##### 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 June 30, 2005
 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.)
 3990 Freedom Circle, Santa Clara, CA 95054
(Address of principal executive offices, including zip code)
 (408) 919-3000
(Registrants telephone number, including area code)
 
 þ o
 þ o




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TRANSMETA CORPORATION
 FORM 10-Q
Quarterly Period Ended June 30, 2005
 TABLE OF CONTENTS
  
 PagePART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004
    
    
    3Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2005 and
June 30, 2004
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and June 30, 2004
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    37Item 4. Controls and Procedures
    
    
    37PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    40Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 3. Defaults Upon Senior Securities
    
    
    40Item 4. Submission of Matters to a Vote of Security Holders
    
    
    40Item 5. Other Information
    
    
    40Item 6. Exhibits
    
    
    40Signatures
    
    
    42EXHIBIT 10.22EXHIBIT 10.23EXHIBIT 10.24EXHIBIT 10.25EXHIBIT 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)
 June 30,
    
    December 31,2005
    
    2004 (1)(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    18,839
    
    
    $
    17,273Short-term investments
    
    
    27,786
    
    
    
    36,395Accounts receivable, net of allowance for doubtful accounts of $9 and $9, respectively
    
    
    10,232
    
    
    
    2,290Inventories
    
    
    1,719
    
    
    
    5,410Prepaid expenses and other current assets
    
    
    3,058
    
    
    
    2,218Total current assets
    
    
    61,634
    
    
    
    63,586Property and equipment, net
    
    
    1,819
    
    
    
    2,187Patents and patent rights, net
    
    
    19,502
    
    
    
    22,926Other assets
    
    
    924
    
    
    
    914Total assets
    
    $
    83,879
    
    
    $
    89,613LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,769
    
    
    $
    6,224Accrued compensation and related compensation liabilities
    
    
    2,715
    
    
    
    4,189Accrued inventory-related charges
    
    
    671
    
    
    
    4,876Advances from customers
    
    
    5,310
    
    
    
    Deferred income
    
    
    15,518
    
    
    
    29Other accrued liabilities
    
    
    2,622
    
    
    
    5,694Current portion of accrued restructuring costs
    
    
    1,758
    
    
    
    1,557Short-term note payable
    
    
    5,000
    
    
    
    Current portion of capital lease obligations
    
    
    181
    
    
    
    356Total current liabilities
    
    
    35,544
    
    
    
    22,925Long-term accrued restructuring costs, net of current portion
    
    
    2,929
    
    
    
    3,688Long-term note payable, net of current portion
    
    
    
    
    
    
    5,000Commitments and contingenciesStockholders equity:Preferred stock, $0.00001 par value, at amounts paid in; Authorized shares 
5,000,000. None issued
    
    
    
    
    
    
    Common stock, $0.00001 par value, at amounts paid in; Authorized shares 
1,000,000,000. Issued and outstanding shares  189,847,966 and 187,773,293,
respectively
    
    
    711,646
    
    
    
    709,926Treasury stock shares  796,875 and 796,875, respectively
    
    
    (2,439
    )
    
    
    (2,439
    )Accumulated other comprehensive loss
    
    
    (186
    )
    
    
    (125
    )Accumulated deficit
    
    
    (663,615
    )
    
    
    (649,362
    )Total stockholders equity
    
    
    45,406
    
    
    
    58,000Total liabilities and stockholders equity
    
    $
    83,879
    
    
    $
    89,613
 
 (1)
    
    Derived from the Companys audited financial statements as of December 31, 2004,
included in the Companys Form 10-K as amended for the fiscal year ended December 31, 2004
filed with the Securities and Exchange Commission.  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
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004*
    
    2005
    
    2004*Revenue:Product
    
    $
    7,068
    
    
    $
    5,673
    
    
    $
    13,474
    
    
    $
    10,680License
    
    
    10,000
    
    
    
    
    
    
    
    10,000
    
    
    
    Service
    
    
    7,634
    
    
    
    327
    
    
    
    8,082
    
    
    
    522Total revenue
    
    
    24,702
    
    
    
    6,000
    
    
    
    31,556
    
    
    
    11,202Cost of revenue:Product
    
    
    3,950
    
    
    
    9,162
    
    
    
    8,702
    
    
    
    14,534License
    
    
    25
    
    
    
    
    
    
    
    25
    
    
    
    Service
    
    
    4,152
    
    
    
    102
    
    
    
    4,313
    
    
    
    344Total cost of revenue
    
    
    8,127
    
    
    
    9,264
    
    
    
    13,040
    
    
    
    14,878Gross profit (loss)
    
    
    16,575
    
    
    
    (3,264
    )
    
    
    18,516
    
    
    
    (3,676
    )Operating expenses:Research and development(1)( 2)
    
    
    2,991
    
    
    
    13,719
    
    
    
    15,213
    
    
    
    26,436Selling, general and administrative( 3)(4)
    
    
    4,996
    
    
    
    7,418
    
    
    
    12,952
    
    
    
    14,139Restructuring charges, net
    
    
    46
    
    
    
    
    
    
    
    1,355
    
    
    
    Amortization of patents and patent rights
    
    
    1,711
    
    
    
    2,347
    
    
    
    3,422
    
    
    
    4,751Stock compensation
    
    
    (14
    )
    
    
    230
    
    
    
    (48
    )
    
    
    1,580Total operating expenses
    
    
    9,730
    
    
    
    23,714
    
    
    
    32,894
    
    
    
    46,906Operating income (loss)
    
    
    6,845
    
    
    
    (26,978
    )
    
    
    (14,378
    )
    
    
    (50,582
    )Interest income and other, net
    
    
    93
    
    
    
    243
    
    
    
    339
    
    
    
    489Interest expense
    
    
    (106
    )
    
    
    (20
    )
    
    
    (214
    )
    
    
    (35
    )Net income (loss)
    
    $
    6,832
    
    
    $
    (26,755
    )
    
    $
    (14,253
    )
    
    $
    (50,128
    )Net income (loss) per share  basic and diluted
    
    $
    0.04
    
    
    $
    (0.15
    )
    
    $
    (0.08
    )
    
    $
    (0.29
    )Weighted average shares outstanding  basic
    
    
    189,848
    
    
    
    174,006
    
    
    
    189,848
    
    
    
    172,938Weighted average shares outstanding  diluted
    
    
    190,081
    
    
    
    174,006
    
    
    
    189,848
    
    
    
    172,938
 
 *
    
    As restated in the June 30, 2004 Form 10-Q/A filed November 8, 2004.(1)
    
    Excludes $0 and $228 in amortization of deferred stock compensation for the three months
ended June 30, 2005 and 2004, respectively, and $0 and $355 for the six months ended June 30,
2005 and 2004, respectively.(2)
    
    Excludes $(14) and $(109) in variable stock compensation for the three months ended June 30,
2005 and 2004, respectively, and $(48) and $362 for the six months ended June 30, 2005 and
2004, respectively.(3)
    
    Excludes $0 and $126 in amortization of deferred stock compensation for the three months
ended June 30, 2005 and 2004, respectively, and $0 and $205 for the six months ended June 30,
2005 and 2004, respectively.(4)
    
    Excludes $0 and $(15) in variable stock compensation for the three months ended June 30, 2005
and 2004, respectively, and $0 and $658 for the six months ended June 30, 2005 and 2004,
respectively.  4




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TRANSMETA CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six Months EndedJune 30,
    
    June 30,2005
    
    2004*Cash flows from operating activities:Net loss
    
    $
    (14,253
    )
    
    $
    (50,128
    )Adjustments to reconcile net loss to net cash used in operating activities:Stock compensation
    
    
    (48
    )
    
    
    1,580Depreciation
    
    
    635
    
    
    
    1,878Amortization of patents and patent rights
    
    
    3,424
    
    
    
    4,751Changes in operating assets and liabilities:Accounts receivable
    
    
    (7,942
    )
    
    
    (1,773
    )Inventories
    
    
    3,691
    
    
    
    (2,550
    )Prepaid expenses and other current assets
    
    
    (850
    )
    
    
    (627
    )Accounts payable and accrued liabilities
    
    
    7,495
    
    
    
    7,150Accrued restructuring charges
    
    
    (558
    )
    
    
    (907
    )Net cash used in operating activities
    
    
    (8,406
    )
    
    
    (40,626
    )Cash flows from investing activities:Purchase of available-for-sale investments
    
    
    (12,000
    )
    
    
    (66,754
    )Proceeds from sale or maturity of available-for-sale investments
    
    
    20,548
    
    
    
    44,726Purchase of property and equipment
    
    
    (267
    )
    
    
    (1,692
    )Payment of patent and patent rights
    
    
    
    
    
    
    (7,500
    )Net cash provided by (used in) investing activities
    
    
    8,281
    
    
    
    (31,220
    )Cash flows from financing activities:Net proceeds from public offering of common stock
    
    
    
    
    
    
    10,223Proceeds from sales of common stock under ESPP and stock option plans
    
    
    1,848
    
    
    
    3,113Repayment of notes from stockholders
    
    
    18
    
    
    
    857Repayment of debt and capital lease obligations
    
    
    (175
    )
    
    
    (199
    )Net cash provided by financing activities
    
    
    1,691
    
    
    
    13,994Change in cash and cash equivalents
    
    
    1,566
    
    
    
    (57,852
    )Cash and cash equivalents at beginning of period
    
    
    17,273
    
    
    
    83,765Cash and cash equivalents at end of period
    
    $
    18,839
    
    
    $
    25,913
 
 *
    
    As restated in the June 30, 2004 Form 10-Q/A filed November 8, 2004.  5




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




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2. Cash, Cash Equivalents and Short-Term Investments
   Classified on Balance Sheet as:Gross
    
    Gross
    
    
    
    
    
    Cash andAmortized
    
    Unrealized
    
    Unrealized
    
    Aggregate
    
    Cash
    
    Short-termcost
    
    Gains
    
    Losses
    
    Fair Value
    
    Equivalents
    
    InvestmentsAs of June 30, 2005US Government debt
securities
    
    $
    28,000
    
    
    $
    
    
    
    $
    (214
    )
    
    $
    27,786
    
    
    $
    
    
    
    $
    27,786Money Market Funds
    
    
    18,839
    
    
    
    
    
    
    
    
    
    
    
    18,839
    
    
    
    18,839
    
    
    
    Total
    
    $
    46,839
    
    
    $
    
    
    
    $
    (214
    )
    
    $
    46,625
    
    
    $
    18,839
    
    
    $
    27,786As of December 31, 2004US Government debt
securities
    
    $
    21,000
    
    
    $
    1
    
    
    $
    (168
    )
    
    $
    20,833
    
    
    $
    
    
    
    $
    20,833Commercial paper
    
    
    15,569
    
    
    
    
    
    
    
    (7
    )
    
    
    15,562
    
    
    
    
    
    
    
    15,562Money Market Funds
    
    
    17,273
    
    
    
    
    
    
    
    
    
    
    
    17,273
    
    
    
    17,273
    
    
    
    Total
    
    $
    53,842
    
    
    $
    1
    
    
    $
    (175
    )
    
    $
    53,668
    
    
    $
    17,273
    
    
    $
    36,395
 3. Net Income (Loss) per Share
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004*
    
    2005
    
    2004*(in thousands, except for per share amounts)Basic and diluted:Net income (loss), as reported
    
    $
    6,832
    
    
    $
    (26,755
    )
    
    $
    (14,253
    )
    
    $
    (50,128
    )Shares used to compute basic net income (loss) per share
    
    
    189,848
    
    
    
    174,006
    
    
    
    189,848
    
    
    
    172,938Effect of dilutive securities:Common stock equivalents
    
    
    233
    
    
    
    
    
    
    
    
    
    
    
    Shares used to compute diluted net income (loss) per share
    
    
    190,081
    
    
    
    174,006
    
    
    
    189,848
    
    
    
    172,938Basic net income (loss) per share
    
    $
    0.04
    
    
    $
    (0.15
    )
    
    $
    (0.08
    )
    
    $
    (0.29
    )Diluted net income (loss) per share
    
    $
    0.04
    
    
    $
    (0.15
    )
    
    $
    (0.08
    )
    
    $
    (0.29
    )
 
 *
    
    As restated in the June 30, 2004 Form 10-Q/A filed November 8, 2004. 7




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##### Table of Contents



4. Stock Based Compensation
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004*
    
    2005
    
    2004*(in thousands, except for per share amounts)Net income (loss), as reported
    
    $
    6,832
    
    
    $
    (26,755
    )
    
    $
    (14,253
    )
    
    $
    (50,128
    )Add: Stock-based employee compensation expense included in
reported net income (loss), net of related tax effects
    
    
    (14
    )
    
    
    230
    
    
    
    (48
    )
    
    
    1,580Less: Total stock-based employee compensation expense
under fair value based method for all awards, net of
related tax effects
    
    
    (1,923
    )
    
    
    (9,196
    )
    
    
    (4,861
    )
    
    
    (20,113
    )Pro forma net income (loss)
    
    $
    4,895
    
    
    $
    (35,721
    )
    
    $
    (19,162
    )
    
    $
    (68,661
    )Basic and
diluted net income (loss) per share  as reported
    
    $
    0.04
    
    
    $
    (0.15
    )
    
    $
    (0.08
    )
    
    $
    (0.29
    )Basic and
diluted net income (loss) per share  pro forma
    
    $
    0.03
    
    
    $
    (0.21
    )
    
    $
    (0.10
    )
    
    $
    (0.40
    )
 
 *
    
    As restated in the June 30, 2004 Form 10-Q/A filed November 8, 2004.  Options
    
    ESPPThree Months
    
    Six Months
    
    Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,
    
    Ended June 30,
    
    Ended June 30,2005
    
    2004
    
    2005
    
    2004
    
    2005
    
    2004
    
    2005
    
    2004Expected volatility
    
    
    0.98
    
    
    
    0.64
    
    
    
    0.65
    
    
    
    0.65
    
    
    
    0.98
    
    
    
    0.90
    
    
    
    0.98
    
    
    
    0.95Expected life in years
    
    
    3.2
    
    
    
    4.0
    
    
    
    4.0
    
    
    
    4.0
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5Risk-free interest rate
    
    
    3.7
    %
    
    
    3.7
    %
    
    
    3.6
    %
    
    
    3.6
    %
    
    
    3.2
    %
    
    
    2.3
    %
    
    
    3.2
    %
    
    
    1.7
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 8




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##### Table of Contents



5. Revenue Recognition and Costs of Revenues
   Product Revenue and Cost of Product.
 License
Revenue and Cost of License
  Service Revenue
 Maintenance
and Technical Support Services Revenue
 Fixed
Fee Development Service Revenue and Cost of Services
 9




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##### Table of Contents



Time and Materials Based Design Service Revenue
  Three Months Ended
    
    Six Months EndedService
Revenue
    
    June 30,
    
    June 30,
    
    June 30,
    
    June 30,(in thousands)
    
    2005
    
    2004
    
    2005
    
    2004Time & Materials Based
Contracts
    
    $
    7,634
    
    
    $
    327
    
    
    $
    7,832
    
    
    $
    522License Related
Maintenance & Technical
Support Services
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    Total Service Revenue
    
    $
    7.634
    
    
    $
    327
    
    
    $
    8,082
    
    
    $
    522Cost of ServicesTime & Materials Based
Contracts
    
    $
    4,152
    
    
    $
    102
    
    
    $
    4,313
    
    
    $
    344Total Cost of Services
    
    $
    4,152
    
    
    $
    102
    
    
    $
    4,313
    
    
    $
    344
 6. Net Comprehensive Income (Loss)
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004*
    
    2005
    
    2004*Net income (loss)
    
    $
    6,832
    
    
    $
    (26,755
    )
    
    $
    (14,253
    )
    
    $
    (50,128
    )Net change in unrealized gain (loss) on investments
    
    
    66
    
    
    
    (238
    )
    
    
    (41
    )
    
    
    (240
    )Net change in foreign currency translation adjustments
    
    
    (9
    )
    
    
    (17
    )
    
    
    (20
    )
    
    
    (12
    )Net comprehensive income (loss)
    
    $
    6,889
    
    
    $
    (27,010
    )
    
    $
    (14,314
    )
    
    $
    (50,380
    )
 
 *
    
    As restated in the June 30, 2004 Form 10-Q/A filed November 8, 2004.   June 30,
    
    December 31,2005
    
    2004Net unrealized loss on investments
    
    $
    (214
    )
    
    $
    (174
    )Cumulative foreign currency translation adjustments
    
    
    28
    
    
    
    49Accumulated other comprehensive loss
    
    $
    (186
    )
    
    $
    (125
    )
 10




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##### Table of Contents



7. Inventories
  June 30,
    
    December 31,2005
    
    2004Work in progress
    
    $
    855
    
    
    $
    4,158Finished goods
    
    
    864
    
    
    
    1,252$
    1,719
    
    
    $
    5,410
  8. Advances from Customers
  9. Deferred Income
  June 30, 2005
    
    December 31, 2004Deferred revenue:Product
    
    $
    2,204
    
    
    $
    61License
    
    
    9,628
    
    
    
    Service
    
    
    6,066
    
    
    
    Total
    
    
    17,898
    
    
    
    61Deferred costs:Product
    
    
    793
    
    
    
    32License
    
    
    38
    
    
    
    Service
    
    
    1,549
    
    
    
    Total
    
    
    2,380
    
    
    
    32Deferred income
    
    $
    15,518
    
    
    $
    29
 10.
Restructuring Charges, net
   Excess
    
    WorkforceFacilities
    
    Reduction
    
    TotalBalance as of December 31, 2003
    
    $
    6,071
    
    
    $
    
    
    
    $
    6,071Net cash utilized in fiscal 2004
    
    
    (826
    )
    
    
    
    
    
    
    (826
    )Balance as of December 31, 2004
    
    
    5,245
    
    
    
    
    
    
    
    5,245Restructuring charge
    
    
    
    
    
    
    1,309
    
    
    
    1,309Net cash utilized in the quarter ended March 31, 2005
    
    
    (427
    )
    
    
    (6
    )
    
    
    (433
    )Balance as of March 31, 2005
    
    
    4,818
    
    
    
    1,303
    
    
    
    6,121
 11




---



##### Table of Contents



Excess
    
    WorkforceFacilities
    
    Reduction
    
    TotalRestructuring charge
    
    
    (147
    )
    
    
    193
    
    
    
    46Net cash utilized in the quarter ended June 30, 2005
    
    
    (220
    )
    
    
    (1,260
    )
    
    
    (1,480
    )Balance as of June 30, 2005
    
    $
    4,451
    
    
    $
    236
    
    
    $
    4,687
 11. Related Party Transaction
  12. Geographic and Customer Concentration Information
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Fujitsu
    
    
    44
    %
    
    
    *
    %
    
    
    37
    %
    
    
    *
    %Sony
    
    
    31
    %
    
    
    *
    %
    
    
    24
    %
    
    
    *
    %Hewlett-Packard
    
    
    *
    %
    
    
    39
    %
    
    
    *
    %
    
    
    46
    %Sharp
    
    
    *
    %
    
    
    21
    %
    
    
    *
    %
    
    
    19
    %Siltrontech
    
    
    *
    %
    
    
    *
    %
    
    
    *
    %
    
    
    11
    %
 
 *
    
    represents less than 10% of total revenue  June 30,
    
    December 31,2005
    
    2004Microsoft
    
    
    51
    %
    
    
    *
    %Hewlett-Packard
    
    
    27
    %
    
    
    31
    %Siltrontech
    
    
    *
    %
    
    
    28
    %Sharp
    
    
    *
    %
    
    
    16
    %
 
 *
    
    represents less than 10% of net accounts receivable 13. Recent Accounting Pronouncements
   12




---



##### Table of Contents



14. Legal Proceedings
 In
re Transmeta Corporation Initial Public Offering Securities Litigation In re
Initial Public Offering Securities Litigation
 15. Asset purchase and license agreements
  13




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Caution Regarding Forward-Looking Statements
    Overview
    14




---



##### Table of Contents




    
    On March 31, 2005, we entered into a design services agreement with Sony Computer
Entertainment Inc. and Sony Corporation (collectively, the Sony Group), under which
agreement we provide the design and engineering services of more than one hundred
Transmeta engineers to work on advanced projects for Sony Group.
    
    On May12, 2005, we entered into a series of related definitive development services
agreements with Microsoft Corporation, under which agreements we will provide
development services to Microsoft relating to a proprietary Microsoft project.
    
    On May 26, 2005, we entered into related definitive asset purchase and license
agreements with Culture.Com Technology Limited (Culturecom), a Hong Kong based
technology company. As part of the transaction, we agreed to sell our Crusoe product
line to Culturecom. Culturecom will also license our 130-nanometer Efficeon technology
to make and sell Efficeon-based products in Taiwan and China. In addition to up-front payments,
Culturecom will pay royalties to us on sales by Culturecom of Crusoe and Efficeon
products.
     Critical Accounting Policies
  Maintenance
and Technical Support Services Revenue.
 Fixed Fee Development Service Revenue and Cost of Services.
 15




---



##### Table of Contents



Recognition
of Time and Materials Based Design Services Revenue and Related
Costs.
 Results of Operations
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004(1)
    
    2005
    
    2004(1)Product
    
    
    29
    %
    
    
    95
    %
    
    
    43
    %
    
    
    95
    %License
    
    
    40
    %
    
    
    *
    %
    
    
    32
    %
    
    
    *
    %Service
    
    
    31
    %
    
    
    5
    %
    
    
    25
    %
    
    
    5
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Costs of product
    
    
    16
    %
    
    
    153
    %
    
    
    27
    %
    
    
    130
    %Costs of license
    
    
    *
    %
    
    
    *
    %
    
    
    *
    %
    
    
    *
    %Costs of service
    
    
    17
    %
    
    
    2
    %
    
    
    14
    %
    
    
    3
    %Total cost of revenue
    
    
    33
    %
    
    
    155
    %
    
    
    41
    %
    
    
    133
    %Gross profit (loss)
    
    
    67
    %
    
    
    (55
    %)
    
    
    59
    %
    
    
    (33
    %)Operating expenses:Research and development
    
    
    12
    %
    
    
    229
    %
    
    
    48
    %
    
    
    236
    %Selling, general and administrative
    
    
    20
    %
    
    
    123
    %
    
    
    41
    %
    
    
    126
    %Restructuring charges
    
    
    *
    %
    
    
    *
    %
    
    
    4
    %
    
    
    *
    %Amortization of patents and patent rights
    
    
    7
    %
    
    
    39
    %
    
    
    11
    %
    
    
    43
    %Stock compensation
    
    
    *
    %
    
    
    4
    %
    
    
    *
    %
    
    
    14
    %Total operating expenses
    
    
    39
    %
    
    
    395
    %
    
    
    104
    %
    
    
    419
    %Operating income (loss)
    
    
    28
    %
    
    
    (450
    %)
    
    
    (46
    %)
    
    
    (452
    %)Interest income and other, net
    
    
    *
    %
    
    
    4
    %
    
    
    2
    %
    
    
    4
    %Interest expense
    
    
    (*
    %)
    
    
    (*
    %)
    
    
    (1
    %)
    
    
    (*
    %)Net income (loss)
    
    
    28
    %
    
    
    (446
    %)
    
    
    (45
    %)
    
    
    (448
    %)
 
 (1)
    
    As restated in the June 30, 2004 Form 10-Q/A filed November 8, 2004. Total Revenue
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004(1)
    
    2005
    
    2004(1)(in thousands)Product
    
    $
    7,068
    
    
    $
    5,673
    
    
    $
    13,474
    
    
    $
    10,680License
    
    
    10,000
    
    
    
    
    
    
    
    10,000
    
    
    
    Service
    
    
    7,634
    
    
    
    327
    
    
    
    8,082
    
    
    
    522Total revenue
    
    $
    24,702
    
    
    $
    6,000
    
    
    $
    31,556
    
    
    $
    11,202
 
 (1)
    
    As restated in the June 30, 2004 Form 10-Q/A filed November 8, 2004. 16




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##### Table of Contents



Product
Revenues.
 
    
    Higher unit shipments and ASPs of Efficeon products, which had their first full
year of sales in fiscal 2004. Revenue from Efficeon products represented $2.9 million
and $5.0 million of total product revenue for the three and six months ended June 30,
2005, respectively, versus $1.9 million and $2.8 million of total product revenue for
the three and six months ended June 30, 2004, respectively.
    
    Higher unit shipments on slightly lower ASPs of Crusoe product, our first product
line. Revenue from Crusoe products represented $4.2 million and $8.5 million of total
revenue for the three and six months ended June 30, 2005, respectively, versus $3.6
million and $7.8 million of total product revenue for the three and six months ended
June 30, 2004, respectively.
  License
Revenue.
 Service
Revenue.
  Services Revenue
    
    Three Months Ended
    
    Six Months Ended(in thousands)
    

June
30, 2005
    
    June 30, 2004
    
    June 30, 2005
    
    June 30, 2004Time & Materials
Based Contract
    
    $
    7,634
    
    
    $
    327
    
    
    $
    7.832
    
    
    $
    522Maintenance &
Technical Support
Services for License
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    Total Services Revenue
    
    $
    7,634
    
    
    $
    327
    
    
    $
    8,082
    
    
    $
    522
 17




---



##### Table of Contents



Maintenance
and Technical Support Services Revenue.
 Fixed Fee
Development Service Revenue.
 Time and Materials Based Design Service Revenue.
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Fujitsu
    
    
    44
    %
    
    
    *
    %
    
    
    37
    %
    
    
    *
    %Sony
    
    
    31
    %
    
    
    *
    %
    
    
    24
    %
    
    
    *
    %Hewlett-Packard
    
    
    *
    %
    
    
    39
    %
    
    
    *
    %
    
    
    46
    %Sharp
    
    
    *
    %
    
    
    21
    %
    
    
    *
    %
    
    
    19
    %Siltrontech
    
    
    *
    %
    
    
    *
    %
    
    
    *
    %
    
    
    11
    %
 
 *
    
    represents less than 10% of total revenue  June 30,
    
    December 31,2005
    
    2004Microsoft
    
    
    51
    %
    
    
    *
    %Hewlett-Packard
    
    
    27
    %
    
    
    31
    %Siltrontech
    
    
    *
    %
    
    
    28
    %Sharp
    
    
    *
    %
    
    
    16
    %
 
 *
    
    represents less than 10% of net accounts receivable 18




---



##### Table of Contents



Costs of Revenues
  Products:
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    

2004(1)
    
    2005
    

2004(1)Product revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of product revenue:Product Cost
    
    
    76.4
    %
    
    
    108.2
    %
    
    
    80.8
    %
    
    
    103.5
    %Underabsorbed overhead
    
    
    2.4
    %
    
    
    1.0
    %
    
    
    3.3
    %
    
    
    5.1
    %Charges for inventory adjustments
    
    
    4.6
    %
    
    
    55.8
    %
    
    
    4.0
    %
    
    
    29.6
    %Cost of product revenue
    
    
    83.4
    %
    
    
    165.0
    %
    
    
    88.1
    %
    
    
    138.3
    %Benefits to gross margin from
the sale of previously written down inventory
    
    
    (27.5
    %)
    
    
    (3.5
    %)
    
    
    (23.5
    %)
    
    
    (2.2
    %)Cost of product revenue
    
    
    55.9
    %
    
    
    161.5
    %
    
    
    64.6
    %
    
    
    136.1
    %Product gross margin
    
    
    44.1
    %
    
    
    (61.5
    %)
    
    
    35.4
    %
    
    
    (36.1
    %)
 
 (1)
    
    As restated in the June 30, 2004 Form 10-Q/A filed November 8, 2004.  
    
    Lower product cost a result of lower manufacturing costs associated with the Efficeon
TM8000 processors, which had higher costs with the introduction of the product in the
first half of 2004;
    
    Higher charges for inventory adjustments in the first half of
2004 resulted from manufacturing costs expected to exceed the price at which we expected to sell these
products;
    
    Benefit derived from sale of previously written-down inventory during the first half
of 2005 from customers.
      19




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##### Table of Contents



Licenses:
  Services:
   Costs of Services Revenue
    

Three
Months Ended
    

Six
Months Ended(in
thousands)
    

June
30, 2005
    

June
30, 2004
    

June
30, 2005
    

June
30, 2004Time & Materials Based
Contract
    
    $
    4,152
    
    
    $
    102
    
    
    $
    4,313
    
    
    $
    344Total Cost of Services
    
    $
    4,152
    
    
    $
    102
    
    
    $
    4,313
    
    
    $
    344
 Research and Development
    Selling, General and Administrative
  20




---



##### Table of Contents



Restructuring Charges, net
  Amortization of Patents and Patent Rights
  Stock Compensation
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Variable stock
compensation
    
    $
    (14
    )
    
    $
    (125
    )
    
    $
    (46
    )
    
    $
    560Deferred stock
compensation
    
    
    
    
    
    
    355
    
    
    
    
    
    
    
    1,020Total stock
compensation
    
    $
    (14
    )
    
    $
    230
    
    
    $
    (46
    )
    
    $
    1,580
 Interest Income and Other, Net and Interest Expense
  Liquidity and Capital Resources
  21




---



##### Table of Contents



Six Months EndedJune 30,
    
    June 30,2005
    
    2004(in thousands)Net cash used in operating activities
    
    $
    (8,406
    )
    
    $
    (40,626
    )Net cash provided by (used in) investing activities
    
    
    8,281
    
    
    
    (31,220
    )Net cash provided by financing activities
    
    
    1,691
    
    
    
    13,994Increase (decrease) in cash and cash equivalents
    
    $
    1,566
    
    
    $
    (57,852
    )
    22




---



##### Table of Contents



Contractual Obligations
  Payments Due by PeriodLess Than
    
    1-3
    
    AfterContractual Obligations
    
    Total
    
    1 Year
    
    Years
    
    4 Years(In thousands)Capital Lease Obligations
    
    $
    186
    
    
    $
    186
    
    
    $
    
    
    
    $
    Operating Leases(1)
    
    
    14,067
    
    
    
    4,591
    
    
    
    9,468
    
    
    
    8Unconditional Purchase Obligations(2)
    
    
    1,979
    
    
    
    1,410
    
    
    
    569
    
    
    
    Other Obligations(3)
    
    
    5,236
    
    
    
    5,236
    
    
    
    
    
    
    
    Total
    
    $
    21,468
    
    
    $
    11,423
    
    
    $
    10,037
    
    
    $
    8
 
 (1)
    
    Operating leases include agreements for building facilities.(2)
    
    Purchase obligations include agreements to purchase goods or services that are enforceable
and legally binding on Transmeta and that specify all significant terms, including: fixed or
minimum quantities to be purchased; fixed, minimum or variable price provisions; and the
approximate timing of the transaction. Purchase obligations also include agreements for design
tools and software for use in product development.(3)
    
    Other obligations represent payments of $5.0 million to our development partner and payments
of $0.2 million pertaining to our restructuring charge. Recent Accounting Pronouncements
    23




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##### Table of Contents



Risks that Could Affect Future Results
 The factors discussed below are cautionary statements that identify important factors that
could cause actual results to differ materially from those anticipated in the forward-looking
statements in this Quarterly Report on Form 10-Q . If any of the following risks actually occurs,
our business, financial condition and results of operations would suffer. In this case, the trading
price of our common stock could decline and investors might lose all or part of their investment in
our common stock.
 We have a history of losses, and we must successfully execute on our modified business model and
restructuring plan if we are to sustain our operations.
   We might fail to execute our restructuring plan or to operate successfully under our modified
business model.
  Our restructuring plan and related reductions in our workforce may adversely affect the morale and
performance of our personnel, the rate of attrition among our personnel, our ability to hire new
personnel and our ability to conduct our business operations.
  24




---



##### Table of Contents



We might not be able to execute on our modified business model and restructuring plan if we lose
key management or technical personnel, on whose knowledge, leadership and technical expertise we
rely.
  We may not be able to raise any more financing, or financing may only be available on terms
unfavorable to us or our stockholders.
  
    
    fund expansion;
    
    fund marketing expenditures;
    
    develop or enhance our products or technologies;
    
    enhance our operating infrastructure;
    
    hire additional personnel;
    
    respond to customer concerns about our viability;
    
    respond to competitive pressures; or
    
    acquire complementary businesses or technologies.
  25




---



##### 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 product revenue and our product business may be negatively impacted by modifications to our
business model that we have recently implemented or are contemplating.
  26




---



##### Table of Contents



The success of our licensing business depends on maintaining and increasing our LongRun2 licensing
revenue.
  We have limited visibility regarding when and to what extent our licensees will use our LongRun2 or
other licensed technologies.
  
    
    the competition these companies face and the market acceptance of their products;
    
    the pricing policies of our licensees for their products incorporating our technology and whether those products are
competitively priced;
    
    the engineering, marketing and management capabilities of these companies and technical challenges unrelated to our
technology that they face in developing their products; and
    
    the financial and other resources of our licensees.
  Our licensing and services revenue cycle is long and unpredictable, which makes it difficult to
predict future revenues, which may cause us to miss analysts estimates and may result in
unexpected changes in our stock price.
  27




---



##### Table of Contents



We have only recently entered the engineering services business, and our ability to succeed in that
line of business is uncertain and subject to many risks.
  We could encounter a variety of technical and manufacturing problems that could delay or prevent us
from satisfying customer demand for Efficeon TM8000 series microprocessors manufactured using a 90
nanometer process.
  Our restructuring plan will very likely reduce our resources and ability to pursue opportunities
and support customers in emerging markets for our microprocessor products.
  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.
   We face intense competition in the x86-compatible microprocessor and power management markets. Many
of our competitors are much larger than we are and have significantly greater resources. We may not
be able to compete effectively.
   28




---



##### Table of Contents



We may experience manufacturing difficulties that could increase the cost and reduce the supply of
our products.
  Our lengthy and variable product sales cycles make it difficult for us to predict when and if a
design win will result in volume shipments.
  29




---



##### Table of Contents



If we fail to forecast demand for our products accurately, we could lose sales and incur inventory
losses.
  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.
  We rely on an independent foundry that has no obligation to provide us with fixed pricing or
production capacity for the fabrication of our wafers, and our business will suffer if we are
unable to obtain sufficient production capacity on favorable terms.
  30




---



##### Table of Contents



Our reliance on TSMC and Fujitsu Limited to fabricate our wafers limits our ability to control the
production, supply and delivery of our products.
  
    
    unpredictability of manufacturing yields and production costs;
    
    interruptions in shipments;
    
    inability to control quality of finished products;
    
    inability to control product delivery schedules;
    
    potential lack of access to key fabrication process technologies; and
    
    potentially greater exposure to misappropriation of our intellectual property.
 We depend on ASE to provide assembly and test services. If ASE were to cease providing services to
us in a timely manner and on acceptable terms, our business would suffer.
  If our products are not compatible with industry standards, hardware that our customers design into
their systems or that is used by end-users or software applications or operating systems for
x86-compatible microprocessors, market acceptance of our products and our ability to maintain or
increase our revenues would suffer.
    31




---



##### Table of Contents



Our products may have defects that could damage our reputation, decrease market acceptance of our
products, cause us to lose customers and revenue and result in liability to us.
  We are subject to general economic and market conditions.
  If we do not keep pace with technological change, our products may not be competitive and our
revenue and operating results may suffer.
  Advances in battery design, cooling systems and power management systems could adversely affect our
ability to achieve widespread market acceptance for our products.
  Our products and technologies may infringe the intellectual property rights of others, which may
cause us to become subject to expensive litigation, cause us to incur substantial damages, require
us to pay significant license fees or prevent us from selling our products.
  32




---



##### Table of Contents



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




---



##### Table of Contents



We have significant international operations, which exposes us to risk and uncertainties.
  
    
    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;
    
    problems in the timeliness or quality of product deliveries;
    
    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.
   We might experience payment disputes for amounts owed to us under our LongRun2 licensing
agreements, and this may harm our results of operations.
  34




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##### Table of Contents



The price of our common stock has been volatile and is subject to wide fluctuations.
  
    
    variations in our quarterly results;
    
    market conditions in our industry, the industries of our customers and the economy as a whole;
    
    announcements of technological innovations by us or by our competitors;
    
    introductions of new products or new pricing policies by us or by our competitors;
    
    acquisitions or strategic alliances by us or by our competitors;
    
    recruitment or departure of key personnel;
    
    the gain or loss of significant orders;
    
    the gain or loss of significant customers; and
    
    changes in the estimates of our operating performance or changes in recommendations by securities analysts.
  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 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;
 35




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##### Table of Contents




    
    authorizing the issuance of blank check preferred stock that our board could issue to increase the number of shares and to
outstanding 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 proposing matters that can upon by
be acted stockholders at stockholder meetings.
  Our reported financial results may be adversely affected by changes in accounting principles
generally accepted in the United States.
  We have identified material weaknesses in our internal control over financial reporting, which
contributed to our need to amend our financial statements for the second quarter of fiscal 2004.
  Changes in securities laws and regulations have increased our costs.
  36




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Interest Rate Risk.
 Foreign Currency Exchange Risk.
 
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
   Internal Control Over Financial Reporting
   37




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##### Table of Contents




    
    Period-end close and financial reporting;
    
    Contract administration;
    
    Inventory and cost accounting;
    
    Inadequate technical accounting staff;
    
    Fixed asset accounting; and
    
    Segregation of duties in Accounts Payable function.
  Remediation Actions to Address Material Weaknesses in Internal Control over Financial Reporting
   Inherent Limitations on Effectiveness of Controls
  38




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  39




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 In
re Transmeta Corporation Initial Public Offering Securities Litigation In re
Initial Public Offering Securities Litigation
 
 Item 2. Unregistered Sales of Equity 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
 Exhibits.
 40




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##### Table of Contents



Exhibit Number
    
    Exhibit Title10.22+
    
    Master Services Agreement and
Intellectual Property Assignment, dated
April 1, 2005, by and between Transmeta
Corporation and Microsoft Corporation.10.23+
    
    Series of six Schedule A
agreements, dated May 11, 2005, by and between Transmeta
Corporation and Microsoft Corporation.10.24+
    
    Asset Purchase Agreement, dated May 26,
2005, by and between Transmeta
Corporation and Culture.com Technology
Limited.10.25+
    
    License Agreement, dated May 26, 2005,
by and between Transmeta Corporation and
Culture.com Technology Limited.31.01
    
    Certification by Arthur L. Swift pursuant to Rule 13a-14(a) promulgated under the
Securities Exchange Act of 1934.31.02
    
    Certification by Mark R. Kent pursuant to Rule 13a-14(a) promulgated under the
Securities Exchange Act of 1934.32.01*
    
    Certification by Arthur L. Swift 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 Mark R. Kent 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.+
    
    Confidential treatment has been requested for portions of this exhibit. These portions have
been omitted from this Report and have been filed separately with the Securities and Exchange
Commission. 41




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##### Table of Contents



SIGNATURES
  TRANSMETA CORPORATIONBy
    
    /s/ MARK R. KENTMark R. KentChief Financial Officer(Principal Financial Officer and Duly AuthorizedOfficer)Date:
August 15, 2005
 42




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Exhibit Title10.22+
    
    Master Services Agreement and Intellectual Property Assignment, dated April 1,
2005, by and between Transmeta Corporation and Microsoft Corporation.10.23+
    
    Series of six Schedule A
agreements, dated May 11, 2005, by and between Transmeta
Corporation and Microsoft Corporation.10.24+
    
    Asset Purchase Agreement, dated May 26, 2005, by and between Transmeta
Corporation and Culture.com Technology Limited.10.25+
    
    License Agreement, dated May 26, 2005, by and between Transmeta Corporation
and Culture.com Technology Limited.31.01
    
    Certification by Arthur L. Swift pursuant to Rule 13a-14(a) promulgated under
the Securities Exchange Act of 1934.31.02
    
    Certification by Mark R. Kent pursuant to Rule 13a-14(a) promulgated under the
Securities Exchange Act of 1934.32.01*
    
    Certification by Arthur L. Swift 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 Mark R. Kent 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.+
    
    Confidential treatment has been requested for portions of this exhibit. These portions have
been omitted from this Report and have been filed separately with the Securities and Exchange
Commission.