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



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FORM 10-Q



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(Mark One)

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

For the Quarterly Period Ended June 30, 2002

OR

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

For the Transition Period from              to

Commission File Number 000-31803

TRANSMETA CORPORATION(Exact name of registrant as specified in its charter)

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

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

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



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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]      No [   ]

There were 133,690,822 shares of the Companys common stock, par value
$0.00001 per share, outstanding on June 30, 2002.



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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Condensed Consolidated Financial Statements                                          
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|PART II. OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 2. Changes in Securities and Use of Proceeds                                            
|                              | Item 3. Defaults upon Senior Securities                                                      
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 5. Other Information                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   
|EXHIBIT INDEX                
|EXHIBIT 10.22                
|EXHIBIT 99.1                 
|EXHIBIT 99.2                 



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##### Table of Contents



TRANSMETA CORPORATION

FORM 10-Q
Quarterly Period Ended June 30, 2002

TABLE OF CONTENTS

|                              |  |                                                                                                                                |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------ |  | ----
|                              |  |                                                                                                                                |  | Page
|                              |  |                                                                                                                                |  |     
|PART I. FINANCIAL INFORMATION
|                             
|Item 1.                       |  | Condensed Consolidated Financial Statements                                                                                    |  | 3   
|                              |  | Condensed Consolidated Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001                                    |  | 3   
|                              |  | Condensed Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2002 and June 30, 2001 (unaudited) |  | 4   
|                              |  | Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002
and June 30, 2001 (unaudited)           |  | 5   
|                              |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                                               |  | 6   
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                          |  | 9   
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                                                     |  | 27  
|                             
|PART II. OTHER INFORMATION   
|                             
|Item 1.                       |  | Legal Proceedings                                                                                                              |  | 27  
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                                                      |  | 28  
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                                |  | 29  
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                            |  | 29  
|Item 5.                       |  | Other Information                                                                                                              |  | 29  
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                               |  | 29  
|Signatures                    |  | 29                                                                                                                            

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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1.Condensed Consolidated Financial Statements




TRANSMETA CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

ASSETS

|                                                                     |                                                                 |                                            |        |          |             |  |              |          |         |  | 
|-------------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------------------------ | ------ | -------- | ----------- |  | ------------ | -------- | ------- |  | 
|                                                                     |                                                                 |                                            |        |          | June 30,    |  | December 31,
|                                                                     |                                                                 |                                            |        |          | 2002        |  | 2001(1)     
|                                                                     |                                                                 |                                            |        |          |             |  |             
|                                                                     |                                                                 |                                            |        |          | (unaudited) |  |              |          |        
|Current assets:                                                      |                                                                 |                                            |        |          |             |  |              |         
|                                                                     | Cash and cash equivalents                                       |                                            | $      | 26,917   |             |  | $            | 57,747   |        
|                                                                     | Short-term investments                                          |                                            |        | 153,459  |             |  |              | 183,941  |        
|                                                                     | Accounts receivable, net                                        |                                            |        | 1,671    |             |  |              | 1,749    |        
|                                                                     | Inventories                                                     |                                            |        | 5,896    |             |  |              | 1,388    |        
|                                                                     | Prepaid expenses and other current assets                       |                                            |        | 5,915    |             |  |              | 7,091    |        
|                                                                     |                                                                 |                                            |        |          |             |  |              |         
|                                                                     |                                                                 | Total current assets                       |        |          | 193,858     |  |              |          | 251,916 | 
|                                                                     | Property and equipment, net                                     |                                            |        | 9,870    |             |  |              | 11,622   |        
|                                                                     | Patents and patent rights, net                                  |                                            |        | 40,046   |             |  |              | 43,469   |        
|                                                                     | Other assets                                                    |                                            |        | 1,781    |             |  |              | 2,017    |        
|                                                                     |                                                                 |                                            |        |          |             |  |              |         
|                                                                     |                                                                 | Total assets                               |        | $        | 245,555     |  |              | $        | 309,024 | 
|                                                                     |                                                                 |                                            |        |          |             |  |              |         
|LIABILITIES AND STOCKHOLDERS EQUITY                                
|Current liabilities:                                                 |                                                                 |                                            |        |          |             |  |              |         
|                                                                     | Accounts payable                                                |                                            | $      | 3,342    |             |  | $            | 5,421    |        
|                                                                     | Accrued compensation and related compensation liabilities       |                                            |        | 4,733    |             |  |              | 5,129    |        
|                                                                     | Other accrued liabilities                                       |                                            |        | 7,264    |             |  |              | 6,553    |        
|                                                                     | Accrued restructuring charges                                   |                                            |        | 2,904    |             |  |              |         |        
|                                                                     | Current portion of long-term debt and capital lease obligations |                                            |        | 1,156    |             |  |              | 2,661    |        
|                                                                     | Current portion of long-term payables                           |                                            |        | 15,000   |             |  |              | 15,000   |        
|                                                                     |                                                                 |                                            |        |          |             |  |              |         
|                                                                     |                                                                 | Total current liabilities                  |        |          | 34,399      |  |              |          | 34,764  | 
|Long-term accrued restructuring charges                              |                                                                 |                                            | 6,091  |          |             |  |             |         
|Long-term debt and capital lease obligations, net of current portion |                                                                 |                                            |       |          |             |  | 391          |         
|Long-term payables, net of current portion                           |                                                                 |                                            | 22,176 |          |             |  | 28,904       |         
|Commitments and contingencies                                        |                                                                 |                                            |        |          |             |  |              |         
|Stockholders equity:                                                |                                                                 |                                            |        |          |             |  |              |         
|                                                                     | Preferred stock, $0.00001 par value (none issued)               |                                            |        |         |             |  |              |         |        
|                                                                     | Common stock, $0.00001 par value, at amounts paid in            |                                            |        | 603,367  |             |  |              | 603,464  |        
|                                                                     | Treasury stock                                                  |                                            |        | (2,439   | )           |  |              | (2,439   | )      
|                                                                     | Deferred stock compensation                                     |                                            |        | (6,807   | )           |  |              | (11,818  | )      
|                                                                     | Accumulated other comprehensive income                          |                                            |        | 245      |             |  |              | 720      |        
|                                                                     | Accumulated deficit                                             |                                            |        | (411,477 | )           |  |              | (344,962 | )      
|                                                                     |                                                                 |                                            |        |          |             |  |              |         
|                                                                     |                                                                 | Total stockholders equity                 |        |          | 182,889     |  |              |          | 244,965 | 
|                                                                     |                                                                 |                                            |        |          |             |  |              |         
|                                                                     |                                                                 | Total liabilities and stockholders equity |        | $        | 245,555     |  |              | $        | 309,024 | 
|                                                                     |                                                                 |                                            |        |          |             |  |              |         



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|(1) |  | Derived from the Companys audited financial statements as of December
31, 2001, included in the Companys Form 10-K filed with the Securities
and Exchange Commission.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

(See accompanying notes)

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TRANSMETA CORPORATION

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

|                                                        |                                                             |                          |         |                    |        |                  |         |          |        |          |         |        |        |   |          |        |        | 
|------------------------------------------------------- | ----------------------------------------------------------- | ------------------------ | ------- | ------------------ | ------ | ---------------- | ------- | -------- | ------ | -------- | ------- | ------ | ------ | - | -------- | ------ | ------ | 
|                                                        |                                                             |                          |         | Three Months Ended |        | Six Months Ended
|                                                        |                                                             |                          |         |                    |        |                 
|                                                        |                                                             |                          |         | June 30,           |        | June 30,         |         | June 30, |        | June 30,
|                                                        |                                                             |                          |         | 2002               |        | 2001             |         | 2002     |        | 2001    
|                                                        |                                                             |                          |         |                    |        |                  |         |          |        |         
|Net revenue                                             |                                                             | $                        | 7,539   |                    |        | $                | 10,531  |          |        | $        | 11,686  |        |        | $ | 29,101   |       
|Cost of product revenue                                 |                                                             |                          | 5,617   |                    |        |                  | 34,026  |          |        |          | 8,453   |        |        |   | 44,407   |       
|                                                        |                                                             |                          |         |                    |        |                  |         |          |        |          |         |        |        |   |          |       
|Gross profit (loss)                                     |                                                             |                          | 1,922   |                    |        |                  | (23,495 | )        |        |          | 3,233   |        |        |   | (15,306  | )     
|Operating expenses:                                     |                                                             |                          |         |                    |        |                  |         |          |        |          |         |        |        |   |          |       
|                                                        | Research and development(1)                                 |                          |         | 19,184             |        |                  |         | 17,233   |        |          |         | 37,263 |        |   |          | 34,359 |       
|                                                        | In-process research and development                         |                          |         |                   |        |                  |         | 13,600   |        |          |         |       |        |   |          | 13,600 |       
|                                                        | Selling, general and administrative(2)                      |                          |         | 8,737              |        |                  |         | 8,861    |        |          |         | 16,671 |        |   |          | 17,851 |       
|                                                        | Restructuring charges                                       |                          |         | 10,624             |        |                  |         |         |        |          |         | 10,624 |        |   |          |       |       
|                                                        | Amortization of deferred charges, patents and patent rights |                          |         | 2,848              |        |                  |         | 4,109    |        |          |         | 5,696  |        |   |          | 7,488  |       
|                                                        | Amortization of deferred stock compensation                 |                          |         | (2,558             | )      |                  |         | 5,650    |        |          |         | 2,246  |        |   |          | 11,777 |       
|                                                        |                                                             |                          |         |                    |        |                  |         |          |        |          |         |        |        |   |          |       
|                                                        |                                                             | Total operating expenses |         |                    | 38,835 |                  |         |          | 49,453 |          |         |        | 72,500 |   |          |        | 85,075 | 
|                                                        |                                                             |                          |         |                    |        |                  |         |          |        |          |         |        |        |   |          |       
|Operating loss                                          |                                                             |                          | (36,913 | )                  |        |                  | (72,948 | )        |        |          | (69,267 | )      |        |   | (100,381 | )     
|                                                        | Interest income                                             |                          |         | 1,427              |        |                  |         | 3,959    |        |          |         | 3,222  |        |   |          | 9,031  |       
|                                                        | Interest expense                                            |                          |         | (140               | )      |                  |         | (262     | )      |          |         | (445   | )      |   |          | (593   | )     
|                                                        |                                                             |                          |         |                    |        |                  |         |          |        |          |         |        |        |   |          |       
|Loss before income taxes                                |                                                             |                          | (35,626 | )                  |        |                  | (69,251 | )        |        |          | (66,490 | )      |        |   | (91,943  | )     
|                                                        | Provision for income taxes                                  |                          |         | 2                  |        |                  |         | 3        |        |          |         | 25     |        |   |          | 16     |       
|                                                        |                                                             |                          |         |                    |        |                  |         |          |        |          |         |        |        |   |          |       
|Net loss                                                |                                                             | $                        | (35,628 | )                  |        | $                | (69,254 | )        |        | $        | (66,515 | )      |        | $ | (91,959  | )     
|                                                        |                                                             |                          |         |                    |        |                  |         |          |        |          |         |        |        |   |          |       
|Net loss per share  basic and diluted                  |                                                             | $                        | (0.27   | )                  |        | $                | (0.54   | )        |        | $        | (0.50   | )      |        | $ | (0.72    | )     
|                                                        |                                                             |                          |         |                    |        |                  |         |          |        |          |         |        |        |   |          |       
|Weighted average shares outstanding  basic and diluted |                                                             |                          | 133,868 |                    |        |                  | 128,478 |          |        |          | 133,427 |        |        |   | 127,863  |       
|                                                        |                                                             |                          |         |                    |        |                  |         |          |        |          |         |        |        |   |          |       



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|(1) |  | Excludes $1,599 and $3,392 in amortization of deferred stock compensation
for the three months ended June 30, 2002 and June 30, 2001, respectively,
and $3,579 and $7,052 for the six months ended June 30, 2002 and June 30,
2001, respectively.    
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Excludes $(4,157) and $2,258 in amortization of deferred stock
compensation for the three months ended June 30, 2002 and June 30, 2001,
respectively, and $(1,333) and $4,725 for the six months ended June 30,
2002 and June 30, 2001, respectively.

(See accompanying notes)

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TRANSMETA CORPORATION

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

|                                                       |                                                                  |                                                     |         |                  |        |          |          |          |          |  
|------------------------------------------------------ | ---------------------------------------------------------------- | --------------------------------------------------- | ------- | ---------------- | ------ | -------- | -------- | -------- | -------- | -
|                                                       |                                                                  |                                                     |         | Six Months Ended
|                                                       |                                                                  |                                                     |         |                 
|                                                       |                                                                  |                                                     |         | June 30,         |        | June 30,
|                                                       |                                                                  |                                                     |         | 2002             |        | 2001    
|                                                       |                                                                  |                                                     |         |                  |        |         
|Net cash used in operating activities                  |                                                                  | $                                                   | (49,613 | )                |        | $        | (45,632  | )       
|                                                       |                                                                  |                                                     |         |                  |        |          |          |         
|Cash flows (used in)/provided by investing activities: |                                                                  |                                                     |         |                  |        |          |          |         
|                                                       | Purchase of available-for-sale investments                       |                                                     |         | (85,220          | )      |          |          | (210,653 | )       
|                                                       | Proceeds from sale or maturity of available-for-sale investments |                                                     |         | 115,227          |        |          |          | 39,851   |         
|                                                       | Purchase of property and equipment                               |                                                     |         | (2,855           | )      |          |          | (4,985   | )       
|                                                       | Loans to founders                                                |                                                     |         |                 |        |          |          | 5,446    |         
|                                                       | Payment to development partner                                   |                                                     |         | (9,000           | )      |          |          | (3,500   | )       
|                                                       | Purchase of intellectual property and other assets               |                                                     |         | (142             | )      |          |          | (11,809  | )       
|                                                       |                                                                  |                                                     |         |                  |        |          |          |         
|                                                       |                                                                  | Net cash (used in)/provided by investing activities |         |                  | 18,010 |          |          |          | (185,650 | )
|                                                       |                                                                  |                                                     |         |                  |        |          |          |         
|Cash flows (used in)/provided by financing activities: |                                                                  |                                                     |         |                  |        |          |          |         
|                                                       | Expenses related to initial public offering of common stock      |                                                     |         |                 |        |          |          | (256     | )       
|                                                       | Common stock issued under ESPP and stock option plans            |                                                     |         | 2,669            |        |          |          | 2,009    |         
|                                                       | Issuance of debt and capital lease obligations                   |                                                     |         |                 |        |          |          |         |         
|                                                       | Repayment of debt and capital lease obligations                  |                                                     |         | (1,896           | )      |          |          | (2,560   | )       
|                                                       |                                                                  |                                                     |         |                  |        |          |          |         
|                                                       |                                                                  | Net cash (used in)/provided by financing activities |         |                  | 773    |          |          |          | (807     | )
|                                                       |                                                                  |                                                     |         |                  |        |          |          |         
|Change in cash and cash equivalents                    |                                                                  |                                                     | (30,830 | )                |        |          | (232,089 | )       
|Cash and cash equivalents at beginning of period       |                                                                  |                                                     | 57,747  |                  |        |          | 259,744  |         
|                                                       |                                                                  |                                                     |         |                  |        |          |          |         
|Cash and cash equivalents at end of period             |                                                                  | $                                                   | 26,917  |                  |        | $        | 27,655   |         
|                                                       |                                                                  |                                                     |         |                  |        |          |          |         

(See accompanying notes)

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TRANSMETA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission and generally accepted accounting principles. However,
certain information or footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed, or omitted, pursuant to such rules and regulations. In the
opinion of management, the statements include all adjustments (which are of a
normal and recurring nature) necessary for the fair presentation of the results
of the interim periods presented. These financial statements should be read in
conjunction with our audited consolidated financial statements and the notes
thereto for the year ended December 31, 2001. The results of operations for the
three months and six months ended June 30, 2002 are not necessarily indicative
of the operating results for the full fiscal year or any future period.

The Companys fiscal year ends on the last Friday in December, and each
fiscal quarter ends on the last Friday of each calendar quarter. For ease of
presentation, the accompanying financial information has been shown as of
December 31 and calendar quarter ends for all annual and quarterly financial
statement captions. The three-month periods ended June 30, 2002
and June 30, 2001 each
consisted of 13 weeks. The first six months of fiscal 2002 and fiscal 2001 each
consisted of 26 weeks.

New Accounting Pronouncements

In July 2002, the
FASB issued Statement of Financial Accounting Standards
No. 146 Accounting for Costs Associated with Exit or Disposal
Activities (SFAS 146). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a
Restructuring) (EITF 94-3). The principal difference
between SFAS 146 and EITF 94-3 relates to the timing of the
recognition of a liability for a cost associated with an exit or
disposal activity. SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF 94-3, a liability for an exit
cost as generally defined in EITF 94-3 is to be recognized at the
date of an entitys commitment to an exit plan. SFAS 146 is
effective for exit or disposal activities that are initiated after
December 31, 2002, and as a result, adoption of SFAS 146
would not have a material impact on the Companys current
financial position or results of operations.

2. Net Loss per Share

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

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

|                                       |                                                                                |   |                                          |         |                  |   |          |         |          |   |       |         |   |   |       |         |  
|-------------------------------------- | ------------------------------------------------------------------------------ | - | ---------------------------------------- | ------- | ---------------- | - | -------- | ------- | -------- | - | ----- | ------- | - | - | ----- | ------- | -
|                                       |                                                                                |   | Three Months Ended                       |         | Six Months Ended
|                                       |                                                                                |   |                                          |         |                 
|                                       |                                                                                |   | June 30,                                 |         | June 30,         |   | June 30, |         | June 30,
|                                       |                                                                                |   | 2002                                     |         | 2001             |   | 2002     |         | 2001    
|                                       |                                                                                |   |                                          |         |                  |   |          |         |         
|                                       |                                                                                |   | (In thousands, except per share amounts)
|Basic and diluted:                     |                                                                                |   |                                          |         |                  |   |          |         |          |   |       |         |   |   |       |        
|                                       | Net loss                                                                       |   | $                                        | (35,628 | )                |   | $        | (69,254 | )        |   | $     | (66,515 | ) |   | $     | (91,959 | )
|                                       |                                                                                |   |                                          |         |                  |   |          |         |          |   |       |         |   |   |       |        
|Basic and diluted:                     |                                                                                |   |                                          |         |                  |   |          |         |          |   |       |         |   |   |       |        
|                                       | Weighted average shares outstanding                                            |   |                                          | 134,066 |                  |   |          | 132,629 |          |   |       | 133,698 |   |   |       | 132,495 |  
|                                       | Less: Weighted average shares subject to repurchase                            |   |                                          | (198    | )                |   |          | (4,151  | )        |   |       | (271    | ) |   |       | (4,632  | )
|                                       |                                                                                |   |                                          |         |                  |   |          |         |          |   |       |         |   |   |       |        
|                                       | Weighted average shares used in computing
basic and diluted net loss per share |   |                                          | 133,868 |                  |   |          | 128,478 |          |   |       | 133,427 |   |   |       | 127,863 |  
|                                       |                                                                                |   |                                          |         |                  |   |          |         |          |   |       |         |   |   |       |        
|Net loss per share  basic and diluted |                                                                                | $ | (0.27                                    | )       |                  | $ | (0.54    | )       |          | $ | (0.50 | )       |   | $ | (0.72 | )      
|                                       |                                                                                |   |                                          |         |                  |   |          |         |          |   |       |         |   |   |       |        

The Company has excluded all outstanding stock options and shares subject
to repurchase from the calculation of basic and diluted net loss per share
because these securities are antidilutive for all periods presented. Options
and warrants to purchase 33,979,995 and 16,368,934 shares of common stock at
June 30, 2002 and June 30, 2001, respectively, determined using the treasury
stock method, were not included in the computation of diluted net loss per
share. These securities, had they been dilutive, would have been included in
the computation of diluted net loss per share using the treasury stock method.

3. Net Comprehensive Loss

Net comprehensive loss was $66.3 million for the first six months of
fiscal 2002 compared to $91.2 million for the same period last year. Net
comprehensive loss for the first six months of fiscal 2002 and 2001 includes
$245,000 and $720,000, respectively, of accumulated comprehensive income due to
unrealized gains on available-for-sale investments.

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4. Concentration of Risks

Transmeta operates in one segment, the development and marketing
and selling of hardware and software technologies used primarily in
mobile computers. The Company also currently operates in one geographic region and is
evaluated by management on a single segment basis. Sales in Japan accounted for
93% of net revenue for the second quarter of fiscal 2002, compared to 83% for
the same period last year. Sales in Japan accounted for 93% of net revenue
during the first six months of fiscal 2002, compared to sales in Japan, Taiwan
and the United States during the same period last year accounting for 66%, 23%
and 11% of net revenue, respectively. Sales made in all other countries during
the periods presented accounted for less than 10% of net revenue.

Sales to two customers accounted for 59% and 23% of net revenue for the
second quarter of fiscal 2002 compared to the same two customers accounting for
28% and 15%, respectively of net revenue for the same period last year.
Further, during the second quarter of fiscal 2001, two other customers
accounted for more than 10% of net revenue with 35% and 13% of net revenue for
that period. Sales to two customers accounted for 48% and 35% of revenue in the
first six months of fiscal 2002, compared to sales to three customers
accounting for 31%, 13% and 12% of net revenue in the first six months of
fiscal 2001.

As of June 30, 2002, three customers accounted for more than 10% of our
accounts receivable balance, with 44%, 40% and 12%, respectively. This compares
to the same three customers accounting for 20%, 16% and 0%, respectively, at
December 31, 2001. Further, there were two additional customers accounting for
more than 10% of our accounts receivable balance as of December 31, 2001 with
44% and 12%.

5. Inventories

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

|                 |  |          |       |              |  |   |       | 
|---------------- |  | -------- | ----- | ------------ |  | - | ----- | 
|                 |  | June 30, |       | December 31,
|                 |  | 2002     |       | 2001        
|                 |  |          |       |             
|Work in progress |  | $        | 4,290 |              |  | $ | 838   | 
|Finished goods   |  |          | 1,606 |              |  |   | 550   | 
|                 |  |          |       |              |  |   |       | 
|                 |  | $        | 5,896 |              |  | $ | 1,388 | 
|                 |  |          |       |              |  |   |       | 

6. Restructuring Charges

In the second quarter of 2002, Transmeta recorded a $10.6 million
restructuring charge as a result of the Companys decision to cease development
and productization of the TM6000 microprocessor. The restructuring charge
consists primarily of lease costs, equipment write-offs and other costs as the
Company identified a number of leased facilities as well as leased and owned
equipment that were no longer required.

The following provides more detailed information as of June 30, 2002
relating to the restructuring charges recorded during the second quarter of
fiscal year 2002.



| |  |  | Transmeta recorded a charge of $8.9 million for excess facilities,
net of expected sublease proceeds. As a result of this transaction,
Transmeta expects to pay approximately $2.9 million of the $8.9 million
accrued charges within the next twelve months and the remaining $6.1
million thereafter until 2008 when the leases for the vacated spaces
will terminate
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Transmeta recorded a charge of $1.6 million for property and
equipment and prepaid software maintenance that will not be used as a
result of the Company ceasing development and productization of the
TM6000 microprocessor. This entire non-cash charge was recorded during
the second quarter of fiscal 2002.                                                       
|
| |  |  | Transmeta recorded a charge of $141,000 for other expenses including
property insurance and other ancillary expenses as a result of the
restructuring. The entire amount is expected to be paid during the third
quarter of fiscal 2002.                                                                                                                               

Accrued restructuring charges consist of the following (in thousands):

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|                                          |  |                     |        |      |  |          |   |               |  |   |       |               |  |   |       | 
|----------------------------------------- |  | ------------------- | ------ | ---- |  | -------- | - | ------------- |  | - | ----- | ------------- |  | - | ----- | 
|                                          |  | Cumulated Drawdowns
|                                          |  |                    
|                                          |  | June 30, 2002       |        |      |  |          |   |               |  |   |       | Provision    
|                                          |  | Restructuring       |        |      |  |          |   |               |  |   |       | Balance as at
|                                          |  | Charges             |        | Cash |  | Non-Cash |   | June 30, 2002
|                                          |  |                     |        |      |  |          |   |              
|Building leasehold costs                  |  | $                   | 8,854  |      |  | $        |  |               |  | $ |      |               |  | $ | 8,854 | 
|Property and equipment
and software costs |  |                     | 1,629  |      |  |          |  |               |  |   | 1,629 |               |  |   |      | 
|Other                                     |  |                     | 141    |      |  |          |  |               |  |   |      |               |  |   | 141   | 
|                                          |  |                     |        |      |  |          |   |               |  |   |       |               |  |   |       | 
|Total                                     |  | $                   | 10,624 |      |  | $        |  |               |  | $ | 1,629 |               |  | $ | 8,995 | 
|                                          |  |                     |        |      |  |          |   |               |  |   |       |               |  |   |       | 

7. Legal Proceedings

Beginning in June 2001, Transmeta, its directors, and certain of its
officers were named as defendants in several putative shareholder class actions
filed in the United States District Court for the Northern District of
California. The Court has consolidated those complaints into a single action
entitled In re Transmeta Corporation Securities Litigation, Case
No. C 01-02450
WHA. In December 2001, plaintiffs filed their consolidated amended complaint. In
March 2002, the Court granted in part and denied in part defendants' motion to
dismiss the consolidated amended complaint, and allowed plaintiffs to amend
their pleading. Plaintiffs filed a second amended complaint in March 2002. Like
its antecedents, the second amended complaint purports to allege a class action
on behalf of purchasers of Transmeta common stock during the period from
November 7, 2000 to July 19, 2001. The second amended complaint alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
as amended, and Rule 10b-5 promulgated thereunder, and
Sections 11 and 15 of the
Securities Act of 1933, as amended. In May 2002, the Court granted in part and
denied in part defendants' motion to dismiss the second amended complaint, and
denied plaintiffs' motion for leave to file a third amended complaint. In June
2002, defendants answered the second amended complaint as to the only surviving
claim. In July 2002, defendants filed a motion for summary judgment
relating to that
claim. Plaintiffs have moved for class certification, and the Court is scheduled
to hear defendants' motion for summary judgment and plaintiffs' motion for class
certification in September 2002. The Company believes that the allegations in
the second amended complaint and the antecedent complaints are without merit and
intends to defend the consolidated action vigorously.

Beginning in June 2001, the directors and certain officers of Transmeta
were sued in three purported shareholder derivative actions filed in the
Superior Courts of the State of California for the Counties of Santa Clara and
San Mateo. In October 2001, those cases were consolidated in and by the Superior
Court for Santa Clara County into a single action entitled In re Transmeta
Corporation Derivative Litigation, Master File No. CV 799491. In April 2002,
plaintiffs filed a consolidated amended complaint. In June 2002, plaintiffs
filed a second amended complaint. Like its antecedents, the second amended
complaint is based upon the same general allegations set out in the purported
federal class action described above. In May and June 2002, Transmeta and the
individual defendants filed two demurrers to the second amended complaint. In
July 2002, the Court sustained Transmeta's demurrer based on
plaintiffs' lack of standing,
gave plaintiffs 90 days to file an amended complaint, and deferred
consideration of the individual defendants' demurrer as moot. The Company believes that the
allegations in the second amended complaint and its antecedents are without
merit and intends to challenge the complaint and to defend the consolidated
action vigorously.

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Beginning in June 2001, Transmeta, certain of its directors and officers,
and certain of the underwriters for its initial public offering were named as
defendants in three putative shareholder class actions filed in the United
States District Court for the Southern District of New York. In January 2002,
the Court ordered that all matters in the Southern District of New York be
consolidated under In re Transmeta Corporation Initial Public Offering
Securities Litigation, No. 01 CV 6492. On April 19, 2002, plaintiffs filed a
consolidated amended complaint. The consolidated amended complaint alleges that
the prospectus from Transmeta's November 2000 initial public offering failed to
disclose certain alleged acts by the underwriters for the offering. The
consolidated amended complaint alleges claims against Transmeta and several of
its officers and directors under Sections 11 and 15 of the Securities Act of
1933, as amended, and under Sections 10(b) and Section 20(a) of the Securities
Exchange Act of 1934, as amended. Other actions have been filed making similar
allegations regarding the initial public offerings of more than 300 other
companies. All of these cases have been coordinated for pretrial purposes as In
re Initial Public Offering Securities Litigation, Master File
No. 21 MC 92
(SAS). The Company believes that the allegations in the consolidated amended
complaint and its antecedents are without merit and intends to defend the action
vigorously. Transmeta and the individual defendants have not yet responded to
the consolidated amended complaint, because the time for defendants to move as
to any such complaint is presently adjourned pending further instruction from
the Honorable Shira A. Scheindlin, U.S. District Court Judge, Southern District
of New York.

Although the prospective outcome of any litigation is subject to many
contingencies and inherently uncertain, Transmeta management believes, based
upon all information presently known to us, that the ultimate resolution of
these lawsuits is unlikely to have a material adverse effect on our business,
including our financial position, results of operations or cash flows.

8. Subsequent Events

On July 18, 2002 and in connection with Transmetas decision to cease the
development and productization of the TM6000 microprocessor, the Company
terminated approximately 195 employees and contractors. As a result the Company
expects to record severance and termination charges between $4.0 million and
$4.5 million. Transmeta expects to pay between $5.0 million and $5.5 million,
which includes previously accrued compensation of approximately $1.0 million
during third quarter of fiscal 2002 in connection with these severance
payments. Of the approximately 195 employees and contractors that were
terminated on July 18, 2002, approximately 44 were sales, marketing,
and administrative employees and approximately 151 were research and
development personnel.




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

Caution Regarding Forward-Looking Statements

The following discussion and analysis should be read in conjunction with
the condensed consolidated financial statements and the related notes contained
in this report and with the information included in the Companys Annual Report
on Form 10-K for the year ended December 31, 2001 and subsequent reports filed
with the Securities and Exchange Commission. The information contained in this
report is not a complete description of our business or the risks associated
with an investment in our common stock. We urge you to carefully review and
consider the various disclosures made by us in this report and in our other
reports filed regularly with the SEC, some of which reports discuss our
business in greater detail.

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

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

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Overview

We develop and sell software-based microprocessors and develop additional
hardware and software technologies that enable computer manufacturers to build
mobile Internet computers, which are portable computing and communication
devices that are compatible with PC software and deliver the high performance
required to run standard PC and Internet applications while also offering long
battery life. We rely on independent, third party contractors to perform
manufacturing, assembly and test functions. Our fabless approach allows us to
focus on designing, developing and marketing our products and to significantly
reduce the amount of capital needed to invest in manufacturing products.

From our inception in March 1995 through September 2000, we were engaged
primarily in research and development. In 1999, we began focusing on achieving
design wins with original equipment manufacturers, or OEMs, in addition to our
ongoing development activities. In January 2000, we introduced our Crusoe
family of microprocessors and began recognizing product revenue from sales of
these microprocessors in the first half of 2000. Through June 30, 2000, product
shipments consisted of development systems and prototypes. We expect to be
dependent on sales of Crusoe microprocessors and successive generations of
these products for the foreseeable future.

We currently sell our products directly to OEMs and, to a lesser extent,
through distributors. Siltrontech Electronics is our primary distributor in
Taiwan, Hong Kong and China, and All American Semiconductor is our exclusive
distributor in North America. Both Siltrontech and All American are restricted
from selling to certain OEMs and major notebook manufacturers and have
provisions in their agreements specifying inventory levels, price protection
policies and rights of return policies for non end-of-life products.

We derive a significant portion of our net revenues from Asia. Sales to
two customers located in Japan accounted for 48% and 35%, respectively,
of our net revenue during the first six months of fiscal 2002. This compares to
three customers in Japan accounting for 31%, 13% and 12%, respectively,
of our net revenue during the same period last year. The loss of a major
customer, or the delay of significant orders from these customers could reduce
or delay our recognition of revenue. All of our sales to date have been
denominated in U.S. dollars, and we expect that most of our sales in the future
will be denominated in U.S. dollars. Our sales during the first six months of
fiscal years 2002 and 2001 were primarily made to the notebook computer market.
If our Crusoe products fail to achieve widespread acceptance in the notebook
computer market we may not achieve revenue sufficient to sustain our business.

Cost of revenue consists primarily of the costs of manufacturing, assembly
and test of our silicon chips, and compensation and associated costs related to
manufacturing support, logistics and quality assurance personnel. Our gross
margin each quarter is affected by a number of factors, including competitive
pricing, mix, foundry pricing, yields, production flow costs and speed
distribution on our products. Research and development expenses consist
primarily of salaries and related overhead costs associated with employees
engaged in research, design and development activities, as well as the cost of
masks, wafers and other materials and related test services and equipment used
in the development process. Selling, general and administrative expenses
consist of salaries and related overhead costs for sales, marketing and
administrative personnel and legal and accounting services.

We recorded deferred stock compensation representing the difference
between the deemed fair value of our common stock at the date of grant for
accounting purposes and the exercise price of these options. Deferred stock
compensation is presented as a reduction of stockholders equity and is
amortized on the graded vesting method. As of June 30, 2002 approximately $6.8
million was recorded on our balance sheet, which will be amortized through 2004
using an accelerated graded method.

Historically we have incurred significant losses. As of June 30, 2002, we
had an accumulated deficit of $411.5 million. We expect to incur substantial
losses for the foreseeable future. We also expect to incur significant research
and development and selling, general and administrative expenses. As a result,
if our revenue does not increase substantially, our operating results will be
adversely affected, and we will not achieve profitability. During the fourth
quarter of fiscal 2001 and into the first quarter of fiscal 2002 our revenue
was primarily impacted by production difficulties. Additionally, beginning in
the second quarter of fiscal 2001 and continuing through the second quarter of
fiscal 2002 our net revenues have been impacted by the slow worldwide and
Japanese economies. If we experience additional production constraints or if
economic conditions do not improve, or worsen, we would continue to experience
adverse impacts on our revenue and operating results.

For ease of presentation, the accompanying financial information has been
shown as of December 31 and calendar quarter ends for all annual and quarterly
financial statement captions. The three-month period ended June 30, 2002 and
June 30, 2001 each consisted of 13 weeks. The first six months of fiscal 2001
and 2002 each consisted of 26 weeks.

New Accounting Pronouncements

In July 2002, the
FASB issued Statement of Financial Accounting Standards
No. 146 Accounting for Costs Associated with Exit or Disposal
Activities (SFAS 146). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a
Restructuring) (EITF 94-3). The principal difference
between SFAS 146 and EITF 94-3 relates to the timing of the
recognition of a liability for a cost associated with an exit or
disposal activity. SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF 94-3, a liability for an exit
cost as generally defined in EITF 94-3 is to be recognized at the
date of an entitys commitment to an exit plan. SFAS 146 is
effective for exit or disposal activities that are initiated after
December 31, 2002, and as a result, adoption of SFAS 146
would not have a material impact on the Companys current
financial position or results of operations.

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Critical Accounting Policies

The process of preparing financial statements requires the use of
estimates on the part of our management. The estimates used by management are
based on our historical experiences combined with managements understanding of
current facts and circumstances. Certain of our accounting policies are
considered critical as they are both important to the portrayal of our
financial condition and results and require significant or complex judgment on
the part of management.

We believe that our most critical accounting policies are as follows:



| |  |  | Estimation of inventory valuations;           
| | - |  | ----------------------------------------------
|
| |  |  | Valuation of long-lived and intangible assets;
|
| |  |  | Restructuring charges; and                    
|
| |  |  | Revenue recognition.                          

Estimation of Inventory Valuations.In accordance with several accounting
pronouncements, including Accounting Research Bulletin 43, our inventory
valuation policy stipulates that at the end of each reporting period we
write-down or write-off our inventory for estimated obsolescence or
unmarketable inventory. The amount of the write-down or write-off is equal to
the difference between the cost of the inventory and the estimated market value
of the inventory based upon reasonable assumptions about future demand and
market conditions. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs or write-offs may be
required. Additionally, as we introduce product enhancements and new products,
and improve our manufacturing processes, demand for our existing products in
inventory may decrease. At the end of the second quarter of 2001, consistent
with this policy, we recorded a charge of $28.1 million primarily to write-off
certain older inventory products as a result of an actual decrease of future
demand for these older products. In the future, we may find that similar
assessments may warrant another write-down or write-off of inventory.

Valuation of Long-Lived and Intangible Assets.Our accounting policy
related to the valuation and impairment of long-lived assets is in accordance
with the Financial Accounting Standards Boards (FASB) Statement of Financial
Accounting Standards (SFAS) 144, Accounting for the Impairment of Long-lived
Assets and for Long-Lived Assets to be Disposed of. In accordance with our
policy, at the end of each accounting period we evaluate our long-lived and
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of long-lived assets may not be recoverable.
Recoverability of assets to be held and used is determined by comparing the
carrying amount of an asset to the future undiscounted cash flows expected to
be generated by the asset. If the carrying amount of an asset exceeds the
future undiscounted cash flows the asset is considered to be impaired and the
impairment charge recognized is measured by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. During the fourth
quarter of 2001, consistent with this policy, we recorded an impairment
write-off charge of $16.6 million related to deferred charges under certain
license agreements with IBM and Toshiba. Although we do not now believe that
our existing long-lived assets will be impaired in the future, we continue to
periodically evaluate our long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying value of a particular asset
or class of assets may not be fully recoverable.

Restructuring Charges.We accrue for restructuring costs when we make a
commitment to a firm exit plan that specifically identifies all significant
actions to be taken in conjunction with our response to a change in our
strategic plan, product demand, increased costs or other environmental factors.
Our assumptions used in determining the estimation of restructuring expenses
include the determination of the period that it will take to sublet our vacated
premises, the market price that we will be able to command for the subleased
space and the discounted interest rate that we are using to determine the
present value of our future lease obligations. Any significant variation in
these estimates compared to actual results may have a material impact on our
restructuring expenses and our operating results. We reassess the prior
restructuring accruals on a quarterly basis to reflect changes in the costs of
the restructuring activities, and we record new restructuring accruals as
commitments are incurred.

Revenue Recognition.In accordance with several accounting
pronouncements, including Securities and Exchange Commission Staff Accounting
Bulletin 101, our revenue recognition policy stipulates that we recognize
revenue from product sales no sooner than transfer of title, which is typically
upon shipment, and that we provide for expected returns and warranty costs at
that time. Prior to 2000, we primarily generated license revenue. Such license
revenue was recognized when earned, which occurred when agreed-upon

11



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##### Table of Contents



deliverables were provided, or milestones were met and confirmed by our
licensees. Also, we recognized license revenue only if payments received were
non-refundable and not subject to any future performance obligation. Our
revenue policy also incorporates FASBs SFAS 48, which governs revenue
recognition when the right of return exists, such as the case with most
products shipped to our distributors. With respect to products shipped to
distributors, we generally defer recognition of product revenue until the
distributors sell our products to their customers. On occasion, however, we
will sell products with End of Life status to our distributors under special
arrangements without any price protection or return privileges for which we
recognize revenue upon transfer of title, typically upon shipment.

At the end of each accounting period, we make a determination of certain
factors including sales returns and allowances, which could affect the amount
of revenue recorded for the period. Sales returns provisions include
considerations for known but unprocessed sales returns and estimation for
unknown returns. At June 30, 2002, consistent with this
policy, we recorded a $251,000 provision for sales returns. Revenue in earlier
periods did not include material provisions for sales returns or allowances. We
do not expect sales returns or allowances to be significant in the future;
however, if our recorded provisions are not adequate, our revenues could be
negatively impacted.

Results of Operations

Net Revenue.Net revenue for the second quarter of fiscal 2002 was $7.5
million, compared to $10.5 million for the same period last year. Net revenue
for the first six months of fiscal 2002 was $11.7 million compared to $29.1 for
the same period last year. The decreases year over year are due to several
factors, including adverse general economic conditions, which began impacting us
in the second quarter of 2001. Net revenue in the second quarter of fiscal 2002
increased 82% from net revenue of $4.1 million in the first quarter of fiscal
2002. The increase in revenue from the prior quarter is due primarily to the
resolution of certain production difficulties which had impacted our
product availability in the
fourth quarter of 2001 and to a lesser extent the first quarter of 2002.
Additionally, we continue to be impacted by the weak worldwide and Japanese
economies. Demand for our products continues to depend in large part upon sales
by our OEM customers of notebook computers that incorporate our products. Sales
to two customers accounted for more than 10% each and for 83% in the aggregate
of net revenue for the first six months of fiscal 2002 compared to three
customers accounting for more than 10% each and 56% in the aggregate of net
revenue for the same period last year.

Gross Profit.Gross margin is the percentage derived from dividing gross
profit by net revenue. Gross margin in the second quarter of fiscal 2002 was
25.5%, compared to (223.1)% for the same period last year. Gross margin for the
first six months of fiscal 2002 was 27.7% compared to (52.6)% for the same
period last year. Our gross margin each quarter is affected by a number of
factors, including competitive pricing, mix, foundry pricing, yields,
production flow costs and speed distribution on our products. The increases in
gross margin for each period presented is primarily a result of the $28.1
million charge to cost of product revenue primarily related to the write off of
excess inventory, which was recorded during the second quarter of fiscal 2001.

Research and Development.Research and development (R&D) expenses in the
second quarter of fiscal 2002 were $19.2 million, compared to $17.2 million for
the same period last year. R&D expenses for the first six months of fiscal 2002
were $37.3 million compared to $34.4 million for the same period last year. The
increases in both comparative periods were primarily a result of hiring
additional development personnel during the periods and secondarily the result
of developing new products and incurring additional costs associated with these
products.

In-Process Research and Development.In April 2001, we licensed certain
computing technologies and intellectual property from Advanced Micro Devices,
Inc. (AMD), including AMDs HyperTransport interconnect technology for our
future products and technology initiatives. As initial consideration for the
patents and patent rights licensed under the agreement, we issued unregistered
shares of our common stock valued at $13.6 million. This amount has been
expensed as in-process research and development during the second quarter of
fiscal 2001 because the HyperTransport technology is designed for use in
products that are currently in research and development that are not
anticipated to be available until fiscal 2003.

Selling, General and Administrative.Selling, general and administrative
(SG&A) expenses in the second quarter of fiscal 2002 were $8.7 million,
compared to $8.9 million for the same period last year. SG&A expenses were
$16.7 million for the first six months of fiscal 2002 compared to $17.9 million
for the same period last year. The decrease in the year-to-year comparison is
primarily due to decreased spending at industry trade-shows during the first
six months of fiscal 2002 compared to the same period last year.

12



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Restructuring Charges.In the second quarter of 2002, we decided to cease
development and productization of our TM6000 microprocessor. Consequently, we
recorded restructuring charges of $10.6 million consisting primarily of lease
costs, equipment write offs and other costs as we identified a number of leased
facilities, as well as leased and owned equipment that were no longer required

The following provides more detailed information as of June 30, 2002
relating to the restructuring charges recorded during the second quarter of
fiscal 2002.



| |  |  | We recorded a charge of $8.9 million for excess facilities, net of
expected sublease proceeds. As a result of this transaction, we expect
to pay approximately $2.9 million of the $8.9 million in accrued
expenses within the next twelve months and the remaining $6.0 million
thereafter until 2008 when the leases for the vacated spaces will
terminate
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We recorded a charge of $1.6 million for property and equipment and
prepaid software maintenance that will not be used as a result of our
decision to cease the development and productization of the TM6000
microprocessor. This entire non-cash charge was recorded during the
second quarter of fiscal 2002.                                             
|
| |  |  | We recorded a charge of $141,000 for other expenses including
property insurance and other ancillary expenses as a result of the
restructuring. The entire amount is expected to be paid during the third
quarter of fiscal 2002.                                                                                                                           

In addition, we anticipate recording a workforce reduction charge of
between $4.0 million and $4.5 million primarily for severance and fringe
benefits. We expect to pay between $5.0 million and $5.5 million, which
includes previously accrued compensation of approximately $1.0 million during
the third quarter of fiscal 2002, in connection with these severance payments. Of
the approximately 195 employees and contractors that were terminated on July
18, 2002, approximately 44 were sales, marketing, and administrative
employees and 151 were research and development personnel.

Amortization of Deferred Charges, Patents and Patent Rights.In connection
with amortization of certain patents and patent rights acquired during the
first and second quarters of fiscal 2001, we recorded amortization of $2.8
million in the second quarter of fiscal 2002, compared to $1.5 million for the
same period last year. We recorded amortization of $5.7 million for the first
six months of fiscal 2002 compared to $1.8 million for the same period last
year. Increases in amortization of patent and patent rights are due to
acquiring the majority of the patents and patent rights at the end of the
second quarter of fiscal 2001 and not realizing the full amortization expense
until thereafter.

In connection with the amortization of deferred charges as a result of
entering into technology license agreements with IBM in 1997 and Toshiba in
1998, we amortized $2.6 million in the second quarter of fiscal 2001 and $5.7
million in the first six months of fiscal 2001. Amortization of the IBM and
Toshiba deferred charges ceased at the end of the fourth quarter of fiscal 2001
when, as a result of applying our accounting policies related to long-lived
assets, we wrote down the value of these assets to zero. As a result of writing
off these deferred charges, we will not incur future amortization expense of
approximately $2.3 million per quarter.

Stock Compensation.Amortization of deferred stock compensation associated
with options granted prior to November 2000, net of cancellation, was $130,000
in the second quarter of fiscal 2002 compared to $5.7 million for the same
period last year. Net amortization for the first six months of fiscal 2002 was
$2.2 million compared to $11.8 million for the same period last year. The
decrease is primarily due to the large number of stock award cancellations due
to employee terminations, which resulted in reversal of deferred stock expense
of approximately $2.1 million for the six months ended June 30, 2002. Further,
the decrease is a result of amortizing the deferred charge on an accelerated
method.

Stock compensation for the second quarter of fiscal 2002 also included a
reversal of $2.7 million in variable stock compensation due to a lower market
price of our stock at the end of the second quarter of fiscal 2002 compared to
the market price of our stock at the end of the first quarter of fiscal 2002.
Net stock compensation charges for the first six months of fiscal 2002 was
$48,000. We account for variable stock compensation awards because, during the
fourth quarter of fiscal 2001, we did not enforce the recourse provisions of
certain employee notes associated with option exercises. Therefore, we account
for all outstanding notes as if they had terms equivalent to non-recourse
notes, even though the terms of these notes were not in fact changed from
recourse to non-recourse. As a result, we have and will continue to record
variable stock compensation expense on the associated stock awards until the
notes are paid. This variable stock compensation charge is based on the excess,
if any, of the current market price of our stock as of period-end over the
purchase price of the stock award, adjusted for vesting and prior stock
compensation expense recognized on the stock award.

Interest Income.Interest income in the second quarter of fiscal 2002 was
$1.4 million, compared to $4.0 million for the same period last year. Interest
income for the first six months of fiscal 2002 was $3.2 million compared to
$9.0 million for the same period

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last year. The decrease is primarily due to lower average yields as a
result of re-investing matured securities at lower rates of return than
originally invested. Further, the decrease is due to lower cash balances as a
result of funding operations. We invest in highly liquid securities, which have
been affected by declining interest rates.

Interest Expense.Interest expense for the second quarter of fiscal 2002
was $141,000, compared to $262,000 for the same period last year. Interest
expense was $445,000 for the first six months of fiscal 2002 compared to
$593,000 for the same period last year.

Provision for Income Taxes.We recorded a provision for income taxes of
$2,000 for the second quarter of fiscal 2002, compared to $3,000 recorded for
same period last year. We recorded a provision for income taxes of $25,000 for
the first six months of fiscal 2002 compared to $16,000 for the same period
last year. All tax provisions recorded relate to state, local and foreign
taxes.

Liquidity and Capital Resources

Cash Flows

As of June 30, 2002 we had $180.4 million in cash and cash equivalents and
short-term investments, a decrease of $61.3 million from December 31, 2001.

Net cash used in operating activities during the first six months of
fiscal 2002 was $49.6 million, compared to $45.6 million used during the same
period last year. Although our net loss for the first six months of fiscal 2002
was $25.4 million lower than the same period last year, our net cash used to
fund operating activities during the first six months of fiscal 2002 was net
$4.0 million more than that of the same period last year. This is a result of
net non-cash adjustments to cash used during the first six months of fiscal
2002 of $21.7 million compared to $36.6 million for the same period last year
and changes in operating assets and liabilities of $(4.8) million in the first
six months of 2002 compared to $9.7 million for the same period last year.
Significant decreases in non-cash adjustments for the six months of fiscal 2002
compared to the same period last year include $9.5 million in stock
compensation, $13.6 million in in-process research and development and $1.8
million related to the amortization of deferred charges, which were offset by
the $10.6 million increase related to restructuring charge, which were recorded
in the second quarter of 2002. Significant changes to operating assets and
liabilities for the first six months of fiscal 2002 include $4.5 million used
in inventory purchases compared to a $12.4 million reduction in inventory
balances for the same period last year as a result of the inventory
write-offs.

Net cash provided by investing activities during the first six months of
fiscal 2002 was $18.0 million, compared to $185.7 million used during the same
period last year. Net cash provided by investing activities in the first six
months of fiscal 2002 consisted primarily of $30.0 million net proceeds from
the maturity of available-for-sale investments, partially offset by the $9.0
million partial settlement of long-term payable obligations for patents and
patent rights. Net cash used during the same period last year was primarily the
result of the investing $170.8 million in excess cash in available-for-sale
investment securities and the partial payment obligations of $15.3 million
related to the purchase of patents and patent rights.

Net cash provided for financing activities during the first six months of
fiscal 2002 was $773,000, compared to $807,000 used during the same period last
year. Net cash provided during the first six months of fiscal 2002 was
primarily due to proceeds from option exercises and employee stock purchase
plan purchases, partially offset by the repayment of debt and lease
obligations. Net cash used during the same period last year is primarily
attributable to the repayment of debt and lease obligations, partially offset
by proceeds from option exercises.

Uses of Liquidity

At June 30, 2002, we had $26.9 million in cash and cash equivalents and
$153.5 million in available-for-sale investments. We lease our facilities under
non-cancelable operating leases expiring in 2008, and we lease equipment and
software under non-cancelable leases with terms ranging from 36 to 48 months.
At June 30, 2002, we had the following contractual obligations:

|                                   |  |                        |        |                  |  |           |        |               |  |   |        |  |  |   |       | 
|---------------------------------- |  | ---------------------- | ------ | ---------------- |  | --------- | ------ | ------------- |  | - | ------ |  |  | - | ----- | 
|                                   |  | Payments Due by Period
|                                   |  |                       
|Contractual Obligations            |  | Total                  |        | Less Than 1 Year |  | 1-3 Years |        | After 4 Years
|                                   |  |                        |        |                  |  |           |        |              
|                                   |  | (In thousands)        
|Long Term Debt                     |  | $                      | 241    |                  |  | $         | 241    |               |  |   |       |  |  |   |      | 
|Capital Lease Obligations          |  | $                      | 915    |                  |  | $         | 811    |               |  | $ | 104    |  |  |   |      | 
|Operating Leases                   |  | $                      | 26,490 |                  |  | $         | 4,085  |               |  | $ | 13,014 |  |  | $ | 9,391 | 
|Unconditional Purchase Obligations |  | $                      | 7,354  |                  |  | $         | 7,354  |               |  |   |       |  |  |   |      | 
|Other Long Term Obligations        |  | $                      | 45,700 |                  |  | $         | 15,000 |               |  | $ | 30,700 |  |  |   |      | 

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The remaining cash outlays of between $5.0 million and $5.5 million, which
include approximately $1.0 million in previously accrued compensation related
to workforce reduction initiatives, are expected to be substantially completed
by the third quarter of 2002.

See Restructuring charges for additional information.

We believe that existing cash and cash equivalents and short-term
investments balances will be sufficient to fund our operations for the next
twelve months. After this period, capital requirements will depend on many
factors, including general economic conditions, the rate of sales growth,
market acceptance of our products, costs of securing access to adequate
manufacturing capacity, the timing and extent of research and development
projects and increases in our operating expenses. To the extent that existing
cash and cash equivalents and short-term investments balances and any cash from
operations are insufficient to fund our future activities, we may need to raise
additional funds through public or private equity or debt financing. Although
we are currently not a party to any agreement or letter of intent with respect
to a potential acquisition or business combination, we may enter into
acquisitions or business combinations in the future, which also could require
us to seek additional equity or debt financing. Additional funds may not be
available on terms favorable to us or at all.

Risks That May Affect Future Results

The factors discussed below are cautionary statements that identify
important factors that could cause actual results to differ materially from
those anticipated in the forward-looking statements in this Form 10-Q. If any
of the following risks actually occurs, our business, financial condition and
results of operations would suffer. In that case, the trading price of our
common stock could decline and investors might lose all or part of their
investment in our common stock.

We Have a History of Losses, Expect to Incur Further Significant Losses and May
Never Achieve or Maintain Profitability.

We have a history of substantial losses and expect to incur further
significant losses. We incurred net losses of $66.5 million in the first six
months of fiscal 2002, $171.3 million in 2001, $97.7 million in 2000 and $41.1
million in 1999. As of June 30, 2002, we had an accumulated deficit of $411.5
million. Historically, we have increased our research and development, sales
and marketing, and administrative expenses over time. Although we have recently
taken steps to reduce operating expenses, we cannot assure you that our
operating expenses will not increase in future periods. We also expect to incur
substantial non-cash charges relating to the amortization of deferred charges,
patents and patent rights and deferred stock and variable stock compensation,
which will serve to increase our net losses further. Our net revenue must
increase if we are to achieve profitability under our current business model.
We cannot assure you that our revenue will increase, so we may never achieve
profitability. Even if we achieve profitability, we may not be able to sustain
or increase profitability on a quarterly or an annual basis.

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

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

We Depend Upon Increasing Demand for Our Crusoe Microprocessors.

We expect to derive virtually all of our revenue for the foreseeable
future from the sale of our Crusoe microprocessors, which we only began to ship
in volume in September 2000. Since September 2000 we have recognized
substantially all of our revenue from sales of our Crusoe microprocessors.
Therefore, our future operating results will depend on the demand for Crusoe
products by

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existing and future customers. If our Crusoe microprocessors are not
widely accepted by the market due to performance, price, compatibility or any
other reason, or if, following acceptance, we fail to enhance our Crusoe
products in a timely manner, demand for our products may fail to increase, or
may diminish. Such was the case in the third and fourth quarters of 2001 where
revenues declined quarter over quarter as a result of manufacturing
difficulties which delayed us from shipping our new products in high volumes.
If demand for our Crusoe products does not increase, our revenue will not
increase and the value of an investment in our common stock would likely
decline further.

We Are Subject to General Economic and Market Conditions.

Our business is subject to the effects of general economic conditions in
the United States and worldwide, and, in particular, market conditions in the
semiconductor and notebook computer industries. In fiscal 2001 and through the
second quarter of fiscal 2002, our operating results were adversely affected by
unfavorable global economic conditions and reduced capital spending,
particularly in Japan, where we currently generate the majority of our revenue.
These adverse conditions resulted in decreased demand for notebook computers
and, as a result, our products, which are components of notebook computers.
Further, demand for our products decreases as computer manufacturers seek to
manage their component and finished product inventory levels. If the economic
conditions in Japan and worldwide do not improve, or worsen, we may continue to
experience material adverse effects on our business, operating results, and
financial condition.

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

Transitioning to new manufacturing technologies involves extensive
redesigning of products and modifying the manufacturing processes for the
products. Difficulties in shifting to smaller geometry process technologies and
other new manufacturing processes have led to delays in product deliveries and
increased expenses. In particular, during the third and fourth quarters of
fiscal 2001 and to a lesser extent the first quarter of fiscal 2002, we
experienced difficulties in bringing our products into volume production and
distribution. As a result, in part, of these delays, our net revenue in 2001
declined from $10.5 million in the second quarter to $5.0 million in the third
quarter and then to $1.5 million in the fourth quarter. In addition, if we
experience continued delays in product deliveries, our target customers could
design a competitors microprocessor into their product, which would lead to
lost sales and impede our ability to increase our revenue. Further, problems
associated with manufacturing processes divert engineering personnel from
product development and other tasks.

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

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

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

The growth of our business depends in part on acceptance and use of our
products in new markets such as the high-density server and Internet appliance
markets. We depend on the ability of our target customers to develop new
products and enhance existing products for these markets that incorporate our
products and to introduce and promote their products successfully. These new
markets often rely on newly developed technologies, which will require
extensive development and marketing before widespread acceptance is achieved,
so the new markets may grow slowly, if at all. If the new markets do not grow
as we anticipate, our target customers do not incorporate our products into
theirs, or our products are not widely accepted by end users, our growth would
be impeded and we will not be able to factor the related revenues into our
growth in the future. In addition, manufacturers within emerging markets may
have widely varying requirements. To meet the requirements of different
manufacturers and markets, we may be required to change our

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product design or features, sales methods or pricing policies. The costs
of addressing these requirements could be substantial and could delay or
prevent any improvement in our operating results.

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

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

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

Our operating results fluctuate significantly from quarter to quarter and
we expect our results to fluctuate in the future. You should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of
our future performance. Our stock price declined substantially since our stock
began trading publicly in November of 2000. If our future operating results
fail to meet or exceed the expectations of securities analysts or investors,
our stock price would likely decline further in the future.

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



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

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



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

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



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

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

Our Recent Reduction In Workforce May Adversely Affect The Morale And
Performance Of Our Personnel, Our Ability To Hire New Personnel And Our
Operations.

On July 18, 2002, as part of our effort to reduce operating expenses, we
announced a financial restructuring and related reduction in our workforce. Our
restructuring plan included the termination of approximately 195 employees and
contractors, which constituted approximately 40 percent of our workforce. As a
result of that workforce reduction, we have incurred and may continue to incur
substantial costs related to severance and other employee-related costs. Our
workforce reduction may also subject us to litigation risks and expenses. In
addition, our restructuring plan may yield unanticipated consequences, such as
attrition beyond our planned reduction in workforce. As a result of these
reductions, our ability to respond to unexpected challenges may be impaired and
we may be unable to take advantage of new opportunities. In addition, some of
the employees who were terminated had specific and valuable knowledge or
expertise, the loss of which may adversely affect our operations. Further, the
reduction in force may reduce employee morale and may create concern among
existing employees about job security, which may lead to increased attrition or
turnover. As a result of these factors, our remaining personnel may decide to
seek employment with more established companies, and we may have difficulty
attracting new personnel that we might wish to hire in the future.

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

Our success depends heavily upon the contributions of our key management
and technical personnel, whose knowledge, leadership and technical expertise
would be difficult to replace. Many of these individuals have been with us for
several years and have developed specialized knowledge and skills relating to
our technology and business. Others, including our president and
chief executive officer, have joined us in
these management roles only very recently. In April

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2002, Matthew R. Perry joined us as chief executive officer and president,
replacing Murray A. Goldman and R. Hugh Barnes, who served in positions of
chief executive officer and president and chief operating officer,
respectively, from October 2001 to April 2002. In October 2001, Fred Brown
joined us as senior vice president of worldwide sales. Further, Svend-Olav
Carlsen, our vice president of finance and corporate controller, began serving
as acting chief financial officer in June 2002. Our success will depend in part
upon the ability of these new executives to work effectively together and with
the rest of our employees to continue to develop our technology and manage the
operation and growth of our business. All of our executive officers and key
personnel are employees at will. We have no employment contracts and do not
maintain key person insurance on any of our personnel. We might not be able to execute on our
business plan if we were to lose the services of any of our key personnel. If
any of these individuals were to leave Transmeta unexpectedly, we could face
substantial difficulty in hiring qualified successors and could experience a
loss in productivity while any such successor develops the necessary training
and experience.

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

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



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

In addition, the stock market generally and the market for semiconductor
and other technology-related stocks in particular has experienced a decline
during 2000, 2001 and through the second quarter of 2002, and could decline
further, which could cause the market price of our common stock to fall for
reasons not necessarily related to our business, results of operations or
financial condition. The market price of our stock also might decline in
reaction to events that affect other companies in our industry even if these
events do not directly affect us. Accordingly, you may not be able to resell
your shares of common stock at or above the price you paid. Securities class
action litigation is often brought against a company following a period of
volatility in the market price of its securities, and we are defending several
purported securities class action lawsuits. Further, certain of our management
and directors have also been sued in purported shareholder derivative actions.
Although we believe that the lawsuits lack merit, an adverse determination
could have a significant effect upon our business and materially affect the
price of our stock. Moreover, regardless of the ultimate result, it is likely
that the lawsuits will divert managements attention and resources from other
matters, which could also adversely affect our business and the price of our
stock.

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

The market for microprocessors is dominated by established firms and
subject to rapid technological change. We face particularly strong competitive
pressure in the United States and we believe that such pressure is increasing
on a worldwide basis. Competition may cause price reductions, reduced gross
margins and loss of market share, any one of which could significantly reduce
our future revenue and increase our losses. For example, we may determine to
lower our prices of our products in order to increase or maintain market share,
which would likely increase our losses. Significant competitors include Intel
and Advanced Micro Devices and licensees of technology from ARM Holdings and MIPS
Technologies.

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

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

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

Highly complex products such as our microprocessors may contain hardware
or software defects or bugs for many reasons, including design issues or
defective materials or manufacturing processes. Often, these defects and bugs
are not detected until after the products have been shipped. If any of our
products contain defects, or has reliability, quality or compatibility
problems, our reputation might be damaged significantly and customers might be
reluctant to buy our products, which could result in the loss of or failure to
attract customers. In addition, these defects could interrupt or delay sales.
We may have to invest significant capital and other resources to correct these
problems. If any of these problems are not found until after we have commenced
commercial production of a new product, we might incur substantial additional
development costs. If we fail to provide solutions to the problems, such as
software upgrades or patches, we could also incur product recall, repair or
replacement costs. These problems might also result in claims against us by our
customers or others. In addition, these problems might divert our technical and
other resources from other development efforts. Moreover, we would likely lose,
or experience a delay in, market acceptance of the affected product or
products, and we could lose credibility with our current and prospective
customers. This is particularly significant as we are a new entrant to a market
dominated by large well-established companies.

We Derive a Substantial Portion of Our Revenue From a Small Number of
Customers, and Our Revenue Would Decline Significantly if Any Major Customer
Were to Cancel, Reduce or Delay a Purchase of Our Products.

Sales to two customers in the aggregate accounted for 83% of net revenue
in the first six months of fiscal 2002. These customers are located in Japan,
which subjects us to economic cycles in that country. We expect that a small
number of OEM customers and distributors will continue to account for a
significant portion of our revenue. Our future success will depend upon the
timing and size of future purchase orders, if any, from these customers and new
customers and, in particular:



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

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

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

The cost, quality and availability of third-party manufacturing operations
are essential elements to the successful production of our products. We
currently rely exclusively on TSMC to fabricate our wafers. We do not have a
manufacturing agreement with TSMC that guarantees any particular production capacity
or any particular price from TSMC. We place orders on a purchase order basis
and TSMC may allocate capacity to other companies products while reducing
deliveries to us on short notice. The absence of dedicated capacity means that,
with little or no notice, TSMC could refuse to continue to fabricate all or
some of the wafers that we require or change the terms under which it
fabricates wafers. If TSMC were to stop manufacturing for us, we would likely
be unable to replace the lost capacity in a timely manner. Transferring to
another manufacturer would require a significant amount of time and money, and
a smooth and timely transition would be unlikely. As a result, we could lose
potential sales and fail to meet existing obligations to our customers. In
addition, if TSMC were to change the terms under which it manufactures for us,
our manufacturing costs could increase.

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



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

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

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

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

We May Experience Manufacturing Difficulties That Could Increase the Cost and
Reduce the Supply of Our Products.

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The fabrication of wafers for our microprocessors is a highly complex and
precise process that requires production in a tightly controlled, clean room
environment. Minute impurities, difficulties in the fabrication process,
defects in the masks used to print circuits on a wafer or other factors can
cause numerous die on each wafer to be nonfunctional. The proportion of
functional die expressed as a percentage of total die on a wafer is referred to
as product yield. Semiconductor companies frequently encounter difficulties
in achieving expected product yields. During 2001, we experienced yield
problems as we migrated our manufacturing processes to smaller geometries,
which caused increases in our product costs, delays in product availability and
diversion of engineering personnel. Even with functional die, normal variations
in wafer fabrication can cause some die to run faster than others. Variations
in speed yield could lead to excess inventory, a resulting unfavorable impact
on gross margins and insufficient inventory of faster products, depending upon
customer demand. Yield problems may not be identified and resolved until a
product has been manufactured and can be analyzed and tested, if ever. As a
result, yield problems are often difficult, time consuming and expensive to
correct. Yield problems have in the past and could in the future hamper our
ability to deliver our products to our customers in a timely manner.

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

We rely on ASE for substantially all of our assembly and test services. As
a result, we do not directly control our product delivery schedules. This lack
of control could result in product shortages, which could increase our costs or
delay delivery of our products. We do not have a contract with ASE for test and
assembly services, and we typically procure these services from ASE on a per
order basis. ASE could cease to perform all of the services that we require, or
could change the terms upon which it performs services for us. Therefore, we
may not be able to obtain assembly and testing services for our products on
acceptable terms, or at all. If we are required to find and qualify alternative
assembly or testing services, we could experience delays in product shipments,
increased product costs or a decline in product quality.

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

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

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

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

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

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

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

Suppliers of other components incorporated into our customers systems may
experience shortages, which could reduce the demand for our products. For
example, from time to time, the computer and semiconductor industries
have experienced
shortages of some materials and devices, such as memory components,
displays, and storage devices. Our customers could defer or cancel
purchases of our products if they are not able to obtain the other components
necessary to build their systems.

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

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

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 Effectively.

Our ability to implement our business plan in a rapidly evolving market
requires effective planning and management process. Changes in our business
plans could place significant strain on our management systems, infrastructure
and other resources. In addition, we expect that we will continue to improve
our financial and managerial controls and procedures. We will also need to
expand, train and manage our workforce worldwide. Furthermore, we expect that
we will be required to manage an increasing number of relationships with
suppliers, manufacturers, customers and other third parties. This will be more
difficult as a result of our reduction in force in July 2002, since we will
need to operate with fewer employees and the existing employees may need to
perform new tasks previously performed by former employees. If we fail to
manage change effectively, our employee-related costs and employee turnover
could increase and our business may not succeed.

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

We depend upon other companies designing our microprocessors into their
products, which we refer to as design wins. Many of our targeted customers
consider the choice of a microprocessor to be a strategic decision. Thus our
targeted customers may take a long time to evaluate our products, and many
individuals may be involved in the evaluation process. We anticipate that the
length of time between our initial contact with a customer and the time when we
recognize revenue from that customer will vary. We expect our sales cycles to
range from six to twelve months from the time we achieve a design win to the
time the customer begins volume production of products that incorporate our
microprocessors. We do not have historical experience selling our products that
is sufficient for us to determine how our sales cycles will affect the timing
of our revenue. Variations in the length of our sales cycles could cause our
revenue to fluctuate widely from period to period. While potential customers
are evaluating our products and before they place an order with us, we may
incur sales and marketing expenses and expend significant management and
engineering resources without any assurance of success. The value of any design
win depends upon the commercial success of our customers products. If our
customers cancel projects or change product plans, we could lose anticipated
sales. We can offer no assurance that we will achieve further design wins or
that the products for which we achieve design wins will ultimately be
introduced or will, if introduced, be commercially successful.

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

The semiconductor industry is characterized by rapid technological change,
frequent new product introductions and enhancements, and ongoing customer
demands for greater performance. In addition, the average selling price of any
particular microprocessor product has historically decreased substantially over
its life, and we expect that trend to continue. As a result, our products may
not be competitive if we fail to introduce new products or product enhancements
that meet evolving customer demands. It may be difficult or costly for us or we
may not be able to enhance existing products to fully meet customer demands.
For instance, in order to meet the demands of our customers for enhancement of
our existing products, we may incur manufacturing or other costs that would
harm our operating margins and financial condition. Further, we may not achieve
further design wins with current customers unless we continue

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to meet their evolving needs by developing new products. The development
of new products is complex, and we may not be able to complete development in a
timely manner, or at all. To introduce and improve products on a timely basis,
we must:



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

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

Our Products May Infringe the Intellectual Property Rights of Others, Which May
Cause Us to Become Subject to Expensive Litigation, Cause Us to Incur
Substantial Damages, Require Us to Pay Significant License Fees or Prevent Us
From Selling Our Products.

Our industry is characterized by the existence of a large number of
patents and frequent claims and related litigation regarding patent and other
intellectual property rights. We cannot be certain that our products do not and
will not infringe issued patents, patents that may be issued in the future, or
other intellectual property rights of others. In addition, leading companies in
the semiconductor industry have extensive intellectual property portfolios with
respect to semiconductor technology. From time to time, third parties,
including these leading companies, may assert exclusive patent, copyright,
trademark and other intellectual property rights to technologies and related
methods that are important to us. We expect that we may become subject to
infringement claims as the number of products and competitors in our target
markets grows and the functionality of products overlaps. We have received, and
may in the future receive, communications from third parties asserting patent
or other intellectual property rights covering our products. Litigation may be
necessary in the future to defend against claims of infringement or invalidity,
to determine the validity and scope of the proprietary rights of others, to
enforce our intellectual property rights, or to protect our trade secrets. We
may also be subject to claims from customers for indemnification. Any resulting
litigation, regardless of its resolution, could result in substantial costs and
diversion of resources.

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

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

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

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extent as the laws of the United States. We may be required to spend
significant resources to monitor and protect our intellectual property rights.

Our pending patent and trademark applications may not be approved. Our
patents, including any patents which may result from our patent applications
may not provide us with any competitive advantage or may be challenged by third
parties. If challenged, our patents might not be upheld or their claims could
be narrowed. Any litigation surrounding our rights could force us to divert
important financial and other resources from our business operations.

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

To grow our business successfully and maintain a high level of quality, we
will need to recruit, train, retain and motivate highly skilled sales,
marketing, engineering and finance personnel. We will need to develop our sales
and marketing organizations in order to increase market awareness of our
products and to increase revenue. In addition, as a company focused on the
development of complex products, we will need to hire skilled engineering staff
of various experience levels in order to meet our product roadmap. We may not
be able to hire on a timely basis a sufficient number of skilled employees,
which could lead to delays in product deliveries or the development of new
products. Competition for skilled employees, particularly in the San Francisco
Bay Area, is intense. We may have difficulty recruiting potential employees and
retaining our key personnel if prospective or current employees perceive the
equity component of our compensation package to be less valuable than that of
other employers.

If We Fail to Meet the Continued Listing Requirements of the Nasdaq Stock
Market, Our Common Stock Could be Delisted, Which Would Likely Result in a
Further Decrease in the Trading Price and Liquidity of Our Common Stock.

Our common stock is listed on the Nasdaq National Market. The Nasdaq Stock
Markets Marketplace Rules impose requirements for companies listed on the
Nasdaq National Market to maintain their listing status. One of these
requirements is that we must maintain a minimum bid price of $1.00 per share
for our common stock. If we fail to meet this requirement for 30 consecutive
business days, we will receive a deficiency notice from Nasdaq. Upon receipt
of this notice, we would then have 90 calendar days to comply, and during this
period the minimum bid price per share must be above $1.00 per share for 10
consecutive business days during this period to comply. Following this period,
we could appeal to Nasdaq for a hearing regarding the determination to delist
our common stock from the Nasdaq National Market. On August 8, 2002, the minimum
bid price of our common stock was $1.02 per share. Delisting could reduce the
ability of holders of our common stock to purchase or sell shares as quickly
and as inexpensively as they have done historically. For instance, failure to
obtain listing on another market or exchange may make it more difficult for
traders to sell our securities. Broker-dealers may be less willing or able to
sell or make a market in our common stock. Not maintaining a listing on a major
stock market may result in a decrease in the trading price of our common stock
due to a decrease in liquidity, reduced analyst coverage and less interest by
institutions and individuals in investing in our common stock.

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

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

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

We believe that we must expand our international sales and distribution
operations to be successful. We have sold, and in the future we expect to sell
a significant portion of our products to customers in Asia. As part of our
international expansion, we have personnel in Taiwan and in Japan, who provide
sales and customer support. In addition, we have appointed a distributor to
sell products in Taiwan, Hong Kong and China. In attempting to conduct and
expand business internationally, we are exposed to various risks that could
adversely affect our international operations and, consequently, our operating
results, including:



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

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

Our Certificate of Incorporation and Bylaws, 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.

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



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

In addition, the stockholder rights, which we implemented in 2002, and
Section 203 of the Delaware General Corporation Law may discourage, delay or
prevent a change in control.

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If We Need Additional Financing, We May Not Be Able to Raise Further Financing
or It May Only Be Available on Terms Unfavorable to Us or Our Stockholders.

We believe that our available cash resources are sufficient to meet our
anticipated working capital and capital expenditure requirements for at least
the next twelve months. We might need to raise additional funds, however, to
respond to business contingencies, which could include the need to:



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

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




Item 3.Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk.Our cash equivalents and available-for-sale
investments are exposed to financial market risk due to fluctuations in
interest rates, which may affect our interest income. As of June 30, 2002, our
cash equivalents and available-for-sale investments included money market funds
and short and medium term corporate bonds and earned interest at an average
rate of 2.8%. Due to the relative short-term nature of our investment
portfolio, our interest income is extremely vulnerable to sudden changes in
market interest rates. Assuming a decline of 10% in the market interest rates
at June 30, 2002, with consistent cash equivalents and available-for-sale
investment balances, interest income for the remaining quarters of fiscal 2002
would be adversely affected by approximately $125,000 on a quarterly basis. We
do not use our investment portfolio for trading or other speculative purposes.

Foreign Currency Exchange Risk.All of our sales and substantially all of
our expenses are denominated in U.S. dollars. As a result, we have relatively
little exposure to foreign currency exchange risk. We do not currently enter
into forward exchange contracts to hedge exposures denominated in foreign
currencies or any other derivative financial instruments for trading or
speculative purposes. However, in the event our exposure to foreign currency
risk increases, we may choose to hedge those exposures.




PART II. OTHER INFORMATION




Item 1.Legal Proceedings

Beginning in June 2001, Transmeta, its directors, and certain of its
officers were named as defendants in several putative shareholder class actions
filed in the United States District Court for the Northern District of
California. The Court has consolidated those complaints into a single action
entitled In re Transmeta Corporation Securities Litigation, Case
No. C 01-02450
WHA. In December 2001, plaintiffs filed their consolidated amended complaint. In
March 2002, the Court granted in part and denied in part
defendants motion to
dismiss the consolidated amended complaint, and allowed plaintiffs to amend
their pleading. Plaintiffs filed a second amended complaint in March 2002. Like
its antecedents, the second amended complaint purports to allege a class action
on behalf of purchasers of Transmeta common stock during the period from
November 7, 2000 to July 19, 2001. The second amended complaint alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
as amended, and Rule 10b-5 promulgated thereunder, and Sections 11 and 15 of the
Securities Act of 1933, as amended. In May 2002, the Court granted in part and
denied in part defendants motion to dismiss the second amended complaint, and
denied plaintiffs motion for leave to file a third amended complaint. In June
2002, defendants answered the second amended complaint as to the only surviving
claim. In July 2002, defendants filed a motion for summary judgment
relating to that
claim. Plaintiffs have moved for class certification, and the Court is scheduled
to hear defendants motion for summary judgment and plaintiffs motion for class
certification in September 2002. We believe that the allegations in the second
amended complaint and the antecedent complaints are without merit and intend to
defend the consolidated action vigorously.

Beginning in June 2001, the directors and certain officers of Transmeta
were sued in three purported shareholder derivative actions filed in the
Superior Courts of the State of California for the Counties of Santa Clara and
San Mateo. In October 2001, those cases were consolidated in and by the Superior
Court for Santa Clara County into a single action entitled In re Transmeta
Corporation Derivative Litigation, Master File No. CV 799491. In April 2002,
plaintiffs filed a consolidated amended complaint. In June 2002, plaintiffs
filed a second amended complaint. Like its antecedents, the second amended
complaint is based upon the same general allegations set out in the purported
federal class action described above. In May and June 2002, Transmeta and the
individual defendants filed two demurrers to the second amended complaint. In
July 2002, the Court sustained Transmetas demurrer based on
plaintiffs lack of standing,
gave plaintiffs 90 days to file an amended complaint, and deferred
consideration of the individual defendants demurrer as moot. We believe that the allegations in
the second amended complaint and it antecedents are without merit and intend to
challenge the complaint and to defend the consolidated action vigorously.

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Beginning in June 2001, Transmeta, certain of its directors and officers,
and certain of the underwriters for its initial public offering were named as
defendants in three putative shareholder class actions filed in the United
States District Court for the Southern District of New York. In January 2002,
the Court ordered that all matters in the Southern District of New York be
consolidated under In re Transmeta Corporation Initial Public Offering
Securities Litigation, No. 01 CV 6492. On April 19, 2002, plaintiffs filed a
consolidated amended complaint. The consolidated amended complaint alleges that
the prospectus from Transmeta's November 2000 initial public offering failed to
disclose certain alleged acts by the underwriters for the offering. The
consolidated amended complaint alleges claims against Transmeta and several of
its officers and directors under Sections 11 and 15 of the Securities Act of
1933, as amended, and under Sections 10(b) and Section 20(a) of the Securities
Exchange Act of 1934, as amended. Other actions have been filed making similar
allegations regarding the initial public offerings of more than 300 other
companies. All of these cases have been coordinated for pretrial purposes as In
re Initial Public Offering Securities Litigation, Master File
No. 21 MC 92
(SAS). We believe that the allegations in the consolidated amended complaint and
its antecedents are without merit and intend to defend the action vigorously.
Transmeta and the individual defendants have not yet responded to the
consolidated amended complaint, because the time for defendants to move as to
any such complaint is presently adjourned pending further instruction from the
Honorable Shira A. Scheindlin, U.S. District Court Judge, Southern District of
New York.

Although the prospective outcome of any litigation is subject to many
contingencies and inherently uncertain, Transmeta management believes, based
upon all information presently known to us, that the ultimate resolution of
these lawsuits is unlikely to have a material adverse effect on our business,
including our financial position, results of operations or cash flows.




Item 2.Changes in Securities and Use of Proceeds

Recent Sales of Unregistered Securities

In January 2002, we issued 340,483
shares of common stock, valued at $1.0 million, to an intellectual
property owner as partial
consideration for certain intellectual property and related assets
that we acquired in February 2001.

Use of Proceeds From Sales of Registered Securities

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

As of June 30, 2002, we had paid $5.0 million of the net proceeds to IBM
under the terms of our amended license agreement, $3.5 million to IBM under the
terms of our original license agreement, $1.1 million to Quickturn Design
Systems to repay indebtedness incurred in conjunction with equipment purchases
in 1998, approximately $10.5 million in property and equipment purchases and

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$20.5 million for the purchase of intellectual property and related assets
from Seiko Epson and other intellectual property owners. We have also paid
approximately $146.3 million in ordinary operating expenses. The remaining net
proceeds have been invested in short-term interest bearing, investment-grade
securities.




Item 3.Defaults upon Senior Securities

Not Applicable.




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

Not Applicable.




Item 5.Other Information

Not Applicable.




Item 6.Exhibits and Reports on Form 8-K

(a)  Exhibits.

The following
exhibits are filed herewith:

| |                |  |                                                                                                                                              
| | -------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
| | Exhibit Number |  | Exhibit Title                                                                                                                                
| |                |  |                                                                                                                                              
| | 10.22          |  | Offer of Employment from Transmeta Corporation to Matthew R. Perry
dated March 21, 2002.                                                     
|
| | 99.1           |  | Certification by
Matthew R. Perry pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.  
|
| | 99.2           |  | Certification by
Svend-Olav Carlsen pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.

(b)  Reports on Form 8-K

Not applicable.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|                     |                                                                                                     |                       
|-------------------- | --------------------------------------------------------------------------------------------------- | ----------------------
|Date: August 9, 2002 | TRANSMETA CORPORATION                                                                              
|                    
|                     | By:                                                                                                 | /s/ SVEND-OLAV CARLSEN
|                     |                                                                                                    
|                     | Svend-Olav CarlsenChief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)

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EXHIBIT INDEX

|               |  |                                                                                                                                              
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit Title                                                                                                                                
|               |  |                                                                                                                                              
|10.22          |  | Offer of Employment from Transmeta Corporation to Matthew R. Perry
dated March 21, 2002.                                                     
|              
|99.1           |  | Certification by
Matthew R. Perry pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.  
|              
|99.2           |  | Certification by
Svend-Olav Carlsen pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.

31