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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549


FORM 10-Q

(Mark One)

|  |  |                                                                                        
|- |  | ---------------------------------------------------------------------------------------
|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
SECURITIES EXCHANGE ACT OF 1934 
|  |  |                                                                                        
|  |  | For the Quarterly Period Ended March 31, 2003                                          
|  |  |                                                                                        
|  |  | OR                                                                                     
|  |  |                                                                                        
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from                      to

Commission File Number 000-31803

TRANSMETA CORPORATION

(Exact name of registrant as specified in its charter)


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

3990 Freedom Circle, Santa Clara, CA 95054
(Address of principal executive offices, including zip code)

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



---



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 o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes x No o

There were 138,530,976 shares of the Companys common stock, par value
$0.00001 per share, outstanding on April 30, 2003.



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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                           
|                              | Item 4. Controls and Procedures                                                              
|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                                                     
|CERTIFICATIONS               
|EXHIBIT INDEX                
|EXHIBIT 99.1                 
|EXHIBIT 99.2                 



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##### Table of Contents



TRANSMETA CORPORATION

FORM 10-Q
Quarterly Period Ended March 31, 2003

TABLE OF CONTENTS

|               |  |                                                                                                                         |  |     
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | ----
|               |  |                                                                                                                         |  | Page
|               |  |                                                                                                                         |  |     
|               |  | PART I. FINANCIAL INFORMATION                                                                                           |  |     
|               |  |                                                                                                                         |  |     
|Item 1.        |  | Unaudited Condensed Consolidated Financial Statements                                                                   |  | 3   
|               |  | Unaudited Condensed Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002.                             |  | 3   
|               |  | Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31,
2003 and March 31, 2002. |  | 4   
|               |  | Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31,
2003 and March 31, 2002. |  | 5   
|               |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                          |  | 6   
|Item 2.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                   |  | 10  
|Item 3.        |  | Quantitative and Qualitative Disclosures about Market Risk                                                              |  | 26  
|Item 4.        |  | Controls and Procedures                                                                                                 |  | 26  
|               |  |                                                                                                                         |  |     
|               |  | 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                                                                                         |  | 28  
|Item 4.        |  | Submission of Matters to a Vote of Security Holders                                                                     |  | 28  
|Item 5.        |  | Other Information                                                                                                       |  | 28  
|Item 6.        |  | Exhibits and Reports on Form 8-K                                                                                        |  | 28  
|Signatures     |  | 29                                                                                                                     
|Certifications |  | 30                                                                                                                     

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1.Condensed Consolidated Financial Statements




TRANSMETA CORPORATION

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

ASSETS

|                                                                     |                                                                 |                                            |                                      |          |             |  |              |          |         |  | 
|-------------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | -------- | ----------- |  | ------------ | -------- | ------- |  | 
|                                                                     |                                                                 |                                            |                                      |          | March 31,   |  | December 31,
|                                                                     |                                                                 |                                            |                                      |          | 2003        |  | 2002(1)     
|                                                                     |                                                                 |                                            |                                      |          |             |  |             
|                                                                     |                                                                 |                                            |                                      |          | (unaudited) |  |              |          |        
|Current assets:                                                      |                                                                 |                                            |                                      |          |             |  |              |         
|                                                                     | Cash and cash equivalents                                       |                                            | $                                    | 60,233   |             |  | $            | 16,613   |        
|                                                                     | Short-term investments                                          |                                            |                                      | 51,550   |             |  |              | 112,837  |        
|                                                                     | Accounts receivable, net                                        |                                            |                                      | 2,642    |             |  |              | 4,060    |        
|                                                                     | Inventories                                                     |                                            |                                      | 9,968    |             |  |              | 10,937   |        
|                                                                     | Prepaid expenses and other current assets                       |                                            |                                      | 5,310    |             |  |              | 4,722    |        
|                                                                     |                                                                 |                                            |                                      |          |             |  |              |         
|                                                                     |                                                                 | Total current assets                       |                                      |          | 129,703     |  |              |          | 149,169 | 
|                                                                     | Property and equipment, net                                     |                                            |                                      | 8,562    |             |  |              | 9,574    |        
|                                                                     | Patents and patent rights, net                                  |                                            |                                      | 34,911   |             |  |              | 36,623   |        
|                                                                     | Other assets                                                    |                                            |                                      | 2,651    |             |  |              | 2,189    |        
|                                                                     |                                                                 |                                            |                                      |          |             |  |              |         
|                                                                     |                                                                 | Total assets                               |                                      | $        | 175,827     |  |              | $        | 197,555 | 
|                                                                     |                                                                 |                                            |                                      |          |             |  |              |          |        
|                                                                     |                                                                 |                                            | LIABILITIES AND STOCKHOLDERS EQUITY |          |             |  |              |          |         |  | 
|Current liabilities:                                                 |                                                                 |                                            |                                      |          |             |  |              |         
|                                                                     | Accounts payable                                                |                                            | $                                    | 1,285    |             |  | $            | 2,311    |        
|                                                                     | Accrued compensation and related compensation liabilities       |                                            |                                      | 2,648    |             |  |              | 3,195    |        
|                                                                     | Other accrued liabilities                                       |                                            |                                      | 7,854    |             |  |              | 8,216    |        
|                                                                     | Accrued restructuring charges                                   |                                            |                                      | 2,183    |             |  |              | 2,549    |        
|                                                                     | Current portion of long-term payables                           |                                            |                                      | 14,500   |             |  |              | 16,000   |        
|                                                                     | Current portion of long-term debt and capital lease obligations |                                            |                                      | 790      |             |  |              | 865      |        
|                                                                     |                                                                 |                                            |                                      |          |             |  |              |         
|                                                                     |                                                                 | Total current liabilities                  |                                      |          | 29,260      |  |              |          | 33,136  | 
|Long-term payables, net of current portion                           |                                                                 |                                            | 18,378                               |          |             |  | 17,449       |         
|Long-term accrued restructuring charges, net of current portion      |                                                                 |                                            | 5,120                                |          |             |  | 5,456        |         
|Long-term debt and capital lease obligations, net of current portion |                                                                 |                                            | 583                                  |          |             |  | 667          |         
|Commitments and contingencies                                        |                                                                 |                                            |                                      |          |             |  |              |         
|Stockholders equity:                                                |                                                                 |                                            |                                      |          |             |  |              |         
|                                                                     | Preferred stock, $0.00001 par value (none issued)               |                                            |                                      |         |             |  |              |         |        
|                                                                     | Common stock, $0.00001 par value, at amounts paid in            |                                            |                                      | 602,084  |             |  |              | 601,119  |        
|                                                                     | Treasury stock                                                  |                                            |                                      | (2,439   | )           |  |              | (2,439   | )      
|                                                                     | Deferred stock compensation                                     |                                            |                                      | (2,228   | )           |  |              | (3,039   | )      
|                                                                     | Accumulated other comprehensive income                          |                                            |                                      | 38       |             |  |              | 134      |        
|                                                                     | Accumulated deficit                                             |                                            |                                      | (474,969 | )           |  |              | (454,928 | )      
|                                                                     |                                                                 |                                            |                                      |          |             |  |              |         
|                                                                     |                                                                 | Total stockholders equity                 |                                      |          | 122,486     |  |              |          | 140,847 | 
|                                                                     |                                                                 |                                            |                                      |          |             |  |              |         
|                                                                     |                                                                 | Total liabilities and stockholders equity |                                      | $        | 175,827     |  |              | $        | 197,555 | 
|                                                                     |                                                                 |                                            |                                      |          |             |  |              |          |        



---

|(1) |  | Derived from the Companys audited financial statements as of December
31, 2002, included in the Companys Form 10-K filed with the Securities
and Exchange Commission.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

(See accompanying notes)

3



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TRANSMETA CORPORATION

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

|                                                        |                                                             |                          |         |                    |        |           |         |        |        | 
|------------------------------------------------------- | ----------------------------------------------------------- | ------------------------ | ------- | ------------------ | ------ | --------- | ------- | ------ | ------ | 
|                                                        |                                                             |                          |         | Three Months Ended
|                                                        |                                                             |                          |         |                   
|                                                        |                                                             |                          |         | March 31,          |        | March 31,
|                                                        |                                                             |                          |         | 2003               |        | 2002     
|                                                        |                                                             |                          |         |                    |        |          
|Net product revenue                                     |                                                             | $                        | 6,017   |                    |        | $         | 4,147   |       
|Cost of revenue                                         |                                                             |                          | 4,452   |                    |        |           | 2,836   |       
|                                                        |                                                             |                          |         |                    |        |           |         |       
|Gross profit                                            |                                                             |                          | 1,565   |                    |        |           | 1,311   |       
|Operating expenses:                                     |                                                             |                          |         |                    |        |           |         |       
|                                                        | Research and development(1)(2)                              |                          |         | 12,479             |        |           |         | 18,080 |       
|                                                        | Selling, general and administrative(3)(4)                   |                          |         | 6,634              |        |           |         | 7,934  |       
|                                                        | Amortization of deferred charges, patents and patent rights |                          |         | 2,640              |        |           |         | 2,848  |       
|                                                        | Stock compensation                                          |                          |         | 436                |        |           |         | 4,804  |       
|                                                        |                                                             |                          |         |                    |        |           |         |       
|                                                        |                                                             | Total operating expenses |         |                    | 22,189 |           |         |        | 33,666 | 
|                                                        |                                                             |                          |         |                    |        |           |         |       
|Operating loss                                          |                                                             |                          | (20,624 | )                  |        |           | (32,355 | )     
|                                                        | Interest and other income                                   |                          |         | 707                |        |           |         | 1,795  |       
|                                                        | Interest expense                                            |                          |         | (124               | )      |           |         | (327   | )     
|                                                        |                                                             |                          |         |                    |        |           |         |       
|Net loss                                                |                                                             | $                        | (20,041 | )                  |        | $         | (30,887 | )     
|                                                        |                                                             |                          |         |                    |        |           |         |       
|Net loss per share  basic and diluted                  |                                                             | $                        | (0.15   | )                  |        | $         | (0.23   | )     
|                                                        |                                                             |                          |         |                    |        |           |         |       
|Weighted average shares outstanding  basic and diluted |                                                             |                          | 137,551 |                    |        |           | 132,997 |       
|                                                        |                                                             |                          |         |                    |        |           |         |       



---

|(1) |  | Excludes $418 and $1,493 in amortization of deferred stock compensation
for the three months ended March 31, 2003 and 2002, respectively.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Excludes $(24) and $487 in variable stock compensation for the three
months ended March 31, 2003 and 2002, respectively.                 
|   
|(3) |  | Excludes $237 and $575 in amortization of deferred stock compensation for
the three months ended March 31, 2003 and 2002, respectively.  
|   
|(4) |  | Excludes $(195) and $2,249 in variable stock compensation for the three
months ended March 31, 2003 and 2002, respectively.              

(See accompanying notes)

4



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TRANSMETA CORPORATION

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

|                                                 |                                                                             |                                                                       |                                                             |         |                    |        |           |         |         |        |  
|------------------------------------------------ | --------------------------------------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------------------------- | ------- | ------------------ | ------ | --------- | ------- | ------- | ------ | -
|                                                 |                                                                             |                                                                       |                                                             |         | Three Months Ended
|                                                 |                                                                             |                                                                       |                                                             |         |                   
|                                                 |                                                                             |                                                                       |                                                             |         | March 31,          |        | March 31,
|                                                 |                                                                             |                                                                       |                                                             |         | 2003               |        | 2002     
|                                                 |                                                                             |                                                                       |                                                             |         |                    |        |          
|Cash flows from operating activities:            |                                                                             |                                                                       |                                                             |         |                    |        |           |        
|                                                 | Net loss                                                                    |                                                                       | $                                                           | (20,041 | )                  |        | $         | (30,887 | )      
|                                                 | Adjustments to reconcile net loss to net cash used in operating activities: |                                                                       |                                                             |         |                    |        |           |         |        
|                                                 |                                                                             |                                                                       | Stock compensation                                          |         |                    | 436    |           |         |         | 4,804  |  
|                                                 |                                                                             |                                                                       | Depreciation                                                |         |                    | 1,540  |           |         |         | 1,444  |  
|                                                 |                                                                             |                                                                       | Amortization of other assets                                |         |                    | 88     |           |         |         | 35     |  
|                                                 |                                                                             |                                                                       | Amortization of deferred charges, patents and patent rights |         |                    | 2,640  |           |         |         | 2,848  |  
|                                                 | Changes in operating assets and liabilities:                                |                                                                       |                                                             |         |                    |        |           |         |        
|                                                 |                                                                             |                                                                       | Accounts receivable                                         |         |                    | 1,418  |           |         |         | (225   | )
|                                                 |                                                                             |                                                                       | Inventories                                                 |         |                    | 970    |           |         |         | (1,797 | )
|                                                 |                                                                             |                                                                       | Prepaid expenses and other current assets                   |         |                    | (1,079 | )         |         |         | (273   | )
|                                                 |                                                                             |                                                                       | Accounts payable and accrued liabilities                    |         |                    | (2,638 | )         |         |         | 1,159  |  
|                                                 |                                                                             |                                                                       |                                                             |         |                    |        |           |        
|Net cash used in operating activities            |                                                                             |                                                                       | (16,666                                                     | )       |                    |        | (22,892   | )      
|                                                 |                                                                             |                                                                       |                                                             |         |                    |        |           |        
|Cash flows from investing activities:            |                                                                             |                                                                       |                                                             |         |                    |        |           |        
|                                                 |                                                                             | Purchase of available-for-sale investments                            |                                                             |         | (47,507            | )      |           |         | (57,315 | )     
|                                                 |                                                                             | Proceeds from sale or maturity of available-for-sale investments      |                                                             |         | 108,698            |        |           |         | 73,666  |       
|                                                 |                                                                             | Purchase of property and equipment                                    |                                                             |         | (528               | )      |           |         | (2,377  | )     
|                                                 |                                                                             | Purchase of patents and patent rights                                 |                                                             |         | (1,500             | )      |           |         | (1,500  | )     
|                                                 |                                                                             | Other assets                                                          |                                                             |         | (59                | )      |           |         |        |       
|                                                 |                                                                             |                                                                       |                                                             |         |                    |        |           |        
|Net cash provided by investing activities        |                                                                             |                                                                       | 59,104                                                      |         |                    |        | 12,474    |        
|                                                 |                                                                             |                                                                       |                                                             |         |                    |        |           |        
|Cash flows from financing activities:            |                                                                             |                                                                       |                                                             |         |                    |        |           |        
|                                                 |                                                                             | Proceeds from sales of common stock under ESPP and stock option plans |                                                             |         | 1,341              |        |           |         | 2,569   |       
|                                                 |                                                                             | Repayment of debt and capital lease obligations                       |                                                             |         | (159               | )      |           |         | (920    | )     
|                                                 |                                                                             |                                                                       |                                                             |         |                    |        |           |        
|Net cash provided by financing activities        |                                                                             |                                                                       | 1,182                                                       |         |                    |        | 1,649     |        
|                                                 |                                                                             |                                                                       |                                                             |         |                    |        |           |        
|Change in cash and cash equivalents              |                                                                             |                                                                       | 43,620                                                      |         |                    |        | (8,769    | )      
|Cash and cash equivalents at beginning of period |                                                                             |                                                                       | 16,613                                                      |         |                    |        | 57,747    |        
|                                                 |                                                                             |                                                                       |                                                             |         |                    |        |           |        
|Cash and cash equivalents at end of period       |                                                                             | $                                                                     | 60,233                                                      |         |                    | $      | 48,978    |        
|                                                 |                                                                             |                                                                       |                                                             |         |                    |        |           |         |        

(See accompanying notes)

5



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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 accounting principles generally accepted in the United
States for interim financial information. However, certain information or
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
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 included in the Companys Form 10-K for the year ended December 31,
2002. The results of operations for the three months ended March 31, 2003 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 March 28, 2003 and March 29,
2002 each consisted of 13 weeks.

2. Stock Based Compensation

The Company accounts for its stock options and equity awards in accordance
with the provisions of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25), and related interpretations and has
elected to follow the disclosure only alternative prescribed by the FASBs
SFAS 123, Accounting for Stock-Based Compensation. Expense associated with
stock-based compensation is amortized on an accelerated basis over the vesting
period of the individual award consistent with the method described in FASB
Interpretation 28. Accordingly, approximately 59% of the unearned deferred
compensation is amortized in the first year, 25% in the second year, 12% in the
third year, and 4% in the fourth year following the date of grant. Pursuant to
SFAS 123, Transmeta discloses the pro forma effect of using the fair value
method of accounting for its stock-based compensation arrangements.

For purposes of pro forma disclosures, the estimated fair value of options
is amortized to pro forma expense over the options vesting period using an
accelerated graded method. Pro forma information follows:

|                                                                                                                               |  |                    |         |           |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------- | --------- |  | - | ------- | -
|                                                                                                                               |  | Three Months Ended
|                                                                                                                               |  |                   
|                                                                                                                               |  | March 31,          |         | March 31,
|                                                                                                                               |  | 2003               |         | 2002     
|                                                                                                                               |  |                    |         |          
|Net loss, as reported                                                                                                          |  | $                  | (20,041 | )         |  | $ | (30,887 | )
|Add: Stock-based employee compensation expense
included in reported net loss, net of related tax
effects                       |  |                    | 436     |           |  |   | 4,804   |  
|Less: Total stock-based employee compensation
expense under fair value based method for all
awards, net of related tax effects |  |                    | (10,190 | )         |  |   | (12,271 | )
|Pro forma net loss                                                                                                             |  | $                  | (29,795 | )         |  | $ | (38,354 | )
|Basic and diluted net loss per share  as reported                                                                             |  | $                  | (0.15   | )         |  | $ | (0.23   | )
|Basic and diluted net loss per share  pro forma                                                                               |  | $                  | (0.22   | )         |  | $ | (0.29   | )

The fair value for the Companys stock-based awards is estimated at the
date of grant using a Black-Scholes option-pricing model. The Black-Scholes
option-pricing model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In
addition, the Black-Scholes option-pricing model requires the input of highly
subjective assumptions, including expected stock price volatility. Because the
Companys stock-based awards have characteristics significantly
6Table of Contentsdifferent from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock-based awards. The fair value of
options granted was determined based on estimated stock price volatility. The
weighted average assumptions used to determine fair value were as follows:

|                        |  |                    |      |                    |  |      |      |      |  |  |      |   |  |  |      |  
|----------------------- |  | ------------------ | ---- | ------------------ |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                        |  | Options            |      | ESPP              
|                        |  |                    |      |                   
|                        |  | Three Months Ended |      | Three Months Ended
|                        |  | March 31,          |      | March 31,         
|                        |  |                    |      |                   
|                        |  | 2003               |      | 2002               |  | 2003 |      | 2002
|                        |  |                    |      |                    |  |      |      |     
|Expected volatility     |  |                    | 0.75 |                    |  |      | 1.43 |      |  |  | 1.03 |   |  |  | 1.31 |  
|Expected life in years  |  |                    | 4.0  |                    |  |      | 4.0  |      |  |  | 0.5  |   |  |  | 0.5  |  
|Risk-free interest rate |  |                    | 2.6  | %                  |  |      | 4.2  | %    |  |  | 1.4  | % |  |  | 3.7  | %
|Expected dividend yield |  |                    | 0    |                    |  |      | 0    |      |  |  | 0    |   |  |  | 0    |  

3. Net Loss per Share

Basic and diluted net loss per share is presented in conformity with the
Financial Accounting Standards Boards (FASB) Statement of Financial
Accounting Standards (SFAS) 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    
|                                       |                                                                                |   |                       
|                                       |                                                                                |   | March 31,              |         | March 31,
|                                       |                                                                                |   | 2003                   |         | 2002     
|                                       |                                                                                |   |                        |         |          
|                                       |                                                                                |   | (in thousands, except 
|                                       |                                                                                |   | for per share amounts)
|Basic and diluted:                     |                                                                                |   |                        |         |           |   |       |        
|                                       | Net loss                                                                       |   | $                      | (20,041 | )         |   | $     | (30,887 | )
|Basic and diluted:                     |                                                                                |   |                        |         |           |   |       |        
|                                       | Weighted average shares outstanding                                            |   |                        | 137,572 |           |   |       | 133,342 |  
|                                       | Less: Weighted average shares subject to repurchase                            |   |                        | (21     | )         |   |       | (345    | )
|                                       |                                                                                |   |                        |         |           |   |       |        
|                                       | Weighted average shares used in computing basic
and diluted net loss per share |   |                        | 137,551 |           |   |       | 132,997 |  
|                                       |                                                                                |   |                        |         |           |   |       |        
|Net loss per share  basic and diluted |                                                                                | $ | (0.15                  | )       |           | $ | (0.23 | )      
|                                       |                                                                                |   |                        |         |           |   |       |         |  

The Company has excluded all outstanding stock options 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
32,920,990 and 27,770,545 shares of common stock at March 31, 2003 and March
31, 2002, respectively, 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. Outstanding shares subject to repurchase have also been excluded
from the calculation of net loss per share.

4. Net Comprehensive Loss

Net comprehensive loss includes the Companys net loss, as well as changes
to the accumulated other comprehensive loss on available-for-sale investments.
Net comprehensive loss for the three-month periods ended March 31, 2003 and
2002, respectively, is as follows (in thousands):

|                                                                        |  |                    |         |           |  |   |         |  
|----------------------------------------------------------------------- |  | ------------------ | ------- | --------- |  | - | ------- | -
|                                                                        |  | Three Months Ended
|                                                                        |  |                   
|                                                                        |  | March 31,          |         | March 31,
|                                                                        |  | 2003               |         | 2002     
|                                                                        |  |                    |         |          
|Net loss                                                                |  | $                  | (20,041 | )         |  | $ | (30,887 | )
|Net change in other comprehensive
loss  unrealized loss on
investments |  |                    | (96     | )         |  |   | (243    | )
|                                                                        |  |                    |         |           |  |   |         |  

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|                       |  |                    |         |           |  |   |         |  
|---------------------- |  | ------------------ | ------- | --------- |  | - | ------- | -
|                       |  | Three Months Ended
|                       |  |                   
|                       |  | March 31,          |         | March 31,
|                       |  | 2003               |         | 2002     
|                       |  |                    |         |          
|Net comprehensive loss |  | $                  | (20,137 | )         |  | $ | (31,130 | )
|                       |  |                    |         |           |  |   |         |  

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):

|                 |  |           |       |              |  |   |        | 
|---------------- |  | --------- | ----- | ------------ |  | - | ------ | 
|                 |  | March 31, |       | December 31,
|                 |  | 2003      |       | 2002        
|                 |  |           |       |             
|Work in progress |  | $         | 7,807 |              |  | $ | 8,545  | 
|Finished goods   |  |           | 2,161 |              |  |   | 2,392  | 
|                 |  |           |       |              |  |   |        | 
|                 |  | $         | 9,968 |              |  | $ | 10,937 | 
|                 |  |           |       |              |  |   |        | 

6. Product Warranty

Transmeta typically provides a warranty that includes factory repair
services or replacement as needed for replacement parts on its products for a
period of one year from shipment. Transmeta records a provision for estimated
warranty costs when the revenue on product sales is recognized. Warranty costs
have been within managements expectations to date and have not been material.

7. Restructuring Charges

In the second quarter of fiscal 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
consisted 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.

On July 18, 2002 and in connection with Transmetas decision to cease the
development and productization of the TM6000 microprocessor, the Company
terminated 195 employees and contractors. As a result, the Company recorded
severance and termination charges of $4.1 million in the third quarter of
fiscal 2002, which excludes a credit of $1.7 million to deferred compensation
expense related to stock option cancellations for terminated employees.
Additionally, the Company paid approximately $531,000 for previously accrued
compensation in the third quarter of fiscal 2002 in connection with the
employee terminations. Of the 195 employees and contractors that were
terminated on July 18, 2002 44 were sales, marketing, and administrative
employees and 151 were research and development personnel. The Companys
workforce reduction was completed in the third quarter of fiscal 2002.
Additionally, the Company vacated all excess facilities as of September 30,
2002.

Accrued restructuring charges consist of the following at March 31, 2003
(in thousands):

|                                                          |  |              |       |           |  |           |     |      |  |   |      |            |  |   |       | 
|--------------------------------------------------------- |  | ------------ | ----- | --------- |  | --------- | --- | ---- |  | - | ---- | ---------- |  | - | ----- | 
|                                                          |  | Provision    |       |           |  |           |     |      |  |   |      | Provision 
|                                                          |  | Balance at   |       |           |  |           |     |      |  |   |      | Balance at
|                                                          |  | December 31, |       | Drawdowns |  | March 31,
|                                                          |  |              |       |           |  |          
|                                                          |  | 2002         |       | Cash      |  | Non-Cash  |     | 2003
|                                                          |  |              |       |           |  |           |     |     
|Charges recorded in the quarter ended
June 30, 2002:      |  |              |       |           |  |           |     |      |  |   |      |            |  |   |       | 
|Building leasehold costs                                  |  | $            | 7,903 |           |  | $         | 702 |      |  | $ | (102 | )          |  | $ | 7,303 | 
|Charges recorded in the quarter ended
September 30, 2002: |  |              |       |           |  |           |     |      |  |   |      |            |  |   |       | 
|Workforce reduction                                       |  |              | 102   |           |  |           |    |      |  |   | 102  |            |  |   |      | 
|                                                          |  |              |       |           |  |           |     |      |  |   |      |            |  |   |       | 
|                                                          |  | $            | 8,005 |           |  | $         | 702 |      |  | $ |     |            |  | $ | 7,303 | 
|                                                          |  |              |       |           |  |           |     |      |  |   |      |            |  |   |       | 

8. 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. In October 2001, the Court consolidated those complaints into a
single action entitled In re Transmeta Corporation Securities Litigation, Case
No. C 01-02450

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WHA, and appointed lead plaintiffs and class counsel. In December 2001,
plaintiffs filed their consolidated amended complaint. The consolidated amended
complaints purported to allege a class action on behalf of all persons, other
than the individual defendants and the other officers of Transmeta, who
purchased or acquired common stock of Transmeta during the period from November
7, 2000 to July 19, 2001. The consolidated amended complaints alleged
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 March 2002, the Court granted in
part and denied in part defendants motions to dismiss the consolidated amended
complaint. 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 moved for class certification, and the Court was
scheduled to hear defendants motion for summary judgment and plaintiffs
motion for class certification in December 2002. The Company believes that the
allegations in the second amended complaint and the antecedent complaints are
without merit and have defended the consolidated action vigorously.
Notwithstanding this belief, and in order to avoid any additional waste of
management time and expense, the Company and the individual defendants entered
into a memorandum of understanding with plaintiffs counsel to settle all
claims that might have been brought in this action for approximately $5.5
million, all of which monies have been paid by the defendants Directors and
Officer (D&O) liability insurance. In December 2002, the court granted
preliminary approval to the proposed settlement agreement. In March 2003, the
Court granted final approval of the settlement and entered judgment in the
action. In April 2003, a plaintiffs attorney who was not selected as
class counsel filed a notice of appeal relating to certain orders of
the court appointing class counsel and addressing certain
applications of her firm for attorneys fees.

Beginning June 2001, the directors and certain officers of Transmeta were
sued in four purported shareholder derivative actions. In October 2001, those
cases were consolidated in and by the Superior Court for Santa Clara County in
a single action entitled In re Transmeta Corporation Derivative Litigation,
Master File No. CV 799491. In April 2002, plaintiffs filed a consolidated
amended complaint. Like its antecedents, the consolidated amended complaint is
based upon the same general allegations set out in the purported shareholder
class actions 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 have defended the action vigorously.
Notwithstanding this belief, and in order to avoid any additional waste of
management time and expense, the Company and the individual defendants agreed
to settle all claims that might have been brought in this action for a sum of
money to be paid entirely by defendants D&O liability insurance, similar to
the proposed agreement to settle all of the claims in the federal class action.
In December 2002, the parties executed a memorandum of understanding dated
October 3, 2002 (the MOU). The MOU provides for a settlement of the
consolidated derivative action pursuant to a definitive agreement and subject
to judicial approval. The proposed settlement includes a dismissal with
prejudice of all asserted claims, a release in favor of all defendants, and a
payment to fees to counsel for the derivative plaintiffs in an amount to be
approved by the Court but not to exceed $300,000. In April 2003, the court
approved the parties stipulated order scheduling for September 2003 a hearing
on their motion for dismissal upon settlement

Beginning in June 2001, the Company, 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 7, 2000 initial public offering failed
to disclose certain alleged actions 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 consolidated 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 intend
to defend the action vigorously. In November 2002, Transmeta joined a
coordinated motion to dismiss filed on behalf of all issuers and individual
defendants. In March 2003, the Court granted in part and denied in part that
coordinated motion to dismiss, and issued an order regarding pleading of
amended complaints.

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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, 2002 and subsequent reports filed
with the Securities and Exchange Commission (SEC). 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 Could Affect Future Results. You should carefully consider those
risks, in addition to the other information in this report and in our other
filings with the SEC, before deciding to invest in our company or to maintain
or change your investment. Investors are cautioned not to place reliance on
these forward-looking statements, which reflect managements analysis only as
of the date of this report. We undertake no obligation to revise or update any
forward-looking statement for any reason.

Overview

We develop and sell software-based microprocessors and develop additional
hardware, software, and system technologies that enable manufacturers to build
highly efficient computing systems characterized by low power consumption,
reduced heat dissipation and the high performance required to run standard x86
compatible programs. We originally developed our family of Crusoe
microprocessors for lightweight notebook computers and other mobile computing
devices, but we have developed and are continuing to develop microprocessors
suitable for a variety of existing and emerging end markets in which energy and
thermal efficiency along with x86 software compatibility are desirable. 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 infrastructure.

From our inception in March 1995 through January 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 sell our products directly to OEMs and, to a lesser extent, through
distributors, stocking representatives and manufacturers representatives. We
have added manufacturers representatives and distributors in Europe, and
manufacturers representatives in North America. Etron Corporation Ltd. is our
manufacturers representative for Korea. Uniquest, Siltrontech Electronics and
Edom Technology are our primary distributors in Hong Kong and Taiwan, and All
American Semiconductor is our exclusive distributor in North America. Inno
Micro Corporation and Shinden Hightex Corporation have been added as
distributors for Japan. Our distributors 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. As needed, we will continue to add
representation to our current sales and distribution network.

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The majority of our sales have been to a limited number of customers and
sales are highly concentrated. Additionally, we derive a significant portion
of our revenue from customers located in Asia. In the first quarter of fiscal
2003, sales to three customers, each of whom is located in Asia, accounted for
32%, 24% and 20%, respectively, of our net product revenue. For the same
period in the prior year, those customers accounted for 0%, 52% and 0%,
respectively. In addition, we also had a customer that accounted for less than
10% and 27%, respectively, of our net product revenue for the first quarter of
fiscal 2003 and 2002. The loss of a major customer or the delay of significant
orders from these customers could reduce or delay our recognition of revenue.
One of our customers accounted for 48% of our accounts receivable balance as of
March 31, 2003. The same customer accounted for 55% of our accounts receivable
balance as of December 31, 2002. While this customer has a proven record for
remitting funds due on a timely basis, any significant future delay in this
customers ability to remit funds owed could have a material adverse effect on
our financial position.

All of our product 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. We have not engaged in any foreign currency hedging activities,
although we may do so in the future. Our product sales in the first quarter of
fiscal years 2003 and 2002 were primarily made to the lightweight and other
mobile personal computer (PC) markets. If our Crusoe products fail to achieve
widespread acceptance in these markets 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. Gross margin
is the percentage derived from dividing gross profit by revenue. 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 of 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 previously 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 an accelerated method. As of March 31, 2003, approximately $2.2
million was recorded on our balance sheet, which will be amortized through
2004.

Historically we have incurred significant losses. As of March 31, 2003, we
had an accumulated deficit of $475 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 negatively impacted by production difficulties. Additionally, beginning in
the second quarter of fiscal 2001 and continuing through the first quarter of
fiscal 2003 our net product revenues have been adversely affected by the slow
worldwide and particularly, 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 periods ended March 31, 2003 and
2002 each consisted of 13 weeks and ended on March 28 and 29, respectively.

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. For a description of what we believe to be our most
critical accounting policies and estimates, refer to our Annual Report on Form
10-K for the year ended December 31, 2002 filed with the Securities and
Exchange Commission on March 27, 2003. There have been no changes in any of our
critical accounting policies since December 31, 2002.

Results of Operations

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Net Revenue

Net revenue for the first quarter of fiscal 2003 was $6.0 million,
compared to $4.1 million for the same period last year. This 46.3% increase
year over year is due to difficulties in shipping and production volume levels
of our then new microprocessors, the TM5500 and TM5800, during the first
quarter of 2002.

Gross Margin

Gross margin was 26.0% for the first quarter of fiscal 2003, compared to
31.6% in the same period last year. Gross margin has declined over the past
year as a result of lower average selling prices, partially offset by a
decrease in the cost of our products sold. Additionally, during the
first quarter of fiscal 2003 we had a limited amount of previously
reserved inventory that was sold during the period. During the first quarter of 2003 as
well as the same period last year, our gross margins have been significantly
adversely affected by unabsorbed overhead costs as our production related
infrastructure has exceeded our needs during these periods.

Research and Development

Research and development (R&D) costs for the first quarter of fiscal 2003
were 31.0% lower than those in the same period last year. Spending on R&D
activities decreased from $18.1 million in the first quarter of fiscal 2002 to
$12.5 million in the first quarter of fiscal 2003. The majority of the
decrease is due to lower compensation and benefit costs and consultant fees
related to our reduction in workforce in the third quarter of fiscal 2002. The
majority of R&D spending in the first quarter of fiscal 2003 was for our
next-generation TM8000 microprocessor. The remaining portion was for
sustaining engineering efforts on our TM5800 microprocessor.

Selling, General and Administrative

Selling, general and administrative (SG&A) costs for the first quarter of
fiscal 2003 were 16.4% lower than those in the same period last year. Spending
on SG&A activities decreased from $7.9 million in the first quarter of fiscal
2002 to $6.6 million in the first quarter of fiscal 2003. The majority of this
decrease is due to lower compensation and benefit costs and consultant fees
related to our reduction in workforce in the third quarter of fiscal 2002.
These decreases were partly offset by increasing corporate insurance costs, as
well as an increase in costs related to the expansion of our foreign sales
offices.

Amortization of Deferred Charges, Patents and Patent Rights

Amortization charges for the first quarters of fiscal 2003 and 2002
primarily relate to various patents and patent rights acquired from Seiko Epson
and others during fiscal 2001. Additionally, we accreted interest payable in
relation to amounts due for certain technology license agreements. The
amortization and accretion charges for these license agreements, patents and
patent rights in the first quarter of fiscal 2003 were $2.6 million, compared
to $2.8 million in the same period last year.

Stock Compensation

Total stock compensation charges during the first quarter of fiscal 2003
were $436,000, compared to $4.8 million in the same period last year. There
were two components to stock compensation expense during these two periods.

The first component is the amortization of deferred stock compensation
associated with options granted prior to November 2000, net of cancellations,
which amounted to $655,000 during the first quarter of fiscal 2003, compared to
$2.1 million in the same period last year. The decrease is primarily a result
of amortizing the deferred charge on an accelerated method, as well as a
decrease in the number of outstanding options affecting the compensation charge
as a result of cancellations in connection with our reduction in workforce in
the third quarter of fiscal 2002.

The second component is the application of variable accounting for certain
stock option grants, which is included in deferred stock compensation. 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 other 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 adjustments related to variable stock option accounting 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 the period-end over the purchase price of the stock award,
adjusted for vesting and prior stock compensation expense recognized on the
stock award. Stock

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compensation for the first quarter of fiscal 2003 included a credit of
$219,000 recorded to stock compensation expense due to a lower market price of
our stock at the end of the period compared to the end of fiscal 2002. Stock
compensation expense in the first quarter fiscal 2002 included $2.7 million in
variable stock compensation.

Interest and Other Income and Interest Expense

Interest and other income was $707,000 in the first quarter of fiscal
2003, compared to $1.8 million in the same period last year. The decrease is
due to a decrease in the average invested cash balances during the first
quarter of fiscal 2003 as we continue to use cash to fund operations, as well
as a decrease in interest rates earned on investments during the period. As we
continue to use cash to fund operations, our investment balances will decrease
and as a result our interest income is expected to decrease over time. Interest
expense was $107,000 in the first quarter of fiscal 2003, compared to $304,000
in the same period last year. The decrease is the result of lower average debt
balances due to several lease-financing arrangements expiring during 2002.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through
sales of equity securities and, to a lesser extent, from product revenue and
lease financing. At March 31, 2003 we had $111.8 million in cash, cash
equivalents and short-term investments compared to $129.5 at December 31, 2002.

Net cash used in operating activities was $16.7 million for the first
quarter of fiscal 2003. This was primarily the result of the net loss of $20.0
million, as well a decrease in accounts payable and prepaid expenses during the
period. This was partially offset by decreases in accounts receivable and
inventory.

Net cash provided by investing activities was $59.1 million for the first
quarter of fiscal 2003, and consisted primarily of $61.2 million net proceeds
from the maturity of available-for-sale investments. These proceeds were
partially offset by a $1.5 million partial settlement of long-term payable
obligations for purchased patents and patent rights, as well as $528,000 in
purchases of capital equipment.

Net cash provided by financing activities was $1.2 million for the first
quarter of fiscal 2003, and consisted primarily of net proceeds from option
exercises and employee stock purchase plan purchases.

At March 31, 2003, we had $60.2 million in cash and cash equivalents and
$51.6 million in short-term 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 March 31, 2003, we had the following contractual obligations:

|                                   |  |       |        |                  |  |                        |        |               |  |   |        |  |  |   |       |  |  |  |  | 
|---------------------------------- |  | ----- | ------ | ---------------- |  | ---------------------- | ------ | ------------- |  | - | ------ |  |  | - | ----- |  |  |  |  | 
|                                   |  |       |        |                  |  | Payments Due by Period |        |               |  |  
|                                   |  |       |        |                  |  |                        |        |               |  |  
|                                   |  | Total |        | Less Than 1 Year |  | 1-3 Years              |        | After 3 Years |  |   |        | 
|                                   |  |       |        |                  |  |                        |        |               |  |   |        | 
|Contractual Obligations            |  |       |        |                  |  | (In thousands)         |        |               |  |   |        |  |  |  
|Capital Lease Obligations          |  | $     | 1,488  |                  |  | $                      | 838    |               |  | $ | 650    |  |  |   |      |  |  |  |  | 
|Operating Leases                   |  | $     | 23,651 |                  |  | $                      | 4,374  |               |  | $ | 13,351 |  |  | $ | 5,926 |  |  |  |  | 
|Unconditional Purchase Obligations |  | $     | 3,820  |                  |  | $                      | 3,820  |               |  |   |       |  |  |   |      |  |  |  |  | 
|Other Long Term Obligations        |  | $     | 38,000 |                  |  | $                      | 14,500 |               |  | $ | 23,500 |  |  |   |      |  |  |  |  | 

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 Could Affect Future Results

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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 this case, the trading price of our
common stock could decline and investors might lose all or part of their
investment in our common stock.

We Have a History of Losses, 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 $20.0 million in the first
quarter of fiscal 2003, $110.0 million in fiscal 2002, $171.3 million in fiscal
2001 and $97.7 million in fiscal 2000. As of March 31, 2003, we had an
accumulated deficit of $475.0 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 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 Forecast 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 forecast our business. Until 2000, we derived substantially all of
our revenue from license fees, but we do not expect any significant license fee
revenue in the foreseeable future. We need to generate substantial future
revenue from product sales, but our ability to manufacture our products in
production quantities and the revenue and income potential of our products and
business are unproven. You should consider our chances of financial and
operational success in light of the risks, uncertainties, expenses, delays and
difficulties associated with new businesses in highly competitive technology
fields, many of which may be beyond our control. If we fail to address these
risks, uncertainties, expenses, delays and difficulties, the value of an
investment in our common stock would decline further.

We Depend Upon Increasing Demand for Our Crusoe Microprocessors.

We expect to derive virtually all of our revenue for the foreseeable
future from the sale of our Crusoe microprocessors, which we only began to ship
in volume in September 2000. Since September 2000 we have recognized
substantially all of our revenue from sales of our Crusoe microprocessors.
Therefore, our future operating results will depend on the demand for Crusoe
products by existing and future customers. If our Crusoe microprocessors are
not widely accepted by the market due to performance, price, compatibility or
any other reason, or if, following acceptance, we fail to enhance our Crusoe
products in a timely manner, demand for our products may fail to increase, or
may diminish. If demand for our Crusoe products does not increase, our revenue
will not increase and the value of an investment in our common stock would
likely decline 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, 2002 and the
first quarter of fiscal 2003, our operating results were adversely affected by
unfavorable global economic conditions and reduced information technology
spending, particularly in Japan, where we currently generate a substantial
portion 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

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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 product 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. If we experience 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 market and new embedded
processor applications. 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 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 experienced a downturn of this type in 1997 and 1998, and has been
experiencing a downturn again since 2001. Our net product 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:
15Table of Contents



| |  |  | 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.

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                                                                                          

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

A large portion of our expenses, including rent, salaries and capital
leases, is fixed and difficult to reduce. Our expenses are based in part on
expectations for our revenue. If our revenue does not meet our expectations,
the adverse effect of the revenue shortfall upon our operating results may be
acute in light of the fixed nature of our expenses. 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.

In July 2002, as part of our effort to reduce operating expenses, we
announced a 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 the recent workforce reduction, we have incurred 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 have joined us in senior management roles
only recently. In March 2003, Arthur L. Swift joined us as senior vice
president of marketing. Our success will depend in part upon the ability of 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;                                                       

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| |  |  | 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 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 have settled or are defending several purported shareholder
class action or derivative lawsuits. Although we believe that those lawsuits
lack merit, 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 the prices of our products in order to increase or maintain market share,
which would likely increase our losses. Significant competitors include Intel,
Advanced Micro Devices, VIA Technologies and licensees of technology from ARM
Holdings and MIPS Technologies.

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.

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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 44% of net product
revenue in the first quarter of fiscal 2003. 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 and stocking representatives for sales of our products in large
territories, including Japan, Taiwan, Hong Kong, Europe, China, Korea and North
America. These agreements do not contain minimum purchase commitments.
Additionally, we have entered into agreements with manufacturers
representatives in North America and Europe. Any distributor, stocking
representative or manufacturers representative 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 revenue.

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 would be subject to all risks incident to relying on third parties for
wafer fabrication. 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.

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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
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, which provides the
majority of our assembly and test services, 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.

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 the majority 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 the majority of our assembly and test services, are located
in Taiwan. Taiwan has experienced significant earthquakes and could be
20Table of Contentssubject 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.The Recent Outbreak of SARS in
the Asia-Pacific Region and Its Continued Spread Could Harm Our
Business.The recent outbreak of severe acute
respiratory syndrome, or SARS, which began in China, Hong Kong,
Singapore and Vietnam but appears to be spreading, may have a
negative impact on our business. We have employees located in Taiwan,
and we have our products manufactured and assembled in Taiwan. Our
business may be impacted by a variety of SARS-related factors,
including but not limited to disruptions in the operations of our
offices, our partners, our customers, and their partners; reduced
sales in certain end-markets; and increased costs to conduct our
business abroad. If the number of cases of SARS continues to increase
or spread to other areas, including the United States, our business
could also be harmed.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.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. 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.21Table of Contents

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, or more, 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 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
22Table of Contentsproducts. 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 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 closing 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 a minimum of 90 calendar days to comply,
and during this period the minimum closing 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
April 30, 2003, the closing bid price of our common stock was $0.95 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 for23Table of Contents

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 incurrence of charges related to goodwill and other intangible
assets, any of which could adversely affect our balance sheet and operating
results. Moreover, we may not be able to identify future suitable acquisition
candidates or, if we are able to identify suitable candidates, we may not be
able to make these acquisitions on commercially reasonable terms or at all.

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

We believe that we must expand our international sales and distribution
operations to be successful. We 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, Japan and Europe who
provide sales and customer support. In addition, we have appointed
distributors, stocking representatives and manufacturers representatives to
sell products in Japan, Taiwan, Hong Kong, Europe, China, Korea and North
America. 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;                                                             
|
| |  |  | major health concerns, such as SARS;                                                              
|
| |  |  | 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;

24



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##### Table of Contents





| |  |  | 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.

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.

Recently Enacted and Proposed Changes in Securities Laws and Regulations are
Likely to Increase Our Costs.

The Sarbanes-Oxley Act of 2002 that became law in July 2002 requires
changes in some of our corporate governance, public disclosure and compliance
practices. The Act also requires the SEC to promulgate new rules on a variety
of subjects. In addition to final rules and rule proposals already made by the
SEC, the National Association of Securities Dealers has proposed revisions to
its requirements for companies, such as us, that are Nasdaq-listed. We expect
these developments to increase our legal and financial compliance costs, and to
make some activities, such as SEC reporting requirements, more difficult.
Additionally, we expect these developments to make it more difficult and more
expensive for us to obtain director and officer liability insurance, and we may
be
25Table of Contents

required to accept reduced coverage or incur substantially higher costs to
obtain coverage. These developments could make it more difficult for us to
attract qualified executive officers and attract and retain qualified members
of our board of directors, particularly to serve on our audit committee. We are
presently evaluating and monitoring regulatory developments and cannot estimate
the timing or magnitude of additional costs we may incur as a result.




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. Over the past few years,
we have experienced significant reductions in our interest income due in part
to declines in interest rates. These declines have led to interest rates that
are low by historical standards and we do not believe that further decreases in
interest rates will have a material impact on the interest income earned on our
cash equivalents and short-term investments held at March 31, 2003.

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.




Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures.Our Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date). Based on such evaluation, such
officers have concluded that, as of the Evaluation Date, our disclosure
controls and procedures are effective for recording, processing, summarizing
and reporting information that we (including our consolidated subsidiaries) are
required to disclose in our reports filed or submitted under the Exchange Act.

Changes in Internal Controls.Since the Evaluation Date, there have not
been any significant changes in our internal controls or, to our knowledge, in
other factors that could significantly affect such controls. Our Chief
Executive Officer and Chief Financial Officer evaluated our internal controls
as of the Evaluation Date. Those officers have indicated that, since the
Evaluation Date, there have not been any significant changes in our internal
controls or, to their knowledge, in other factors that could significantly
affect those controls.

26



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##### Table of Contents






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. In October 2001, the Court consolidated those complaints into a
single action entitled In re Transmeta Corporation Securities Litigation, Case
No. C 01-02450 WHA, and appointed lead plaintiffs and class counsel. In
December 2001, plaintiffs filed their consolidated amended complaint. The
consolidated amended complaints purported to allege a class action on behalf of
all persons, other than the individual defendants and the other officers of
Transmeta, who purchased or acquired common stock of Transmeta during the
period from November 7, 2000 to July 19, 2001. The consolidated amended
complaints alleged 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 March 2002,
the Court granted in part and denied in part defendants motions to dismiss the
consolidated amended complaint. 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 moved for class certification, and the Court was
scheduled to hear defendants motion for summary judgment and plaintiffs
motion for class certification in December 2002. The Company believes that the
allegations in the second amended complaint and the antecedent complaints are
without merit and have defended the consolidated action vigorously.
Notwithstanding this belief, and in order to avoid any additional waste of
management time and expense, the Company and the individual defendants entered
into a memorandum of understanding with plaintiffs counsel to settle all
claims that might have been brought in this action for approximately $5.5
million, all of which monies have been paid by the defendants Directors and
Officer (D&O) liability insurance. In December 2002, the court granted
preliminary approval to the proposed settlement agreement. In March 2003, the
Court granted final approval of the settlement and entered judgment in the
action. In April 2003, a plaintiffs attorney who was not selected as
class counsel filed a notice of appeal relating to certain orders of
the court appointing class counsel and addressing certain
applications of her firm for attorneys fees.

Beginning June 2001, the directors and certain officers of Transmeta were
sued in four purported shareholder derivative actions. In October 2001, those
cases were consolidated in and by the Superior Court for Santa Clara County in
a single action entitled In re Transmeta Corporation Derivative Litigation,
Master File No. CV 799491. In April 2002, plaintiffs filed a consolidated
amended complaint. Like its antecedents, the consolidated amended complaint is
based upon the same general allegations set out in the purported shareholder
class actions 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 have defended the action vigorously.
Notwithstanding this belief, and in order to avoid any additional waste of
management time and expense, the Company and the individual defendants agreed
to settle all claims that might have been brought in this action for a sum of
money to be paid entirely by defendants D&O liability insurance, similar to
the proposed agreement to settle all of the claims in the federal class action.
In December 2002, the parties executed a memorandum of understanding dated
October 3, 2002 (the MOU). The MOU provides for a settlement of the
consolidated derivative action pursuant to a definitive agreement and subject
to judicial approval. The proposed settlement includes a dismissal with
prejudice of all asserted claims, a release in favor of all defendants, and a
payment to fees to counsel for the derivative plaintiffs in an amount to be
approved by the Court but not to exceed $300,000. In April 2003, the court
approved the parties stipulated order scheduling for September 2003 a hearing
on their motion for dismissal upon settlement

Beginning in June 2001, the Company, 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 7, 2000 initial public offering failed
to disclose certain alleged actions 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 consolidated 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

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##### Table of Contents



and intend to defend the action vigorously. In November 2002, Transmeta
joined a coordinated motion to dismiss filed on behalf of all issuers and
individual defendants. In March 2003, the Court granted in part and denied in
part that coordinated motion to dismiss, and issued an order regarding pleading
of amended complaints.




Item 2.Changes in Securities and Use of Proceeds

Recent Sales of Unregistered Securities

In February 2003, we issued 796,178 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.

The sales and issuance of securities listed above were determined to be
exempt from registration under Section 4(2) of the Securities Act or Regulation
D promulgated under the Securities Act as transactions by an issuer not
involving a public offering.

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 March 31, 2003, we paid $14.5 million of the net proceeds to IBM
under the terms of our amended license agreement, approximately $13.7 million
in property and equipment purchases and $22 million for the purchase of
intellectual property and related assets from Seiko Epson and other
intellectual property owners. We have also paid approximately $207.3 million to
fund 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                                                                                                                                
|               |  |                                                                                                                                              
|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.

| |  |                       |  |                                                                                                                            
| |  | --------------------- |  | ---------------------------------------------------------------------------------------------------------------------------
| |  | TRANSMETA CORPORATION
| |  |                       |  |                                                                                                                            
| |  | By:                   |  | /s/ SVEND-OLAV CARLSEN

Svend-Olav CarlsenChief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)

Date: May 12, 2003

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CERTIFICATIONS

I, Matthew R. Perry, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Transmeta
Corporation;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and



| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|    |  |                                                                                            
|--- |  | -------------------------------------------------------------------------------------------
|By: |  | /s/ MATTHEW R. PERRY

Matthew R. PerryChief Executive Officer
(Principal Executive Officer)

Date: May 12, 2003

30



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##### Table of Contents



CERTIFICATIONS

I, Svend-Olav Carlsen, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Transmeta
Corporation;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and



| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|    |  |                                                                                               
|--- |  | ----------------------------------------------------------------------------------------------
|By: |  | /s/ SVEND-OLAV CARLSEN
Svend-Olav CarlsenChief Financial Officer
(Principal Financial Officer)

Date: May 12, 2003

31



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##### Table of Contents






EXHIBIT INDEX

|               |  |                                                                                                                                              
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit Title                                                                                                                                
|               |  |                                                                                                                                              
|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.

32