    
    395
    
    
    
    677Computer software
    
    
    773
    
    
    
    1,8587,014
    
    
    
    8,794Less accumulated depreciation and amortization
    
    
    (6,638
    )
    
    
    (8,036
    )Total
    
    $
    376
    
    
    $
    758Other accrued liabilitiesAccrued audit
    
    $
    777
    
    
    $
    847Deferred rent
    
    
    68
    
    
    
    407Accrued insurance
    
    
    
    
    
    
    546Accrued legal
    
    
    1,681
    
    
    
    337Accrued equity issuance costs
    
    
    1,147
    
    
    
    Other
    
    
    715
    
    
    
    878Total
    
    $
    4,388
    
    
    $
    3,015
 4. Short-Term Investments
   Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    Aggregate Fair(In thousands)
    
    Amortized Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueAs of September 30, 2007Federal agency discount notes
    
    $
    6,000
    
    
    $
    1
    
    
    $
    
    
    
    $
    6,001Commercial paper
    
    
    2,977
    
    
    
    
    
    
    
    2
    
    
    
    2,975Total
    
    $
    8,977
    
    
    $
    1
    
    
    $
    2
    
    
    $
    8,976As of December 31, 2006Federal agency discount notes
    
    $
    16,000
    
    
    $
    
    
    
    $
    45
    
    
    $
    15,955Commercial paper
    
    
    14,000
    
    
    
    
    
    
    
    
    
    
    
    14,000Total
    
    $
    30,000
    
    
    $
    
    
    
    $
    45
    
    
    $
    29,955
 7




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##### Table of Contents



Aggregate Fair(In thousands)
    
    Amortized Cost
    
    
    ValueAs of September 30, 2007:Amounts maturing within one year
    
    $
    6,977
    
    
    $
    6,975Amounts maturing after one year, within five years
    
    
    2,000
    
    
    
    2,001Total
    
    $
    8,977
    
    
    $
    8,976
     In Loss Position < 12 Months
    
    
    In Loss Position > 12 Months
    
    
    Total in Loss PositionGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized(In thousands)
    
    Fair Value
    
    
    (Loss)
    
    
    Fair Value
    
    
    (Loss)
    
    
    Fair Value
    
    
    (Loss)Short-term
investments:Federal agency discount notes
    
    $
    1,999
    
    
    $
    (1
    )
    
    $
    
    
    
    $
    
    
    
    $
    1,999
    
    
    $
    (1
    )Commercial paper
    
    
    2,976
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    2,976
    
    
    
    (1
    )Total in loss position
    
    $
    4,975
    
    
    $
    (2
    )
    
    $
    
    
    
    $
    
    
    
    $
    4,975
    
    
    $
    (2
    )
 5. Commitments and Contingencies
 Purchase Commitments
  8




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##### Table of Contents



Operating Leases
   Operating Leases(In thousands)Years ending December 31,2007(remaining 3 months)
    
    $
    1,1572008
    
    
    2,7132009
    
    
    800Total minimum operating lease payments
    
    $
    4,670
 Litigation
  In re Transmeta Corporation Initial Public Offering Securities Litigation and related putative
stockholder demand
 In re Transmeta Corporation Initial Public Offering Securities Litigation, In re Initial Public Offering Securities Litigation, .
  Transmeta Corporation v. Intel Corporation
  9




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6. Net Comprehensive Income (Loss)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    (9,073
    )
    
    $
    2,519
    
    
    $
    (39,257
    )
    
    $
    (7,597
    )Net change in unrealized gain (loss) on investments
    
    
    15
    
    
    
    76
    
    
    
    44
    
    
    
    131Net change in foreign currency translation adjustments
    
    
    7
    
    
    
    (8
    )
    
    
    51
    
    
    
    (14
    )Net comprehensive income (loss)
    
    $
    (9,051
    )
    
    $
    2,587
    
    
    $
    (39,162
    )
    
    $
    (7,480
    )
  September 30,
    
    
    December 31,(In thousands)
    
    2007
    
    
    2006Net unrealized gain (loss) on investments
    
    $
    (1
    )
    
    $
    (45
    )Cumulative foreign currency translation adjustments
    
    
    30
    
    
    
    (21
    )Accumulated other comprehensive income (loss)
    
    $
    29
    
    
    $
    (66
    )
 7. Stock Based Compensation
  10




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Valuation Assumptions
 
 Three Months Ended September 30,
    
    Nine Months Ended September 30,Incentive Stock Plans
    
    2007
    
    2006
    
    2007
    
    2006Risk-free interest rate
    
    
    4.5
    %
    
    
    4.9
    %
    
    
    4.6
    %
    
    
    4.8
    %Expected life of option in years
    
    
    4
    
    
    
    3 to 4
    
    
    
    4
    
    
    
    3 to 4Expected dividend yield
    
    
    0.0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    91
    %
    
    89% to 92
    %
    
    87% to 90
    %
    
    89% to 100
    %Three Months Ended September 30,
    
    Nine Months Ended September 30,Employee Stock Purchase Plan
    
    2007
    
    2006
    
    2007
    
    2006Risk-free interest rate
    
    
    5.1
    %
    
    
    5.1
    %
    
    
    5.1
    %
    
    
    5.1
    %Expected life of option
    
    
    1.25
    
    
    
    1.25
    
    
    
    1.25
    
    
    
    1.25Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    86
    %
    
    
    89
    %
    
    71% to 86
    %
    
    
    89
    %
   11




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##### Table of Contents



Stock Compensation Expense
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of product revenue
    
    $
    
    
    
    $
    (4
    )
    
    $
    
    
    
    $
    5Cost of service revenue
    
    
    1
    
    
    
    239
    
    
    
    18
    
    
    
    1,603Research and Development
    
    
    (271
    )
    
    
    339
    
    
    
    11
    
    
    
    1,000Selling, general and administrative
    
    
    244
    
    
    
    527
    
    
    
    941
    
    
    
    1,720Total stock-based compensation
    
    $
    (26
    )
    
    $
    1,101
    
    
    $
    970
    
    
    $
    4,328
 Equity Incentive Plans
    Stocks Options OutstandingWeightedAverageWeighted
    
    RemainingAverage
    
    ContractualShares Available for
    
    Number of
    
    Exercise
    
    Term
    
    Aggregate IntrinsicGrant
    
    Shares
    
    Price
    
    (In Years)
    
    ValueBalance at December 31, 2006 (*)
    
    
    1,027,138
    
    
    
    1,899,008
    
    
    $
    38.06Additional shares reserved
    
    
    494,691
    
    
    
    Options granted
    
    
    (152,500
    )
    
    
    152,500
    
    
    
    11.55Options exercised
    
    
    
    
    
    
    (43,597
    )
    
    
    14.34Options forfeited / canceled / expired
    
    
    1,150,855
    
    
    
    (1,198,576
    )
    
    
    39.70Balance at September 30, 2007
    
    
    2,520,184
    
    
    
    809,335
    
    
    $
    31.92
    
    
    
    7.01
    
    
    $
    Vested and expected to be vested
    
    
    
    
    
    
    738,827
    
    
    $
    33.40
    
    
    
    5.25
    
    
    $
    (*) All data adjusted for 20-for-1 reverse stock split in August 2007.Shares Exercisable:September 30, 2007
    
    
    
    
    
    
    572,780
    
    
    $
    38.59
    
    
    
    6.12
    
    
    $
    
  12




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##### Table of Contents



Outstanding
    
    ExercisableWeighted
    
    WeightedAverage
    
    Average
    
    
    
    
    
    WeightedShares
    
    Contractual
    
    Exercise
    
    Shares
    
    AverageRange of Exercise Prices
    
    Outstanding
    
    Life Years
    
    Price
    
    Exercisable
    
    Exercise PriceAs of September 30, 2007:$10.04 - $11.00
    
    
    102,500
    
    
    
    9.85
    
    
    $
    10.65
    
    
    
    0
    
    
    $
    $13.00 - $14.40
    
    
    66,621
    
    
    
    8.87
    
    
    
    13.60
    
    
    
    13,670
    
    
    
    14.17$15.00 - $15.00
    
    
    147,162
    
    
    
    7.60
    
    
    
    15.00
    
    
    
    118,751
    
    
    
    15.00$15.40 - $23.00
    
    
    102,654
    
    
    
    6.06
    
    
    
    20.31
    
    
    
    100,410
    
    
    
    20.41$24.00 - $29.60
    
    
    144,295
    
    
    
    8.15
    
    
    
    27.52
    
    
    
    94,125
    
    
    
    26.75$31.40 - $47.00
    
    
    89,171
    
    
    
    5.76
    
    
    
    39.01
    
    
    
    88,933
    
    
    
    39.02$47.60 - $49.60
    
    
    83,620
    
    
    
    4.49
    
    
    
    48.88
    
    
    
    83,595
    
    
    
    48.88$50.04 - $260.20
    
    
    73,312
    
    
    
    3.68
    
    
    
    109.21
    
    
    
    73,296
    
    
    
    109.21Total
    
    
    809,335
    
    
    
    7.01
    
    
    $
    31.92
    
    
    
    572,780
    
    
    $
    38.59
 2000 Employee Stock Purchase Plan
  8. Geographic and Customer Concentration Information
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Sony Corporation
    
    
    *
    %
    
    
    38
    %
    
    
    78
    %
    
    
    54
    %Microsoft Corporation
    
    
    *
    %
    
    
    *
    %
    
    
    *
    %
    
    
    21
    %Toshiba Corporation
    
    
    97
    %
    
    
    59
    %
    
    
    15
    %
    
    
    22
    %
 
 *%
    
    represents less than 10% of total revenue  September 30,
    
    December 31,2007
    
    2006Microsoft Corporation
    
    
    *
    %
    
    
    100
    %Toshiba Corporation
    
    
    100
    %
    
    
    *
    %
 
 *%    represents less than 10% of net accounts receivable  13




---



##### Table of Contents



9. Net Income (Loss) per Share
   Three Months Ended
    
    
    Nine Months Ended(In thousands, except per share amounts)
    
    September 30, 
2007
    
    
    September 30, 
2006
    
    
    September 30, 
2007
    
    
    September 30, 
2006Basic and diluted:Net income (loss)
attributable to common
shareholders, as reported
    
    $
    (12,703
    )
    
    $
    2,519
    
    
    $
    (42,887
    )
    
    $
    (7,597
    )Shares used to compute basic net inome (loss) per share
    
    
    10,236
    
    
    
    9,832
    
    
    
    10,066
    
    
    
    9,763Effect of dilutive securities:Potentially
dilutive shares
    
    
    
    
    
    
    158
    
    
    
    
    
    
    
    Shares used to compute diluted net income (loss) per share
    
    
    10,236
    
    
    
    9,990
    
    
    
    10,066
    
    
    
    9,763Basic net income (loss) per share attributable to common
shareholders
    
    $
    (1.24
    )
    
    $
    0.26
    
    
    $
    (4.26
    )
    
    $
    (0.78
    )Diluted net income (loss) per share attributable to common
shareholders
    
    $
    (1.24
    )
    
    $
    0.25
    
    
    $
    (4.26
    )
    
    $
    (0.78
    )
 10. Advances from Customers
  11. Deferred income
  14




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##### Table of Contents



September 30,
    
    
    December 31,(In thousands)
    
    2007
    
    
    2006Deferred revenue:Product
    
    $
    
    
    
    $
    48License
    
    
    
    
    
    
    Service
    
    
    
    
    
    
    Total
    
    $
    
    
    
    $
    48Deferred costs:Product
    
    $
    
    
    
    $
    33License
    
    
    
    
    
    
    Service
    
    
    
    
    
    
    Total
    
    $
    
    
    
    $
    33Deferred income
    
    $
    
    
    
    $
    15
 12. Restructuring Charges
   15




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##### Table of Contents



Excess
    
    
    Workforce(In thousands)
    
    Facilities
    
    
    Reduction
    
    
    TotalBalance as of December 31, 2006
    
    $
    2,984
    
    
    $
    
    
    
    $
    2,984Restructuring charges
    
    
    701
    
    
    
    5,806
    
    
    
    6,507Change in estimates
    
    
    158
    
    
    
    
    
    
    
    158Cash drawdowns
    
    
    (529
    )
    
    
    (3,802
    )
    
    
    (4,331
    )Balance as of March 31, 2007
    
    
    3,314
    
    
    
    2,004
    
    
    
    5,318Restructuring charges
    
    
    565
    
    
    
    1,262
    
    
    
    1,827Change in estimates
    
    
    93
    
    
    
    
    
    
    
    93Cash drawdowns
    
    
    (644
    )
    
    
    (2,823
    )
    
    
    (3,467
    )Balance as of June 30, 2007
    
    
    3,328
    
    
    
    443
    
    
    
    3,771Restructuring charges
    
    
    40
    
    
    
    81
    
    
    
    121Change in estimates
    
    
    (13
    )
    
    
    1
    
    
    
    (12
    )Cash drawdowns
    
    
    (920
    )
    
    
    (368
    )
    
    
    (1,288
    )Balance as of September 30, 2007
    
    $
    2,435
    
    
    $
    157
    
    
    $
    2,592
  13. Stockholders Equity
  Nine Months EndedSeptember 30,
    
    
    September 30,(In thousands)
    
    2007
    
    
    2006Beginning balance:
    
    $
    42,683
    
    
    $
    54,952Net income (loss)
    
    
    (39,257
    )
    
    
    (7,597
    )Proceeds from stock option exercises and ESPP
    
    
    1,826
    
    
    
    4,677Stock-based compensation expense
    
    
    970
    
    
    
    4,350Net proceeds from direct placement offering of
common stock and warrants
    
    
    11,600
    
    
    
    Net proceeds from issuance of preferred stock
    
    
    6,966
    
    
    
    Beneficial conversion feature of preferred stock
    
    
    3,630
    
    
    
    Deemed dividend for preferred stocks
beneficial conversion feature
    
    
    (3,630
    )
    
    
    Comprehensive income (loss)
    
    
    95
    
    
    
    117Ending balance:
    
    $
    24,883
    
    
    $
    56,499
 16




---



##### Table of Contents



Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006Beginning balance:
    
    
    9,893,820
    
    
    
    9,585,531Shares from stock option exercises and ESPP
    
    
    127,691
    
    
    
    269,231Shares from
direct placement offering of common stock and warrants
    
    
    2,000,000
    
    
    
    Refund of fractional shares due to reverse stock split
    
    
    (123
    )
    
    
    Ending balance:
    
    
    12,021,388
    
    
    
    9,854,762
  Sale of Series B Preferred Stock to Advanced Micro Devices in July 2007
   Conversion rights, Non-redeemable
 Dividends
 Liquidation Preference
 Voting Rights.
 17




---



##### Table of Contents



Beneficial Conversion Feature and Deemed Dividend.
 One-for-20 Reverse Stock Split in August 2007
   Direct Placement Offering of Common Stock and Warrants in September 2007
     18




---



##### Table of Contents



Other Outstanding Warrants
  ExerciseNumber of
    
    Price perIssuance Date
    
    Shares
    
    Share
    
    Expiration DateJanuary 1998
    
    
    6,252
    
    
    $
    25.00
    
    
    December 2007April 1998
    
    
    12,000
    
    
    $
    25.00
    
    
    April 200818,252
 14. Correspondence from NASDAQ
  15. Recent Accounting Pronouncements
   19




---



##### Table of Contents



16. Segment Information
  17. Income Taxes
     18. Subsequent Events
  20




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Caution Regarding Forward-Looking Statements
  
  Overview
     21




---



##### Table of Contents



Subsequent Event: Resolution of Patent Infringement Lawsuit with Intel Corporation
   Critical Accounting Policies
   Beneficial Conversion Feature and Deemed Dividend related to Series B Preferred Stock
  Accounting for Stock-Based Compensation
  22




---



##### Table of Contents



Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Product
    
    
    0
    %
    
    
    3
    %
    
    
    7
    %
    
    
    3
    %License
    
    
    2
    %
    
    
    58
    %
    
    
    0
    %
    
    
    22
    %Service
    
    
    98
    %
    
    
    39
    %
    
    
    93
    %
    
    
    75
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Costs of product
    
    
    0
    %
    
    
    0
    %
    
    
    3
    %
    
    
    0
    %Costs of license
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Costs of service
    
    
    41
    %
    
    
    23
    %
    
    
    53
    %
    
    
    45
    %Impairment charges on long-lived assets
    
    
    0
    %
    
    
    0
    %
    
    
    15
    %Total cost of revenue
    
    
    41
    %
    
    
    23
    %
    
    
    71
    %
    
    
    45
    %Gross profit
    
    
    59
    %
    
    
    77
    %
    
    
    29
    %
    
    
    55
    %
  Total Revenue
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Product
    
    $
    
    
    
    $
    507
    
    
    $
    167
    
    
    $
    1,457License
    
    
    1
    
    
    
    10,000
    
    
    
    1
    
    
    
    10,000Service
    
    
    43
    
    
    
    6,810
    
    
    
    2,186
    
    
    
    34,700Total revenue
    
    $
    44
    
    
    $
    17,317
    
    
    $
    2,354
    
    
    $
    46,157
  Product Revenues.
  License Revenue.
 Services Revenue.
 23




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##### Table of Contents



Services Revenue
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Time & Materials Based Contracts
    
    $
    43
    
    
    $
    6,810
    
    
    $
    2,186
    
    
    $
    24,862Fixed Fee Development Service
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,838Maintenance & Technical Support Services for License
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Services Revenue
    
    $
    43
    
    
    $
    6,810
    
    
    $
    2,186
    
    
    $
    34,700
   Maintenance and Technical Support Services Revenue.
 Fixed Fee Development Service Revenue
 Time and Materials Based Design Service Revenue.
 Costs of Revenues
  Products
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of product revenue
    
    $
    
    
    
    $
    9
    
    
    $
    80
    
    
    $
    109Impairment charge on inventory
    
    
    
    
    
    
    
    
    
    
    364
    
    
    
    Total Cost of Product Revenue
    
    $
    
    
    
    $
    9
    
    
    $
    444
    
    
    $
    109
 24




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##### Table of Contents



Licenses
 Services
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Time & materials based contracts
    
    $
    18
    
    
    $
    3,913
    
    
    $
    1,236
    
    
    $
    15,533Fixed fee development service
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,056Maintenance & technical support services for license
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Cost of Services Revenue
    
    $
    18
    
    
    $
    3,913
    
    
    $
    1,236
    
    
    $
    20,589
  Research and Development
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Research and development expenses
    
    $
    1,336
    
    
    $
    4,838
    
    
    $
    8,809
    
    
    $
    12,859Amount classified to costs of service and deferred costs (1)
    
    $
    18
    
    
    $
    3,688
    
    
    $
    1,201
    
    
    $
    15,007
 
 (1)
    
    We classified costs directly attributable to time and materials based contracts and
development services agreements to costs of services revenues.
   25




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##### Table of Contents



Selling, General and Administrative
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Selling, general and administrative expenses
    
    $
    6,107
    
    
    $
    4,847
    
    
    $
    17,857
    
    
    $
    16,434
   Restructuring Charges, net
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Restructuring charges
    
    $
    109
    
    
    $
    107
    
    
    $
    8,694
    
    
    $
    277
   Amortization of Patents and Patent Rights
  Impairment Charge on Long-Lived and Other Assets
  26




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##### Table of Contents



Stock Compensation
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Stock-based compensation expense
    
    $
    (26
    )
    
    $
    1,101
    
    
    $
    970
    
    
    $
    4,328
  Interest Income and Other, Net
  Interest Expense
  Liquidity and Capital Resources
   Nine Months EndedSeptember 30,
    
    
    September 30,(In thousands)
    
    2007
    
    
    2006Net cash provided by (used in) operating activities
    
    $
    (33,324
    )
    
    $
    (10,192
    )Net cash provided by (used in) investing activities
    
    
    20,960
    
    
    
    (3,379
    )Net cash provided by financing activities
    
    
    20,398
    
    
    
    4,671Increase (decrease) in cash and cash equivalents
    
    $
    8,034
    
    
    $
    (8,900
    )
  27




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##### Table of Contents



Restructuring
  Contractual Obligations
  Payments Due by PeriodRemainder of(In thousands)
    
    Total
    
    
    2007
    
    
    2008
    
    
    2009Operating Leases(1)
    
    $
    3,070
    
    
    $
    1,023
    
    
    $
    2,047
    
    
    $
    Unconditional Contractual Obligations(2)
    
    
    1,600
    
    
    
    134
    
    
    
    666
    
    
    
    800Total
    
    $
    4,670
    
    
    $
    1,157
    
    
    $
    2,713
    
    
    $
    800
 
 (1)
    
    Operating leases include agreements for building facilities.(2)
    
    Contractual obligations include agreements to purchase goods or services that are enforceable
and legally binding on us and that specify all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. Purchase obligations also include agreements for design tools and
software for use in product development. Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
 -
 28




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Interest Rate Risk.
 Foreign Currency Exchange Risk.
 29




---



##### Table of Contents



Item 4. Controls and Procedures
 Disclosure Controls and Procedures
  Inherent Limitations on Effectiveness of Controls
  Changes in Internal Control over Financial Reporting
  30




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  In re Transmeta Corporation Initial Public Offering Securities Litigation and related putative
stockholder demand
 In
re Transmeta Corporation Initial Public Offering Securities Litigation In re Initial Public Offering
Securities Litigation
  Transmeta Corporation v. Intel Corporation
   31




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##### Table of Contents



Item 1A. Risk Factors
 The factors discussed below are cautionary statements that identify important risk factors
that could cause actual results to differ materially from those anticipated in the forward-looking
statements in this quarterly report on Form 10Q If any of the following risks actually occurs, our
business, financial condition and results of operations would suffer. In this case, the trading
price of our common stock could decline and investors might lose all or part of their investment in
our common stock.
 We
have a history of losses, and we must successfully execute on our
modified business model after restructuring if we are to sustain our operations.
    We might fail to operate successfully under our modified
business model, having executed our restructuring plan.
  We might lose key technical or management personnel, on whose knowledge, leadership and technical
expertise we rely. Such losses could prevent us from operating
successfully after executing our restructuring
plan.
  32




---



##### Table of Contents



Our
completed restructuring and the evolution of our business could place significant strain on our
management systems, infrastructure and other resources, and our business may not succeed if we fail
to manage it effectively.
  Our financial and operational outlook depends upon our receipt of future payments from Intel in
accordance with our recent agreement to license our patents and settle our litigation. If Intel
were not to make those payments, our financial position and business operations would be adversely
affected.
  Our licensing business depends on maintaining and increasing our LongRun2 licensing revenue, and we
might be unsuccessful in our efforts to license our LongRun2 technology to other parties.
  We have limited visibility regarding when and to what extent our licensees will use our LongRun2 or
other licensed technologies.
  
    
    the competition that our licensees face and the market acceptance of their products;
    
    the pricing policies of our licensees for their products incorporating our technology;
 33




---



##### Table of Contents




    
    the engineering, marketing and management capabilities of our
licensees and technical challenges unrelated to our technology that
they face in developing their products; and
    
    the financial and other resources of our licensees.
  We face intense competition in the development of advanced technologies. Many of our competitors
are much larger than we are and have significantly greater resources. We may not be able to compete
effectively.
  If we do not keep pace with technological change, our technology offerings may not be competitive
and our revenue and operating results may suffer.
  We might experience payment disputes for amounts owed to us under our LongRun2 licensing
agreements, and this may harm our results of operations.
  We currently derive a substantial portion of our revenue from a small number of customers and
licensees, and our revenue would decline significantly if any major customer were to cancel, reduce
or delay a transaction relating to our products, licenses and services.
   34




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##### Table of Contents



We may be unable to protect our proprietary technologies and defend our intellectual property
rights. Our competitors might gain access to our technologies, and we might not compete
successfully in our markets.
   Any dispute regarding our intellectual property may require us to indemnify certain licensees or
third parties, the cost of which could severely hamper our business operations and financial
condition.
  If we are unable to protect our proprietary rights adequately, our competitors might gain access to
our technology and we might not compete successfully in our markets.
   35




---



##### Table of Contents



We have significant international business relationships, which expose us to risk and
uncertainties.
  
    
    difficulties and costs of servicing international customers;
    
    fluctuations in currency exchange rates;
    
    unexpected changes in regulatory requirements, including imposition of currency exchange controls;
    
    longer accounts receivable collection cycles;
    
    import or export licensing requirements;
    
    potentially adverse tax consequences;
    
    major health concerns, such as SARS;
    
    political and economic instability, for example as a result of tensions between Taiwan and the
Peoples Republic of China; and
    
    potentially reduced protection for intellectual property rights.
 Our operating results are difficult to predict and fluctuate significantly. A failure to meet the
expectations of securities analysts or investors could result in a substantial decline in our stock
price.
   The price of our common stock has been volatile and is subject to wide fluctuations.
  
    
    variations in our quarterly results;
    
    market conditions in our industry, the industries of our customers and the economy as a whole;
    
    announcements of technological innovations by us or by our competitors;
    
    introductions of new products or new pricing policies by us or by our competitors;
    
    acquisitions or strategic alliances by us or by our competitors;
    
    recruitment or departure of key personnel;
    
    the gain or loss of significant customers; and
    
    changes in the estimates of our operating performance or changes in recommendations by securities analysts.
 36




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##### Table of Contents



We might need to raise additional financing, which might not be available or might be available
only on terms unfavorable to us or our stockholders.
  
    
    fund expansion;
    
    develop or enhance our products or technologies;
    
    enhance our operating infrastructure;
    
    hire additional personnel;
    
    respond to customer concerns about our viability;
    
    respond to competitive pressures; or
    
    acquire complementary businesses or technologies.
  37




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##### Table of Contents



We may fail to meet the continued listing requirements of the NASDAQ Stock Market, which may cause
our stock to be delisted and result in reduced liquidity of our stock, reduce the trading price of
our stock, and impair our ability to raise financing.
   Our certificate of incorporation and bylaws, stockholder rights plan and Delaware law contain
provisions that could discourage or prevent a takeover, even if an acquisition would be beneficial
to our stockholders.
  
    
    establishing a classified board of directors so that not all members of our board may be elected at one time;
    
    providing that directors may be removed only for cause and only with the vote of 66 2/3% of our
outstanding shares;
    
    requiring super-majority voting to amend some provisions in our certificate of incorporation and bylaws;
    
    authorizing the issuance of blank check preferred stock that our board could issue to increase the number
of shares outstanding and to discourage a takeover attempt;
    
    limiting the ability of our stockholders to call special meetings of stockholders;
    
    prohibiting stockholder action by written consent, which requires all stockholder actions to be taken at a
meeting of our stockholders; and
    
    establishing advance notice requirements for nominations for election to our board or for proposals that can
be acted upon by stockholders at stockholder meetings.
  We may develop or identify material weaknesses in our internal control over financial reporting.
  38




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##### Table of Contents



Item 4 . Submission of Matters to a Vote of Security Holders.
 (a)
    
    The Annual Meeting of Stockholders was held on July 31, 2007.(b)
    
    At the Annual Meeting, our stockholders elected each of the following nominees as
Class III directors, each for a term of three years and until
his successor has been
elected and qualified or until his earlier resignation, death or removal. The vote for
each director was as follows:
  Total VotesNominees
    
    For
    
    WithheldR. Hugh Barnes
    
    
    135,507,261
    
    
    
    18,149,843Murray A Goldman
    
    
    138,104,247
    
    
    
    15,552,857
 39




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##### Table of Contents



Total VotesFor
    
    
    126,942,712Against
    
    
    26,143,202Abstain
    
    
    571,190
  Total VotesFor
    
    
    143,278,422Against
    
    
    9,238,491Abstain
    
    
    1,140,191
 40




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##### Table of Contents



Item 6. Exhibits
 Exhibits.
 ExhibitNumber
    
    Exhibit Title10.33
    
    Separation and Release Agreement and Consulting Agreement, entered June 15, 2007, between Transmeta
Corporation and David R. Ditzel. **10.34
    
    Separation and Release Agreement entered August 14, 2007, between Transmeta Corporation and Ralph J. Harms.
**10.35
    
    Offer of Employment as Chief Financial Officer, dated August 11, 2007, from Transmeta Corporation to Sujan
Jain.**31.01
    
    Certification by Lester M. Crudele pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act
of 1934.31.02
    
    Certification by Sujan Jain pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.32.01*
    
    Certification by Lester M. Crudele pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.32.02*
    
    Certification by Sujan Jain pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
  
 *
    
    As contemplated by SEC Release No. 33-8212, these exhibits are
furnished with this quarterly report on Form 10-Q and are not deemed
filed with the Securities and Exchange Commission and are not
incorporated by reference in any filing of Transmeta Corporation under
the Securities Act of 1933 or the Securities Exchange Act of 1934,
including this quarterly report, whether made before or after the date
hereof and irrespective of any general incorporation language in any
filings.**
    
    Management contract or compensatory arrangement. 41




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##### Table of Contents



SIGNATURES
   By
    
    /s/ Sujan Jain

Sujan JainChief Financial Officer(Principal Financial Officer and Duly AuthorizedDate: November 8, 2007
    
    
    
    Officer)
 42




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Exhibit Title10.33
    
    Separation and Release Agreement and Consulting Agreement, entered June 15, 2007, between Transmeta
Corporation and David R. Ditzel. **10.34
    
    Separation and Release Agreement entered August 14, 2007, between Transmeta Corporation and Ralph J. Harms.
**10.35
    
    Offer of Employment as Chief Financial Officer, dated August 11, 2007, from Transmeta Corporation to Sujan
Jain.**31.01
    
    Certification by Lester M. Crudele pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act
of 1934.31.02
    
    Certification by Sujan Jain pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.32.01*
    
    Certification by Lester M. Crudele pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.32.02*
    
    Certification by Sujan Jain pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *
    
    As contemplated by SEC Release No. 33-8212, these exhibits are
furnished with this quarterly report on Form 10-Q and are not deemed
filed with the Securities and Exchange Commission and are not
incorporated by reference in any filing of Transmeta Corporation under
the Securities Act of 1933 or the Securities Exchange Act of 1934,
including this quarterly report, whether made before or after the date
hereof and irrespective of any general incorporation language in any
filings.**
    
    Management contract or compensatory arrangement.