##### 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, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period from                    to
 Commission File Number 000-31803
 TRANSMETA CORPORATION
 (Exact name of Registrant as specified in its charter)
 Delaware
    
    77-0402448(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification no.)
 3990 Freedom Circle, Santa Clara, CA 95054
(Address of principal executive offices, including zip code)
 (408) 919-3000
(Registrants telephone number, including area code)
 
 þ o
  o þ o
 o þ




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##### 



TRANSMETA CORPORATION
 FORM 10-Q
Quarterly Period Ended June 30, 2006
TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005
    
    
    3Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2006 and 2005
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2006 and 2005
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    28Item 4. Submission of Matters to a Vote of Security Holders
    
    
    40Item 6. Exhibits
    
    
    42Signatures
    
    
    43EXHIBIT 10.27EXHIBIT 10.28EXHIBIT 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 31,2006
    
    
    2005 (1)(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    21,344
    
    
    $
    27,659Short-term investments
    
    
    30,866
    
    
    
    28,811Accounts receivable
    
    
    366
    
    
    
    1,686Inventories
    
    
    440
    
    
    
    265Prepaid expenses and other current assets
    
    
    2,094
    
    
    
    2,279Total current assets
    
    
    55,110
    
    
    
    60,700Property and equipment, net
    
    
    1,372
    
    
    
    1,623Patents and patent rights, net
    
    
    12,657
    
    
    
    16,080Other assets
    
    
    921
    
    
    
    911Total assets
    
    $
    70,060
    
    
    $
    79,314LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,228
    
    
    $
    1,521Accrued compensation and related compensation liabilities
    
    
    3,748
    
    
    
    3,279Deferred income, net
    
    
    5,485
    
    
    
    5,937Other accrued liabilities
    
    
    1,792
    
    
    
    2,109Advances from customers
    
    
    2,431
    
    
    
    7,260Current portion of accrued restructuring costs
    
    
    1,804
    
    
    
    1,803Total current liabilities
    
    
    16,488
    
    
    
    21,909Long-term accrued restructuring costs, net of current portion
    
    
    1,640
    
    
    
    2,453Total liabilities
    
    
    18,128
    
    
    
    24,362Commitments
and contingencies (Note 5)Stockholders equity:Preferred stock, $0.00001 par value, at amounts paid in; Authorized shares 
5,000,000. None issued and outstanding
    
    
    
    
    
    
    Common stock, $0.00001 par value, at amounts paid in; Authorized shares
 1,000,000,000. Issued and outstanding shares  195,999,445 and
191,710,620, respectively
    
    
    720,176
    
    
    
    713,129Treasury stock shares  796,875 and 796,875, respectively
    
    
    (2,439
    )
    
    
    (2,439
    )Accumulated other comprehensive loss
    
    
    (146
    )
    
    
    (195
    )Accumulated deficit
    
    
    (665,659
    )
    
    
    (655,543
    )Total stockholders equity
    
    
    51,932
    
    
    
    54,952Total liabilities and stockholders equity
    
    $
    70,060
    
    
    $
    79,314
 
 (1)
    
    Derived from the Companys audited financial statements as of December 31, 2005, 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
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue:Product
    
    $
    361
    
    
    $
    7,068
    
    
    $
    950
    
    
    $
    13,474License
    
    
    
    
    
    
    10,000
    
    
    
    
    
    
    
    10,000Service
    
    
    8,970
    
    
    
    7,634
    
    
    
    27,890
    
    
    
    8,082Total revenue
    
    
    9,331
    
    
    
    24,702
    
    
    
    28,840
    
    
    
    31,556Cost of revenue:Product (2)
    
    
    (62
    )
    
    
    3,950
    
    
    
    100
    
    
    
    8,702License
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    25Service (2)
    
    
    5,795
    
    
    
    4,152
    
    
    
    16,676
    
    
    
    4,313Total cost of revenue
    
    
    5,733
    
    
    
    8,127
    
    
    
    16,776
    
    
    
    13,040Gross profit
    
    
    3,598
    
    
    
    16,575
    
    
    
    12,064
    
    
    
    18,516Operating expenses:Research and development (1) (2)
    
    
    4,769
    
    
    
    2,991
    
    
    
    8,021
    
    
    
    15,213Selling, general and administrative (2)
    
    
    6,043
    
    
    
    4,996
    
    
    
    11,587
    
    
    
    12,952Restructuring charges, net
    
    
    96
    
    
    
    46
    
    
    
    170
    
    
    
    1,355Amortization of patents and patent rights
    
    
    1,712
    
    
    
    1,711
    
    
    
    3,423
    
    
    
    3,422Stock compensation
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    (48
    )Total operating expenses
    
    
    12,620
    
    
    
    9,730
    
    
    
    23,201
    
    
    
    32,894Operating loss
    
    
    (9,022
    )
    
    
    6,845
    
    
    
    (11,137
    )
    
    
    (14,378
    )Interest income and other, net
    
    
    590
    
    
    
    93
    
    
    
    1,093
    
    
    
    339Interest expense
    
    
    (37
    )
    
    
    (106
    )
    
    
    (72
    )
    
    
    (214
    )Net income (loss)
    
    $
    (8,469
    )
    
    $
    6,832
    
    
    $
    (10,116
    )
    
    $
    (14,253
    )Net income (loss) per share  basic and diluted
    
    $
    (0.04
    )
    
    $
    0.04
    
    
    $
    (0.05
    )
    
    $
    (0.08
    )Weighted average shares outstanding  basic
    
    
    195,725
    
    
    
    189,848
    
    
    
    194,553
    
    
    
    189,848Weighted average shares outstanding  diluted
    
    
    195,725
    
    
    
    190,081
    
    
    
    194,553
    
    
    
    189,848
 
 (1)
    
    Excludes $0, $0, $(14) and $(48) in variable stock compensation for the three and six months
ended June 30, 2006 and 2005, respectively.(2)
    
    Includes stock based compensation charges as follows:
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Cost of product revenue
    
    $
    5
    
    
    $
    
    
    
    $
    9
    
    
    $
    Cost of service revenue
    
    
    763
    
    
    
    
    
    
    
    1,364
    
    
    
    Research and development
    
    
    403
    
    
    
    
    
    
    
    661
    
    
    
    Selling, general and administrative
    
    
    739
    
    
    
    
    
    
    
    1,193
    
    
    
    Total stock-based compensation
    
    $
    1,910
    
    
    $
    
    
    
    $
    3,227
    
    
    $
    
  4




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##### Table of Contents



TRANSMETA CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (10,116
    )
    
    $
    (14,253
    )Adjustments to reconcile net loss to net cash used in operating activities:Stock compensation expense
    
    
    3,227
    
    
    
    (48
    )Depreciation
    
    
    556
    
    
    
    635Amortization of patents and patent rights
    
    
    3,423
    
    
    
    3,424Non cash restructuring charges
    
    
    170
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    1,320
    
    
    
    (7,942
    )Inventories
    
    
    (163
    )
    
    
    3,691Prepaid expenses and other current assets
    
    
    191
    
    
    
    (850
    )Other assets
    
    
    (10
    )
    
    
    Accounts payable and accrued liabilities
    
    
    (188
    )
    
    
    7,495Deferred income, net
    
    
    (450
    )
    
    
    Advances from customers
    
    
    (4,829
    )
    
    
    Accrued restructuring charges
    
    
    (982
    )
    
    
    (558
    )Net cash used in operating activities
    
    
    (7,851
    )
    
    
    (8,406
    )Cash flows from investing activities:Purchase of available-for-sale investments
    
    
    (14,000
    )
    
    
    (12,000
    )Proceeds from sale or maturity of available-for-sale investments
    
    
    12,000
    
    
    
    20,548Purchase of property and equipment
    
    
    (305
    )
    
    
    (267
    )Net cash provided by (used in) investing activities
    
    
    (2,305
    )
    
    
    8,281Cash flows from financing activities:Proceeds from sales of common stock under employee stock purchase and incentive option plans
    
    
    3,841
    
    
    
    1,848Repayment of notes from stockholders
    
    
    
    
    
    
    18Repayment of debt and capital lease obligations
    
    
    
    
    
    
    (175
    )Net cash provided by financing activities
    
    
    3,841
    
    
    
    1,691Change in cash and cash equivalents
    
    
    (6,315
    )
    
    
    1,566Cash and cash equivalents at beginning of period
    
    
    27,659
    
    
    
    17,273Cash and cash equivalents at end of period
    
    $
    21,344
    
    
    $
    18,839
  5




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TRANSMETA CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. Description of Business
  2. Basis of Presentation
  3. Balance Sheet Details
 June 30,
    
    
    December 31,2006
    
    
    2005InventoriesRaw materials
    
    $
    192
    
    
    $
    Work in progress
    
    
    239
    
    
    
    Finished goods
    
    
    9
    
    
    
    265Total
    
    $
    440
    
    
    $
    265Property and equipment, netLeasehold improvements
    
    $
    2,475
    
    
    $
    2,410Computer equipment
    
    
    6,110
    
    
    
    5,911Furniture and fixtures
    
    
    1,648
    
    
    
    1,635Computer software
    
    
    1,853
    
    
    
    1,82512,086
    
    
    
    11,781Less accumulated depreciation and amortization
    
    
    (10,714
    )
    
    
    (10,158
    )Total
    
    $
    1,372
    
    
    $
    1,623Other accrued liabilitiesAccrued audit
    
    $
    598
    
    
    $
    885Deferred rent
    
    
    334
    
    
    
    408Other
    
    
    860
    
    
    
    816Total
    
    $
    1,792
    
    
    $
    2,109
 6




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4. Short-Term Investments
   Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Aggregatecost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAs of June 30, 2006Federal agency discount notes
    
    $
    15,000
    
    
    $
    
    
    
    $
    134
    
    
    $
    14,866Commercial paper
    
    
    16,000
    
    
    
    
    
    
    
    
    
    
    
    16,000Total
    
    $
    31,000
    
    
    $
    
    
    
    $
    134
    
    
    $
    30,866As of December 31, 2005Federal agency discount notes
    
    $
    25,000
    
    
    $
    
    
    
    $
    189
    
    
    $
    24,811Commercial paper
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    4,000Total
    
    $
    29,000
    
    
    $
    
    
    
    $
    189
    
    
    $
    28,811
  Amortized
    
    
    AggregateCost
    
    
    Fair Value(In thousands)As of June 30, 2006:Amounts maturing within one year
    
    $
    22,000
    
    
    $
    21,959Amounts maturing after one year, within five years
    
    
    9,000
    
    
    
    8,907Total
    
    $
    31,000
    
    
    $
    30,866
     7




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##### Table of Contents



In Loss Position
    
    
    In Loss Position<12 Months
    
    

>12 Months
    
    
    Total in Loss PositionGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    (Loss)
    
    
    Value
    
    
    (Loss)
    
    
    Value
    
    
    (Loss)Short-term investments:Federal agency discount notes
    
    $
    5,959
    
    
    $
    (41
    )
    
    $
    8,907
    
    
    $
    (93
    )
    
    $
    14,866
    
    
    $
    (134
    )Commercial paper
    
    
    16,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,000
    
    
    
    Total in loss position
    
    $
    21,959
    
    
    $
    (41
    )
    
    $
    8,907
    
    
    $
    (93
    )
    
    $
    30,866
    
    
    $
    (134
    )
 5. Commitments and Contingencies
 Purchase Obligations
  Operating Leases
   Operating Leases(In thousands)Years
ending December 31,2006 (remaining six months)
    
    $
    2,4252007
    
    
    4,8582008
    
    
    2,5102009
    
    
    162010
    
    
    4Income from subleases
    
    
    (548
    )Total minimum operating lease payments
    
    $
    9,265
 Litigation
 In
re Transmeta Corporation Initial Public Offering Securities Litigation, In re
Initial Public Offering Securities Litigation,
 8




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##### Table of Contents



6. Net Comprehensive Income (Loss)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    (8,469
    )
    
    $
    6,832
    
    
    $
    (10,116
    )
    
    $
    (14,253
    )Net change in unrealized gain (loss) on investments
    
    
    7
    
    
    
    66
    
    
    
    55
    
    
    
    (41
    )Net change in foreign currency translation adjustments
    
    
    (5
    )
    
    
    (9
    )
    
    
    (6
    )
    
    
    (20
    )Net comprehensive income (loss)
    
    $
    (8,467
    )
    
    $
    6,889
    
    
    $
    (10,067
    )
    
    $
    (14,314
    )
  June 30,
    
    
    December 31,2006
    
    
    2005Net unrealized loss on investments
    
    $
    (134
    )
    
    $
    (189
    )Cumulative foreign currency translation adjustments
    
    
    (12
    )
    
    
    (6
    )Accumulated other comprehensive loss
    
    $
    (146
    )
    
    $
    (195
    )
 7. Stock Based Compensation
     9




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Prior to the Adoption of SFAS No. 123(R)
   Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2005
    
    
    June 30, 2005Net income (loss) as reported
    
    $
    6,832
    
    
    $
    (14,253
    )Add: Stock-based employee compensation expense included
in reported net income (loss), net of related tax effects
    
    
    (14
    )
    
    
    (48
    )Less: Pro forma stock compensation expense computed under
the fair value method for all awards, net of related tax
effects
    
    
    (1,923
    )
    
    
    (4,861
    )Pro forma net income (loss)
    
    $
    4,895
    
    
    $
    (19,162
    )Basic and diluted net income (loss) per share, as reported
    
    $
    0.04
    
    
    $
    (0.08
    )Pro forma basic and diluted net income (loss) per share
    
    $
    0.03
    
    
    $
    (0.10
    )
 10




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##### Table of Contents



Impact of the Adoption of SFAS No. 123(R)
  Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2006
    
    
    June 30, 2006Stock-based compensation expense by type of award:Employee stock options
    
    $
    1,302
    
    
    $
    2,314Employee stock purchase plan
    
    
    609
    
    
    
    927Net change in amounts capitalized as inventory
    
    
    (2
    )
    
    
    (12
    )Net change in amounts capitalized as deferred costs
    
    
    2
    
    
    
    (2
    )Total stock-based compensation
    
    
    1,911
    
    
    
    3,227Tax effect on stock-based compensation
    
    
    
    
    
    
    Net effect on net loss
    
    $
    1,911
    
    
    $
    3,227
   Valuation Assumptions
  Three Months Ended June 30,
    
    Six Months Ended June 30,Equity Incentive Plans
    
    2006
    
    2005
    
    2006
    
    2005Risk-free interest rate
    
    
    5.0
    %
    
    
    3.7
    %
    
    
    4.8
    %
    
    
    3.6
    %Expected life of option in years
    
    
    3 to 4
    
    
    
    3.2
    
    
    
    3 to 4
    
    
    
    4.0Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    100
    %
    
    
    98
    %
    
    
    100
    %
    
    
    65
    %
 Three Months Ended June 30,
    
    Six Months Ended June 30,Employee Stock Purchase Plan
    
    2006
    
    2005
    
    2006
    
    2005Risk-free interest rate
    
    
    5.0
    %
    
    
    3.2
    %
    
    
    4.8
    %
    
    
    3.2
    %Expected life of option in years
    
    
    1.25
    
    
    
    0.5
    
    
    
    1.25
    
    
    
    0.5Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    89
    %
    
    
    98
    %
    
    
    89
    %
    
    
    98
    %
  11




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##### Table of Contents



Equity Incentive Plans
    WeightedShares
    
    
    
    
    
    Average
    
    Weighted Average
    
    Weighted Average
    
    AggregateAvailable for
    
    Number of
    
    Exercise
    
    Grant Date
    
    Remaining
    
    IntrinsicGrant
    
    Shares
    
    Price
    
    Fair Value
    
    Contractual Term
    
    Value( In years)
    
    (In thousands)Balance at December 31,
2005
    
    
    16,847,775
    
    
    
    39,124,784
    
    
    $
    1.90Additional shares reserved
    
    
    9,585,531
    
    
    
    Options granted
    
    
    (7,002,163
    )
    
    
    7,002,163
    
    
    $
    1.49
    
    
    $
    0.99Options exercised
    
    
    
    
    
    
    (2,491,242
    )
    
    $
    1.02Options forfeited / canceled / expired
    
    
    1,331,894
    
    
    
    (1,331,894
    )
    
    $
    1.88Balance at June 30, 2006
    
    
    20,763,037
    
    
    
    42,303,811
    
    
    $
    1.89
    
    
    
    
    
    
    
    7.7
    
    
    $
    15,986Vested and expected to be vested
    
    
    
    
    
    
    39,452,666
    
    
    $
    1.93
    
    
    
    
    
    
    
    7.6
    
    
    $
    13,666Shares Exercisable at:June 30, 2006
    
    
    
    
    
    
    23,631,155
    
    
    $
    2.48
    
    
    
    
    
    
    
    6.6
    
    
    $
    6,417
   12




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##### Table of Contents



Outstanding
    
    ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageShares
    
    Contractual
    
    Exercise
    
    Shares
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    Life Years
    
    Price
    
    Exercisable
    
    PriceAs of June 30, 2006:$0.19-$0.72
    
    
    1,023,168
    
    
    
    6.5
    
    
    $
    0.67
    
    
    
    567,084
    
    
    $
    0.65$0.75-$0.75
    
    
    10,185,109
    
    
    
    8.9
    
    
    $
    0.75
    
    
    
    3,243,926
    
    
    $
    0.75$0.77-$1.15
    
    
    4,305,838
    
    
    
    7.3
    
    
    $
    0.97
    
    
    
    2,867,708
    
    
    $
    1.00$1.19-$1.35
    
    
    4,268,091
    
    
    
    8.3
    
    
    $
    1.22
    
    
    
    2,309,304
    
    
    $
    1.22$1.36-$1.43
    
    
    219,875
    
    
    
    8.8
    
    
    $
    1.39
    
    
    
    32,958
    
    
    $
    1.36$1.48-$1.48
    
    
    6,267,163
    
    
    
    9.9
    
    
    $
    1.48
    
    
    
    0
    
    
    $
    0.00$1.49-$2.15
    
    
    5,800,468
    
    
    
    7.7
    
    
    $
    1.82
    
    
    
    4,419,945
    
    
    $
    1.87$2.16-$2.46
    
    
    4,403,684
    
    
    
    5.7
    
    
    $
    2.41
    
    
    
    4,384,295
    
    
    $
    2.41$2.48-$6.00
    
    
    4,650,744
    
    
    
    4.9
    
    
    $
    4.34
    
    
    
    4,626,264
    
    
    $
    4.35$8.25-$14.49
    
    
    1,179,671
    
    
    
    4.3
    
    
    $
    9.40
    
    
    
    1,179,671
    
    
    $
    9.40Total
    
    
    42,303,811
    
    
    
    7.7
    
    
    $
    1.89
    
    
    
    23,631,155
    
    
    $
    2.48
 13




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##### Table of Contents



2000 Employee Stock Purchase Plan
  8. Geographic and Customer Concentration Information
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Sony Corporation
    
    
    88
    %
    
    
    31
    %
    
    
    63
    %
    
    
    24
    %Microsoft Corporation
    
    
    *
    %
    
    
    *
    %
    
    
    34
    %
    
    
    *
    %Fujitsu
    
    
    *
    %
    
    
    44
    %
    
    
    *
    %
    
    
    37
    %
 
 *
    
    represents less than 10% of total revenue  June 30,
    
    December 31,2006
    
    2005Sony Corporation
    
    
    98
    %
    
    
    11
    %3COM Corporation
    
    
    *
    %
    
    
    27
    %OQO, Inc.
    
    
    *
    %
    
    
    14
    %All American
    
    
    *
    %
    
    
    12
    %Microsoft Corporation
    
    
    *
    %
    
    
    12
    %ASEM S.p.A.
    
    
    *
    %
    
    
    11
    %
 
 *
    
    represents less than 10% of net accounts receivable 9. Net Income (Loss) per Share
  14




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##### Table of Contents



Three Months Ended
    
    
    Six Months Ended(in thousands, except for per share amounts)
    
    June 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Basic and diluted:Net income (loss), as reported
    
    $
    (8,469
    )
    
    $
    6,832
    
    
    $
    (10,116
    )
    
    $
    (14,253
    )Shares used to compute basic net loss per share
    
    
    195,725
    
    
    
    189,848
    
    
    
    194,553
    
    
    
    189,848Effect of dilutive securities:Common stock equivalents
    
    
    
    
    
    
    233
    
    
    
    
    
    
    
    Shares used to compute diluted net loss per share
    
    
    195,725
    
    
    
    190,081
    
    
    
    194,553
    
    
    
    189,848Basic and diluted net income (loss) per share
    
    $
    (0.04
    )
    
    $
    0.04
    
    
    $
    (0.05
    )
    
    $
    (0.08
    )
 10. Advances from Customers
  11. Deferred Income, net
  June 30,
    
    
    December 31,2006
    
    
    2005Deferred revenue:Product
    
    $
    579
    
    
    $
    619License
    
    
    5,000
    
    
    
    Service
    
    
    
    
    
    
    8.934Total
    
    
    5,579
    
    
    
    9.553Deferred costs:Product
    
    
    60
    
    
    
    54License
    
    
    
    
    
    
    Service
    
    
    34
    
    
    
    3.562Total
    
    
    94
    
    
    
    3.616Deferred income
    
    $
    5.485
    
    
    $
    5.937
 12. Restructuring Charges
   Excess
    
    
    WorkforceFacilities
    
    
    Reduction
    
    
    TotalBalance as of December 31, 2004
    
    $
    5,245
    
    
    $
    
    
    
    $
    5,245Restructuring charges
    
    
    1,841
    
    
    
    1,502
    
    
    
    3,343Adjustments and reversals
    
    
    (1,278
    )
    
    
    (56
    )
    
    
    (1,334
    )Cash drawdowns
    
    
    (1,552
    )
    
    
    (1,446
    )
    
    
    (2,998
    )Balance as of December 31, 2005
    
    
    4,256
    
    
    
    
    
    
    
    4,256Restructuring charges
    
    
    74
    
    
    
    
    
    
    
    74Cash drawdowns
    
    
    (484
    )
    
    
    
    
    
    
    (484
    )Balance as of March 31, 2006
    
    
    3,846
    
    
    
    
    
    
    
    3,846Restructuring charges
    
    
    96
    
    
    
    
    
    
    
    96Cash drawdowns
    
    
    (498
    )
    
    
    
    
    
    
    (498
    )Balance as of June 30, 2006
    
    $
    3,444
    
    
    $
    
    
    
    $
    3,444
  15




---



##### Table of Contents



13. Related Party Transactions
 Sales to Investee
  Indemnification Agreements
  14. Recent Accounting Pronouncements
 Accounting for
Uncertainty in Income Taxes
   16




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Caution Regarding Forward-Looking Statements
    Overview
   
    
    On March 31, 2005, we entered into a design and engineering services agreement with Sony
Computer Entertainment Inc. and Sony Corporation (collectively, the Sony Group). The term
of this design services agreement extends to March 31, 2007; however, the services we
provide are agreed upon pursuant to specific project agreements with terms of one year or
less. Our prior project agreements expired by their terms on March 31, 2006, corresponding
to Sony Groups fiscal year end. In April 2006, we entered into a series of new project
agreements for us to continue to provide design and engineering services to the Sony Group
during the second year of the two-year design and engineering services agreement. Those
April 2006 project agreements provide for us to perform a variety of design and engineering
services for the Sony Group over project periods ranging from three months to one year,
ending March 31, 2007. Under those April 2006 project agreements, we initially provided the
services of more than 100 engineers in the second quarter of fiscal 2006 to work on advanced
projects for the Sony Group. Since April 2006, we have also negotiated some additional new
project agreements with the Sony Group. Notwithstanding those most recent new project
agreements, we expect a slight reduction in Sonys demand for our engineering services in
the third quarter of fiscal 2006. We and the Sony Group are currently discussing additional
potential engineering
 17




---



##### Table of Contents



projects for us to perform for the Sony Group under the design and engineering services
agreement, but we cannot assure you that the parties will enter into any additional project
agreements.
    
    On May 12, 2005, we entered into a series of related definitive engineering and
development services agreements with Microsoft Corporation. Those agreements provide for us
to develop certain security technologies designed to enable end users to use or access
certain products, services or functionality for limited periods of time or specific tasks on
a variety of business models, including customer services offered on a pre-paid or
subscription basis. Microsoft publicly announced and introduced that technology under the
trade name FlexGo in May 2006. We have substantially completed the services to be performed
under these engineering and development services agreements. We generally have deferred the
recognition of revenue and the associated costs until the project has been completed and we
have met all of our obligations in connection with the engineering and development services
and have obtained customer acceptance for such completed deliverables. However, since we
have substantially completed the project, we have elected to segment our fixed fee revenue
and related costs into a recognized portion (for the amount accepted by the customer) and a
deferred portion (for the remaining amount). Accordingly, in the three and six months ended
June 30, 2006, we recognized $0.7 million and $9.8 million of fixed fee revenue,
respectively, and $0.4 million and $5.1 million of the related fixed fee development costs
of services, respectively. We currently are in negotiations with Microsoft regarding the
provision of additional engineering and development services, and, although we expect to
continue to provide such services to Microsoft in 2006, we do not necessarily expect that we
will continue to supply engineering and development services at the same level as we
provided in 2005.
     18




---



##### Table of Contents



Critical Accounting Policies
  Accounting for Stock-Based Compensation
  Results of Operations
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Product
    
    
    4
    %
    
    
    29
    %
    
    
    3
    %
    
    
    43
    %License
    
    
    0
    %
    
    
    40
    %
    
    
    0
    %
    
    
    32
    %Service
    
    
    96
    %
    
    
    31
    %
    
    
    97
    %
    
    
    25
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Costs of product
    
    
    (1
    %)
    
    
    16
    %
    
    
    0
    %
    
    
    27
    %Costs of license
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Costs of service
    
    
    62
    %
    
    
    17
    %
    
    
    58
    %
    
    
    14
    %Total cost of revenue
    
    
    61
    %
    
    
    33
    %
    
    
    58
    %
    
    
    41
    %Gross profit
    
    
    39
    %
    
    
    67
    %
    
    
    42
    %
    
    
    59
    %Operating expenses:Research and development
    
    
    51
    %
    
    
    12
    %
    
    
    28
    %
    
    
    48
    %Selling, general and administrative
    
    
    65
    %
    
    
    20
    %
    
    
    40
    %
    
    
    41
    %Restructuring charges
    
    
    1
    %
    
    
    0
    %
    
    
    1
    %
    
    
    4
    %Amortization of patents and patent rights
    
    
    19
    %
    
    
    7
    %
    
    
    12
    %
    
    
    11
    %Stock compensation
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Total operating expenses
    
    
    136
    %
    
    
    39
    %
    
    
    81
    %
    
    
    104
    %Operating income (loss)
    
    
    (97
    %)
    
    
    28
    %
    
    
    (39
    %)
    
    
    (45
    %)Interest income and other, net
    
    
    6
    %
    
    
    0
    %
    
    
    4
    %
    
    
    1
    %Interest expense
    
    
    0
    %
    
    
    (0
    %)
    
    
    (0
    %)
    
    
    (1
    %)Net income (loss)
    
    
    (91
    %)
    
    
    28
    %
    
    
    (35
    %)
    
    
    (45
    %)
 Total Revenue
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Product
    
    $
    361
    
    
    $
    7,068
    
    
    $
    950
    
    
    $
    13,474License
    
    
    
    
    
    
    10,000
    
    
    
    
    
    
    
    10,000Service
    
    
    8,970
    
    
    
    7,634
    
    
    
    27,890
    
    
    
    8,082Total revenue
    
    $
    9,331
    
    
    $
    24,702
    
    
    $
    28,840
    
    
    $
    31,556
 19




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##### Table of Contents



Product Revenues.
  License Revenue.
 Service Revenue.
 Services Revenue
 Three Months Ended
    
    
    Six Months Ended(in thousands)
    
    June 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Time & Materials Based Contracts
    
    $
    8,223
    
    
    $
    7,634
    
    
    $
    18,052
    
    
    $
    7,832Fixed Fee Development Service
    
    
    747
    
    
    
    
    
    
    
    9,838
    
    
    
    Maintenance & Technical Support Services for License
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250Total Services Revenue
    
    $
    8,970
    
    
    $
    7,634
    
    
    $
    27,890
    
    
    $
    8,082
 Maintenance and Technical Support Services Revenue.
 Fixed Fee Development Service Revenue and Cost of Services
 Time and Materials Based Design Service Revenue.
  20




---



##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Sony Corporation
    
    
    88
    %
    
    
    31
    %
    
    
    63
    %
    
    
    24
    %Microsoft Corporation
    
    
    *
    %
    
    
    *
    %
    
    
    34
    %
    
    
    *
    %Fujitsu
    
    
    *
    %
    
    
    44
    %
    
    
    *
    %
    
    
    37
    %
 
 *
    
    represents less than 10% of total revenue  June 30,
    
    December 31,2006
    
    2005Sony Corporation
    
    
    98
    %
    
    
    11
    %3COM Corporation
    
    
    *
    %
    
    
    27
    %OQO, Inc.
    
    
    *
    %
    
    
    14
    %All American
    
    
    *
    %
    
    
    12
    %Microsoft Corporation
    
    
    *
    %
    
    
    12
    %ASEM S.p.A.
    
    
    *
    %
    
    
    11
    %
 
 *
    
    represents less than 10% of net accounts receivable Costs of Revenues
  Products:
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Product revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of product revenue
    
    
    (17
    %)
    
    
    56
    %
    
    
    11
    %
    
    
    65
    %Product gross margin
    
    
    117
    %
    
    
    44
    %
    
    
    89
    %
    
    
    35
    %
   Licenses:
 Three Months Ended
    
    Six Months Ended(in thousands)
    
    June 30, 2006
    
    June 30, 2005
    
    June 30, 2006
    
    June 30, 2005Cost of License
    
    $             
    
    $
            25
    
    $             
    
    $
            25
  21




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##### Table of Contents



Services:
   Costs of Services Revenue
 Three Months Ended
    
    
    Six Months Ended(in thousands)
    
    June 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Time & Materials Based Contract
    
    $
    5,400
    
    
    $
    4,152
    
    
    $
    11,620
    
    
    $
    4,313Fixed Fee Development Service
    
    
    395
    
    
    
    
    
    
    
    5,056
    
    
    
    Total Cost of Services
    
    $
    5,795
    
    
    $
    4,152
    
    
    $
    16,676
    
    
    $
    4,313
 Research and Development
 Three Months Ended
    
    
    Six Months Ended(in thousands)
    
    June 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Research and development expenses
    
    $
    4,769
    
    
    $
    2,991
    
    
    $
    8,021
    
    
    $
    15,213Amount classified to costs of service and deferred costs (1)
    
    $
    5,123
    
    
    $
    6,025
    
    
    $
    11,319
    
    
    $
    6,025
 
 (1)
    
    In fiscal 2006, we classified costs directly attributable to the design and development
services agreements to costs of service revenues. In the prior years, such costs were included
in the R&D activities as the employees involved with such activities were performing R&D
related activities.    22




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##### Table of Contents



Selling, General and Administrative
 Three Months Ended
    
    
    Six Months Ended(in thousands)
    
    June 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Selling, general and administrative expenses
    
    $
    6,043
    
    
    $
    4,996
    
    
    $
    11,587
    
    
    $
    12,952
    Restructuring Charges, net
 Three Months Ended
    
    
    Six Months Ended(in thousands)
    
    June 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Restructuring charges, net
    
    $
    96
    
    
    $
    46
    
    
    $
    170
    
    
    $
    1,355
  Amortization of Patents and Patent Rights
 Three Months Ended
    
    
    Six Months Ended(in thousands)
    
    June 30, 2006
    
    
    June 30, 2006
    
    
    June 30, 2006
    
    
    June 30, 2006Amortization of patent and patent rights
    
    $
    1,712
    
    
    $
    1,711
    
    
    $
    3,423
    
    
    $
    3,422
  Stock Compensation
 Three Months Ended
    
    
    Six Months Ended(in thousands)
    
    June 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Stock compensation expense
    
    $
    1,910
    
    
    $
    (14
    )
    
    $
    3,227
    
    
    $
    (48
    )
   23




---



##### Table of Contents



Interest Income and Other, Net
 Three Months Ended
    
    
    Six Months Ended(in thousands)
    
    June 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Interest income and other, net
    
    $
    590
    
    
    $
    93
    
    
    $
    1,093
    
    
    $
    339
 Interest Expense
 Three Months Ended
    
    
    Six Months Ended(in thousands)
    
    June 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Interest expense
    
    $
    37
    
    
    $
    106
    
    
    $
    72
    
    
    $
    214
   Liquidity and Capital Resources
   Six months EndedJune 30,
    
    
    June 30,2006
    
    
    2005(in thousands)Net cash used in operating activities
    
    $
    (7,851
    )
    
    $
    (8,406
    )Net cash provided by (used in) investing activities
    
    
    (2,305
    )
    
    
    8,281Net cash provided by financing activities
    
    
    3,841
    
    
    
    1,691Increase (decrease) in cash and cash equivalents
    
    $
    (6,315
    )
    
    $
    1,566
  24




---



##### Table of Contents



Restructuring
  25




---



##### Table of Contents



Excess
    
    
    WorkforceFacilities
    
    
    Reduction
    
    
    TotalBalance as of December 31, 2004
    
    $
    5,245
    
    
    $
    
    
    
    $
    5,245Restructuring charges
    
    
    1,841
    
    
    
    1,502
    
    
    
    3,343Adjustments and reversals
    
    
    (1,278
    )
    
    
    (56
    )
    
    
    (1,334
    )Cash drawdowns
    
    
    (1,552
    )
    
    
    (1,446
    )
    
    
    (2,998
    )Balance as of December 31, 2005
    
    
    4,256
    
    
    
    
    
    
    
    4,256Restructuring charges
    
    
    74
    
    
    
    
    
    
    
    74Cash drawdowns
    
    
    (484
    )
    
    
    
    
    
    
    (484
    )Balance as of March 31, 2006
    
    $
    3,846
    
    
    $
    
    
    
    $
    3,846Restructuring charges
    
    
    96
    
    
    
    
    
    
    
    96Cash drawdowns
    
    
    (498
    )
    
    
    
    
    
    
    (498
    )Balance as of June 30, 2006
    
    $
    3,444
    
    
    $
    
    
    
    $
    3,444
  Contractual Obligations
  Payments Due by PeriodRemainder
    
    
    2007 to
    
    
    AfterContractual Obligations
    
    Total
    
    
    of 2006
    
    
    2009
    
    
    2009(In thousands)Operating Leases(1)
    
    $
    9,813
    
    
    $
    2,425
    
    
    $
    7,384
    
    
    $
    4Unconditional Purchase Obligations(2)
    
    
    2,962
    
    
    
    2,962
    
    
    
    
    
    
    
    Total
    
    $
    12,775
    
    
    $
    5,387
    
    
    $
    7,384
    
    
    $
    4
 
 (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. Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
 Accounting for
Uncertainty in Income Taxes
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Interest Rate Risk.
 Foreign Currency Exchange Risk.
 
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
  Inherent Limitations on Effectiveness of Controls
  Changes in Internal Control over Financial Reporting
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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 In
re Transmeta Corporation Initial Public Offering Securities Litigation In re
Initial Public Offering Securities Litigation
 
 Item 1A. Risk Factors
 The factors discussed below are cautionary statements that identify important risk factors
that could cause actual results to differ materially from those anticipated in the forward-looking
statements in this Quarterly Report on Form 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 if we
are to sustain our operations.
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We might fail to operate successfully under our modified business model.
  We might not be able to execute on our modified business model 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;
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
    
    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.
  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.
  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.
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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.
  We might experience payment disputes for amounts owed to us under our LongRun2 licensing
agreements, and this may harm our results of operations.
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Our licensing and other businesses depend in part on our proprietary technology rights, and we
might experience difficulties and expense in obtaining and protecting those rights.
   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.
   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.
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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.
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Our restructuring plan has reduced our resources and ability to pursue opportunities and support
customers in emerging markets for our microprocessor products.
    We face intense competition in the power management, engineering services and x86-compatible
microprocessor markets. Many of our competitors are much larger than we are and have significantly
greater resources. We may not be able to compete effectively.
     We may experience manufacturing difficulties that could increase the cost and reduce the supply of
our products.
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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.
  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.
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Our reliance on Fujitsu 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.
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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 and technologies.
  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.
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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.
   Our reported financial results may be adversely affected by changes in accounting principles
generally accepted in the United States.
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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;
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
    
    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 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 be acted upon by stockholders at stockholder meetings.
  We may identify material weaknesses in our internal control over financial reporting.
  Changes in securities laws and regulations have increased our costs.
  
 Item 4. Submission of Matters to a Vote of Security Holders
 (a)
    
    The Annual Meeting of Stockholders of Transmeta was held on June 1, 2006.
 (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
    
    WithheldLester M. Crudele
    
    
    141,548,928
    
    
    
    5,270,721William P. Tai
    
    
    141,606,313
    
    
    
    5,213,336Rick Timmins
    
    
    142,542,915
    
    
    
    4,276,734
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(c)
    
    Further, at the Annual Meeting, our stockholders adopted the following resolution by the vote
indicated:
  Total VotesFor
    
    
    145,461,840Against
    
    
    782,136Abstain
    
    
    575,673
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Item 6. Exhibits
 Exhibits.
  Exhibit Number
    
    Exhibit Title10.27
    
    Separation Benefits and Release Agreement and Consulting Agreement, entered May 19,
2006, between Transmeta and Mark R. Kent.10.28+
    
    Agreement for the Purchase and Sale of Products, entered June 5, 2006, between
Transmeta and Advanced Micro Devices, Inc.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 Ralph J. Harms 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 Ralph J. Harms pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this quarterly
report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and
are not incorporated by reference in any filing of Transmeta Corporation under the Securities
Act of 1933 or the Securities Exchange Act of 1934, including this quarterly report, whether
made before or after the date hereof and irrespective of any general incorporation language in
any filings.+
    
    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. 42




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SIGNATURES
  TRANSMETA CORPORATIONBy
    
    /s/ RALPH J. HARMSRalph J. HarmsChief Financial OfficerDate: August 9, 2006
    
    
    
    
    
    (Principal Financial Officer and Duly Authorized
Officer)
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EXHIBIT INDEX
 Exhibit Number
    
    Exhibit Title10.27
    
    Separation Benefits and Release Agreement and Consulting Agreement, entered May 19,
2006, between Transmeta and Mark R. Kent10.28+
    
    Agreement for the Purchase and Sale of Products, entered June 5, 2006, between Transmeta
and Advanced Micro Devices, Inc.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 Ralph J. Harms 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 Ralph J. Harms pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this quarterly
report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and
are not incorporated by reference in any filing of Transmeta Corporation under the Securities
Act of 1933 or the Securities Exchange Act of 1934, including this quarterly report, whether
made before or after the date hereof and irrespective of any general incorporation language in
any filings.+
    
    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.