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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) OF
THE SECURITIES EXCHANGE ACT OF 1934
|--- |  | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended June 30, 2003

OR

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

For the Transition Period from          to

Commission File Number 000-31803

TRANSMETA CORPORATION

(Exact name of registrant as specified in its charter)


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

3990 Freedom Circle, Santa Clara, CA 95054

(Address of principal executive offices, including zip code)


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



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

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

There were 140,352,465 shares of the Companys common stock, par value
$0.00001
per share, outstanding on July 31, 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                                                     
|SIGNATURES                   
|EXHIBIT 31.1                 
|EXHIBIT 31.2                 
|EXHIBIT 32.1                 
|EXHIBIT 32.2                 



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TRANSMETA CORPORATION

FORM 10-Q
Quarterly Period Ended June 30, 2003

TABLE OF CONTENTS

|           |  |                                                                                                                              |  |     
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                                              |  | Page
|           |  |                                                                                                                              |  |     
|           |  | PART I. FINANCIAL INFORMATION                                                                                                |  |     
|Item 1.    |  | Unaudited Condensed Consolidated Financial Statements                                                                        |  | 3   
|           |  | Unaudited Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002                                    |  | 3   
|           |  | Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 2003 and June 30, 2002 |  | 4   
|           |  | Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June
30, 2003 and June 30, 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                                                                   |  | 27  
|Item 4.    |  | Controls and Procedures                                                                                                      |  | 27  
|           |  | PART II. OTHER INFORMATION                                                                                                   |  |     
|Item 1.    |  | Legal Proceedings                                                                                                            |  | 27  
|Item 2.    |  | Changes in Securities and Use of Proceeds                                                                                    |  | 28  
|Item 3.    |  | Defaults Upon Senior Securities                                                                                              |  | 29  
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                          |  | 29  
|Item 5.    |  | Other Information                                                                                                            |  | 29  
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                                             |  | 29  
|Signatures |  | 31                                                                                                                          

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PART I. FINANCIAL INFORMATION




Item 1.Condensed Consolidated Financial Statements

TRANSMETA CORPORATION




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

|                                                                     |                                                                 |                                            |        |             |         |              |        |          |         | 
|-------------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------------------------ | ------ | ----------- | ------- | ------------ | ------ | -------- | ------- | 
|                                                                     |                                                                 |                                            |        | June 30,    |         | December 31,
|                                                                     |                                                                 |                                            |        | 2003        |         | 2002(1)     
|                                                                     |                                                                 |                                            |        |             |         |             
|                                                                     |                                                                 |                                            |        | (unaudited) |         |              |        |         
|ASSETS                                                               |                                                                 |                                            |        |             |         |              |        |         
|Current assets:                                                      |                                                                 |                                            |        |             |         |              |        |         
|                                                                     | Cash and cash equivalents                                       |                                            | $      | 39,614      |         |              | $      | 16,613   |        
|                                                                     | Short-term investments                                          |                                            |        | 49,506      |         |              |        | 112,837  |        
|                                                                     | Accounts receivable, net                                        |                                            |        | 2,824       |         |              |        | 4,060    |        
|                                                                     | Inventories                                                     |                                            |        | 7,577       |         |              |        | 10,937   |        
|                                                                     | Prepaid expenses and other current assets                       |                                            |        | 4,893       |         |              |        | 4,722    |        
|                                                                     |                                                                 |                                            |        |             |         |              |        |         
|                                                                     |                                                                 | Total current assets                       |        |             | 104,414 |              |        |          | 149,169 | 
|                                                                     | Property and equipment, net                                     |                                            |        | 7,197       |         |              |        | 9,574    |        
|                                                                     | Patents and patent rights, net                                  |                                            |        | 33,194      |         |              |        | 36,623   |        
|                                                                     | Other assets                                                    |                                            |        | 2,039       |         |              |        | 2,189    |        
|                                                                     |                                                                 |                                            |        |             |         |              |        |         
|                                                                     |                                                                 | Total assets                               |        | $           | 146,844 |              |        | $        | 197,555 | 
|                                                                     |                                                                 |                                            |        |             |         |              |        |          |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                 |                                                                 |                                            |        |             |         |              |        |         
|Current liabilities:                                                 |                                                                 |                                            |        |             |         |              |        |         
|                                                                     | Accounts payable                                                |                                            | $      | 1,235       |         |              | $      | 2,311    |        
|                                                                     | Accrued compensation and related compensation liabilities       |                                            |        | 3,547       |         |              |        | 3,195    |        
|                                                                     | Other accrued liabilities                                       |                                            |        | 6,231       |         |              |        | 8,216    |        
|                                                                     | Accrued restructuring charges                                   |                                            |        | 1,927       |         |              |        | 2,549    |        
|                                                                     | Current portion of long-term payables                           |                                            |        | 14,500      |         |              |        | 16,000   |        
|                                                                     | Current portion of long-term debt and capital lease obligations |                                            |        | 583         |         |              |        | 865      |        
|                                                                     |                                                                 |                                            |        |             |         |              |        |         
|                                                                     |                                                                 | Total current liabilities                  |        |             | 28,023  |              |        |          | 33,136  | 
|Long-term accrued restructuring charges, net of current portion      |                                                                 |                                            | 4,806  |             |         |              | 5,456  |         
|Long-term payables, net of current portion                           |                                                                 |                                            | 11,795 |             |         |              | 17,449 |         
|Long-term debt and capital lease obligations, net of current portion |                                                                 |                                            | 526    |             |         |              | 667    |         
|Commitments and contingencies                                        |                                                                 |                                            |        |             |         |              |        |         
|Stockholders equity:                                                |                                                                 |                                            |        |             |         |              |        |         
|                                                                     | Preferred stock, $0.00001 par value (none issued)               |                                            |        |            |         |              |        |         |        
|                                                                     | Common stock, $0.00001 par value, at amounts paid in            |                                            |        | 602,647     |         |              |        | 601,119  |        
|                                                                     | Treasury stock                                                  |                                            |        | (2,439      | )       |              |        | (2,439   | )      
|                                                                     | Deferred stock compensation                                     |                                            |        | (1,549      | )       |              |        | (3,039   | )      
|                                                                     | Accumulated other comprehensive income                          |                                            |        | 25          |         |              |        | 134      |        
|                                                                     | Accumulated deficit                                             |                                            |        | (496,990    | )       |              |        | (454,928 | )      
|                                                                     |                                                                 |                                            |        |             |         |              |        |         
|                                                                     |                                                                 | Total stockholders equity                 |        |             | 101,694 |              |        |          | 140,847 | 
|                                                                     |                                                                 |                                            |        |             |         |              |        |         
|                                                                     |                                                                 | Total liabilities and stockholders equity |        | $           | 146,844 |              |        | $        | 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)

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TRANSMETA CORPORATION




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

|                                                        |                                                             |                          |         |                    |        |                  |         |          |        |          |         |        |        |   |         |        |        | 
|------------------------------------------------------- | ----------------------------------------------------------- | ------------------------ | ------- | ------------------ | ------ | ---------------- | ------- | -------- | ------ | -------- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                        |                                                             |                          |         | Three Months Ended |        | Six Months Ended
|                                                        |                                                             |                          |         |                    |        |                 
|                                                        |                                                             |                          |         | June 30,           |        | June 30,         |         | June 30, |        | June 30,
|                                                        |                                                             |                          |         | 2003               |        | 2002             |         | 2003     |        | 2002    
|                                                        |                                                             |                          |         |                    |        |                  |         |          |        |         
|Net product revenue                                     |                                                             | $                        | 5,054   |                    |        | $                | 7,539   |          |        | $        | 11,071  |        |        | $ | 11,686  |       
|Cost of revenue                                         |                                                             |                          | 4,998   |                    |        |                  | 5,617   |          |        |          | 9,450   |        |        |   | 8,453   |       
|                                                        |                                                             |                          |         |                    |        |                  |         |          |        |          |         |        |        |   |         |       
|Gross profit                                            |                                                             |                          | 56      |                    |        |                  | 1,922   |          |        |          | 1,621   |        |        |   | 3,233   |       
|Operating expenses:                                     |                                                             |                          |         |                    |        |                  |         |          |        |          |         |        |        |   |         |       
|                                                        | Research and development(1)(2)                              |                          |         | 12,190             |        |                  |         | 19,184   |        |          |         | 24,669 |        |   |         | 37,263 |       
|                                                        | Selling, general and administrative(3)(4)                   |                          |         | 6,347              |        |                  |         | 8,737    |        |          |         | 12,981 |        |   |         | 16,671 |       
|                                                        | Restructuring charge                                        |                          |         |                   |        |                  |         | 10,624   |        |          |         |       |        |   |         | 10,624 |       
|                                                        | Amortization of deferred charges, patents and
patent rights |                          |         | 2,634              |        |                  |         | 2,848    |        |          |         | 5,274  |        |   |         | 5,696  |       
|                                                        | Stock compensation                                          |                          |         | 1,095              |        |                  |         | (2,558   | )      |          |         | 1,531  |        |   |         | 2,246  |       
|                                                        |                                                             |                          |         |                    |        |                  |         |          |        |          |         |        |        |   |         |       
|                                                        |                                                             | Total operating expenses |         |                    | 22,266 |                  |         |          | 38,835 |          |         |        | 44,455 |   |         |        | 72,500 | 
|                                                        |                                                             |                          |         |                    |        |                  |         |          |        |          |         |        |        |   |         |       
|Operating loss                                          |                                                             |                          | (22,210 | )                  |        |                  | (36,913 | )        |        |          | (42,834 | )      |        |   | (69,267 | )     
|                                                        | Interest and other income                                   |                          |         | 312                |        |                  |         | 1,427    |        |          |         | 1,019  |        |   |         | 3,222  |       
|                                                        | Interest expense                                            |                          |         | (123               | )      |                  |         | (142     | )      |          |         | (247   | )      |   |         | (470   | )     
|                                                        |                                                             |                          |         |                    |        |                  |         |          |        |          |         |        |        |   |         |       
|Net loss                                                |                                                             | $                        | (22,021 | )                  |        | $                | (35,628 | )        |        | $        | (42,062 | )      |        | $ | (66,515 | )     
|                                                        |                                                             |                          |         |                    |        |                  |         |          |        |          |         |        |        |   |         |       
|Net loss per share  basic and diluted                  |                                                             | $                        | (0.16   | )                  |        | $                | (0.27   | )        |        | $        | (0.30   | )      |        | $ | (0.50   | )     
|                                                        |                                                             |                          |         |                    |        |                  |         |          |        |          |         |        |        |   |         |       
|Weighted average shares outstanding  basic and diluted |                                                             |                          | 138,678 |                    |        |                  | 133,868 |          |        |          | 138,089 |        |        |   | 133,427 |       
|                                                        |                                                             |                          |         |                    |        |                  |         |          |        |          |         |        |        |   |         |       



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|(1) |  | Excludes $316 and $1,209 in amortization of deferred stock compensation
for the three months ended June 30, 2003 and 2002, respectively, and $735
and $2,702 for the six months ended June 30, 2003 and June 30, 2002,
respectively.  
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Excludes $59 and $(618) in variable stock compensation for the three
months ended June 30, 2003 and 2002, respectively, and $35 and $(130) for
the six months ended June 30, 2003 and June 30, 2002, respectively.                    
|   
|(3) |  | Excludes $269 and $(1,079) in amortization of deferred stock compensation
for the three months ended June 30, 2003 and 2002, respectively, and $506
and $(504) for the six months ended June 30, 2003 and June 30, 2002,
respectively.
|   
|(4) |  | Excludes $451 and $(2,070) in variable stock compensation for the three
months ended June 30, 2003 and 2002, respectively, and $255 and $178 for
the six months ended June 30, 2003 and June 30, 2002, respectively.                  

(See accompanying notes)

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TRANSMETA CORPORATION




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

|                                                 |                                                                             |                                                                       |                                                             |         |                  |        |          |         |         |        |  
|------------------------------------------------ | --------------------------------------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------------------------- | ------- | ---------------- | ------ | -------- | ------- | ------- | ------ | -
|                                                 |                                                                             |                                                                       |                                                             |         | Six Months Ended
|                                                 |                                                                             |                                                                       |                                                             |         |                 
|                                                 |                                                                             |                                                                       |                                                             |         | June 30,         |        | June 30,
|                                                 |                                                                             |                                                                       |                                                             |         | 2003             |        | 2002    
|                                                 |                                                                             |                                                                       |                                                             |         |                  |        |         
|Cash flows from operating activities:            |                                                                             |                                                                       |                                                             |         |                  |        |          |        
|                                                 | Net loss                                                                    |                                                                       | $                                                           | (42,062 | )                |        | $        | (66,515 | )      
|                                                 | Adjustments to reconcile net loss to net cash used in operating activities: |                                                                       |                                                             |         |                  |        |          |         |        
|                                                 |                                                                             |                                                                       | Stock compensation                                          |         |                  | 1,531  |          |         |         | 2,246  |  
|                                                 |                                                                             |                                                                       | Depreciation                                                |         |                  | 3,036  |          |         |         | 3,014  |  
|                                                 |                                                                             |                                                                       | Amortization of other assets                                |         |                  | 324    |          |         |         | 76     |  
|                                                 |                                                                             |                                                                       | Amortization of deferred charges, patents and patent rights |         |                  | 5,274  |          |         |         | 5,696  |  
|                                                 |                                                                             |                                                                       | Non-cash restructuring charges                              |         |                  |       |          |         |         | 1,629  |  
|                                                 | Changes in operating assets and liabilities:                                |                                                                       |                                                             |         |                  |        |          |         |        
|                                                 |                                                                             |                                                                       | Accounts receivable                                         |         |                  | 1,236  |          |         |         | 78     |  
|                                                 |                                                                             |                                                                       | Inventories                                                 |         |                  | 3,360  |          |         |         | (4,508 | )
|                                                 |                                                                             |                                                                       | Prepaid expenses and other current assets                   |         |                  | (286   | )        |         |         | 1,440  |  
|                                                 |                                                                             |                                                                       | Accounts payable and accrued liabilities                    |         |                  | (2,707 | )        |         |         | (1,764 | )
|                                                 |                                                                             |                                                                       | Accrued restructuring charges                               |         |                  | (1,272 | )        |         |         | 8,995  |  
|                                                 |                                                                             |                                                                       |                                                             |         |                  |        |          |        
|Net cash used in operating activities            |                                                                             |                                                                       | (31,566                                                     | )       |                  |        | (49,613  | )      
|                                                 |                                                                             |                                                                       |                                                             |         |                  |        |          |        
|Cash flows from investing activities:            |                                                                             |                                                                       |                                                             |         |                  |        |          |        
|                                                 |                                                                             | Purchase of available-for-sale investments                            |                                                             |         | (61,507          | )      |          |         | (85,220 | )     
|                                                 |                                                                             | Proceeds from sale or maturity of available-for-sale investments      |                                                             |         | 124,729          |        |          |         | 115,227 |       
|                                                 |                                                                             | Purchase of property and equipment                                    |                                                             |         | (659             | )      |          |         | (2,855  | )     
|                                                 |                                                                             | Payments of patents and patent rights                                 |                                                             |         | (9,000           | )      |          |         | (9,000  | )     
|                                                 |                                                                             | Other assets                                                          |                                                             |         | (59              | )      |          |         | (142    | )     
|                                                 |                                                                             |                                                                       |                                                             |         |                  |        |          |        
|Net cash provided by investing activities        |                                                                             |                                                                       | 53,504                                                      |         |                  |        | 18,010   |        
|                                                 |                                                                             |                                                                       |                                                             |         |                  |        |          |        
|Cash flows from financing activities:            |                                                                             |                                                                       |                                                             |         |                  |        |          |        
|                                                 |                                                                             | Proceeds from sales of common stock under ESPP and stock option plans |                                                             |         | 1,486            |        |          |         | 2,669   |       
|                                                 |                                                                             | Repayment of debt and capital lease obligations                       |                                                             |         | (423             | )      |          |         | (1,896  | )     
|                                                 |                                                                             |                                                                       |                                                             |         |                  |        |          |        
|Net cash provided by financing activities        |                                                                             |                                                                       | 1,063                                                       |         |                  |        | 773      |        
|                                                 |                                                                             |                                                                       |                                                             |         |                  |        |          |        
|Change in cash and cash equivalents              |                                                                             |                                                                       | 23,001                                                      |         |                  |        | (30,830  | )      
|Cash and cash equivalents at beginning of period |                                                                             |                                                                       | 16,613                                                      |         |                  |        | 57,747   |        
|                                                 |                                                                             |                                                                       |                                                             |         |                  |        |          |        
|Cash and cash equivalents at end of period       |                                                                             | $                                                                     | 39,614                                                      |         |                  | $      | 26,917   |        
|                                                 |                                                                             |                                                                       |                                                             |         |                  |        |          |         |        

(See accompanying notes)

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TRANSMETA CORPORATION




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission and 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 and six months ended June
30, 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 June 27, 2003 and June 28,
2002 each consisted of 13 weeks. The first six months of fiscal 2003 and 2002
each consisted of 26 weeks.

2. Stock Based Compensation

In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure an Amendment of FASB
Statement No. 123 (SFAS 148). SFAS 148 amends the disclosure requirements of
FASBs SFAS 123, Accounting for Stock-Based Compensation to require more
prominent disclosures in both annual and interim financial statements regarding
the method of accounting for stock-based employee compensation and the effect
of the method used on reported results.

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 SFAS 123.
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 |         | Six Months Ended
|                                                                                                                               |  |                    |         |                 
|                                                                                                                               |  | June 30,           |         | June 30,         |  | June 30, |         | June 30,
|                                                                                                                               |  | 2003               |         | 2002             |  | 2003     |         | 2002    
|                                                                                                                               |  |                    |         |                  |  |          |         |         
|Net loss, as reported                                                                                                          |  | $                  | (22,021 | )                |  | $        | (35,628 | )        |  | $ | (42,062 | ) |  | $ | (66,515 | )
|Add: Stock-based employee compensation expense
included in reported net loss, net of related tax
effects                       |  |                    | 1,095   |                  |  |          | (2,558  | )        |  |   | 1,531   |   |  |   | 2,246   |  
|Less: Total stock-based employee compensation
expense under fair value based method for all
awards, net of related tax effects |  |                    | (12,879 | )                |  |          | (9,521  | )        |  |   | (23,069 | ) |  |   | (21,792 | )
|Pro forma net loss                                                                                                             |  | $                  | (33,805 | )                |  | $        | (47,707 | )        |  | $ | (63,600 | ) |  | $ | (86,061 | )
|Basic
and diluted net loss per share  as reported                                                                             |  | $                  | (0.16   | )                |  | $        | (0.27   | )        |  | $ | (0.30   | ) |  | $ | (0.50   | )
|Basic
and diluted net loss per share  pro forma                                                                               |  | $                  | (0.24   | )                |  | $        | (0.36   | )        |  | $ | (0.46   | ) |  | $ | (0.65   | )

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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 different 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   |      | Six Months     |  | Three Months   |      | Six Months    
|                        |  | Ended June 30, |      | Ended June 30, |  | Ended June 30, |      | Ended June 30,
|                        |  |                |      |                |  |                |      |               
|                        |  | 2003           |      | 2002           |  | 2003           |      | 2002           |  | 2003 |      | 2002 |  | 2003 |      | 2002
|                        |  |                |      |                |  |                |      |                |  |      |      |      |  |      |      |     
|Expected volatility     |  |                | 0.88 |                |  |                | 1.24 |                |  |      | 0.85 |      |  |      | 1.34 |      |  |  | 0.81 |   |  |  | 1.26 |   |  |  | 0.93 |   |  |  | 1.31 |  
|Expected life in years  |  |                | 4.0  |                |  |                | 4.0  |                |  |      | 4.0  |      |  |      | 4.0  |      |  |  | 0.5  |   |  |  | 0.5  |   |  |  | 0.5  |   |  |  | 0.5  |  
|Risk-free interest rate |  |                | 2.2  | %              |  |                | 4.3  | %              |  |      | 2.3  | %    |  |      | 4.3  | %    |  |  | 1.4  | % |  |  | 3.6  | % |  |  | 1.4  | % |  |  | 3.7  | %
|Expected dividend yield |  |                | 0    |                |  |                | 0    |                |  |      | 0    |      |  |      | 0    |      |  |  | 0    |   |  |  | 0    |   |  |  | 0    |   |  |  | 0    |  

3. Net Loss per Share

Basic and diluted net loss per share is presented in conformity with
FASBs SFAS 128, Earnings Per Share, for all periods presented. Basic and
diluted net loss per share has been computed using the weighted-average number
of shares of common stock outstanding during each period, less weighted-average
shares subject to repurchase.

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

|                                       |                                                                                |   |                                              |         |                  |   |          |         |          |   |       |         |   |   |       |         |  
|-------------------------------------- | ------------------------------------------------------------------------------ | - | -------------------------------------------- | ------- | ---------------- | - | -------- | ------- | -------- | - | ----- | ------- | - | - | ----- | ------- | -
|                                       |                                                                                |   | Three Months Ended                           |         | Six Months Ended
|                                       |                                                                                |   |                                              |         |                 
|                                       |                                                                                |   | June 30,                                     |         | June 30,         |   | June 30, |         | June 30,
|                                       |                                                                                |   | 2003                                         |         | 2002             |   | 2003     |         | 2002    
|                                       |                                                                                |   |                                              |         |                  |   |          |         |         
|                                       |                                                                                |   | (in thousands, except for per share amounts)
|Basic and diluted:                     |                                                                                |   |                                              |         |                  |   |          |         |          |   |       |         |   |   |       |        
|                                       | Net loss                                                                       |   | $                                            | (22,021 | )                |   | $        | (35,628 | )        |   | $     | (42,062 | ) |   | $     | (66,515 | )
|Basic and diluted:                     |                                                                                |   |                                              |         |                  |   |          |         |          |   |       |         |   |   |       |        
|                                       | Weighted average shares outstanding                                            |   |                                              | 138,679 |                  |   |          | 134,066 |          |   |       | 138,100 |   |   |       | 133,698 |  
|                                       | Less: Weighted average shares
subject to repurchase                            |   |                                              | (1      | )                |   |          | (198    | )        |   |       | (11     | ) |   |       | (271    | )
|                                       |                                                                                |   |                                              |         |                  |   |          |         |          |   |       |         |   |   |       |        
|                                       | Weighted average shares used in
computing basic and diluted net
loss per share |   |                                              | 138,678 |                  |   |          | 133,868 |          |   |       | 138,089 |   |   |       | 133,427 |  
|                                       |                                                                                |   |                                              |         |                  |   |          |         |          |   |       |         |   |   |       |        
|Net loss per share  basic and diluted |                                                                                | $ | (0.16                                        | )       |                  | $ | (0.27    | )       |          | $ | (0.30 | )       |   | $ | (0.50 | )      
|                                       |                                                                                |   |                                              |         |                  |   |          |         |          |   |       |         |   |   |       |        

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
36,566,532 and 33,979,995 shares of common stock at June 30, 2003 and 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 and six month periods ended June 30, 2003
and 2002, respectively, is as follows (in thousands):

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|                                                                        |  |                    |         |                  |  |          |         |       |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------- |  | ------------------ | ------- | ---------------- |  | -------- | ------- | ----- |  | - | ------- | - |  | - | ------- | -
|                                                                        |  | Three Months Ended |         | Six Months Ended
|                                                                        |  |                    |         |                 
|                                                                        |  | June 30,           |         | June 30,         |  | June 30, |         | June,
|                                                                        |  | 2003               |         | 2002             |  | 2003     |         | 2002 
|                                                                        |  |                    |         |                  |  |          |         |      
|Net loss                                                                |  | $                  | (22,021 | )                |  | $        | (35,628 | )     |  | $ | (42,062 | ) |  | $ | (66,515 | )
|Net change in other
comprehensive loss -
unrealized loss on
investments |  |                    | (13     | )                |  |          | (232    | )     |  |   | (109    | ) |  |   | (475    | )
|                                                                        |  |                    |         |                  |  |          |         |       |  |   |         |   |  |   |         |  
|Net comprehensive loss                                                  |  | $                  | (22,034 | )                |  | $        | (35,860 | )     |  | $ | (42,171 | ) |  | $ | (66,990 | )
|                                                                        |  |                    |         |                  |  |          |         |       |  |   |         |   |  |   |         |  

5. Inventories

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

|                 |  |          |       |              |  |   |        | 
|---------------- |  | -------- | ----- | ------------ |  | - | ------ | 
|                 |  | June 30, |       | December 31,
|                 |  | 2003     |       | 2002        
|                 |  |          |       |             
|Work in progress |  | $        | 5,757 |              |  | $ | 8,545  | 
|Finished goods   |  |          | 1,820 |              |  |   | 2,392  | 
|                 |  |          |       |              |  |   |        | 
|                 |  | $        | 7,577 |              |  | $ | 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. Actual warranty
costs have been within managements expectations to date and have not been
material.

The Company generally sells products with a limited indemnification of
customers against intellectual property infringement claims related to the
Companys products. The Companys policy is to accrue for known indemnification
issues if a loss is probable and can be reasonably estimated, and accrues for
estimated incurred but unidentified issues based on historical activity. To
date, there are no such accruals or related expenses.

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, 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.

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Accrued restructuring charges consist of the following at June 30, 2003
(in thousands):

|                         |  |              |       |           |  |          |       |      |  |   |     |            |  |   |       | 
|------------------------ |  | ------------ | ----- | --------- |  | -------- | ----- | ---- |  | - | --- | ---------- |  | - | ----- | 
|                         |  | Provision    |       |           |  |          |       |      |  |   |     | Provision 
|                         |  | Balance at   |       |           |  |          |       |      |  |   |     | Balance at
|                         |  | December 31, |       | Drawdowns |  | June 30,
|                         |  |              |       |           |  |         
|                         |  | 2002         |       | Cash      |  | Non-Cash |       | 2003
|                         |  |              |       |           |  |          |       |     
|Building leasehold costs |  | $            | 7,903 |           |  | $        | 1,262 |      |  | $ | (92 | )          |  | $ | 6,733 | 
|Workforce reduction      |  |              | 102   |           |  |          |      |      |  |   | 102 |            |  |   |      | 
|                         |  |              |       |           |  |          |       |      |  |   |     |            |  |   |       | 
|                         |  | $            | 8,005 |           |  | $        | 1,262 |      |  | $ | 10  |            |  | $ | 6,733 | 
|                         |  |              |       |           |  |          |       |      |  |   |     |            |  |   |       | 

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 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

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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.

9. Subsequent Events

On July 15, 2003, the Companys Board of Directors approved and the
Company adopted a retention and severance plan providing certain benefits for
certain key employees in the contingency of a change of control of the Company
or its Board of Directors.

On July 17, 2003, Transmeta filed a Form S-3 shelf registration statement
with the Securities and Exchange Commission. The shelf registration statement
provides for the possible future offer and sale by Transmeta of up to
$100,000,000 of its common stock, preferred stock, secured or unsecured debt
securities and warrants, from time to time. The shelf registration statement
became effective on July 29, 2003.




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

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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 and additional technologies
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.

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 six months of fiscal
2003, sales to three customers, each of whom is located in Asia, accounted for
23%, 21% and 19%, respectively, of our net revenue. For the same period in the
prior year, those customers accounted for 0%, 0% and 34%, respectively. In
addition, a customer that had accounted for less than 10% of our net revenue
for the first six months of fiscal 2003 accounted for 49% of our net revenue
for the same period last year. The loss of a major customer or the delay of
significant orders from these customers could reduce or delay our recognition
of revenue. Five of our customers accounted for 67% of our accounts receivable
balance as of June 30, 2003. Two of these customers accounted for 52% and 15%,
respectively, of our accounts receivable balance as of December 31, 2002. Each
of the other three customers represented less than 10% of our accounts
receivable at December 31, 2002.

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 six months
of fiscal years 2003 and 2002 were primarily made to the lightweight and other
mobile personal computer (PC) markets. If our 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 June 30, 2003, approximately $1.5
million was recorded on our balance sheet, which will be amortized through
2004.

Historically we have incurred significant losses. As of June 30, 2003, we
had an accumulated deficit of $497.0 million. We expect to incur substantial
losses for the foreseeable future. We also expect to incur significant research
and development and selling, general

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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 six months 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 June 30, 2003 and
2002 each consisted of 13 weeks and ended on June 27 and 28, respectively. The
first six months of fiscal 2003 and 2002 each consisted of 26 weeks.

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

Net Revenue

Net revenue for the second quarter of fiscal 2003 was $5.1 million,
compared to $7.5 million for the same period last year. Net revenue for the
first six months of fiscal 2003 was $11.1 million, compared to $11.7 million
for the same period last year. These decreases year over year are primarily
due to adverse economic conditions and a decrease in average selling prices in
the first six months of fiscal 2003 from the same period in fiscal 2002 as a
result of general pricing pressure in the mobile notebook computer market. We
expect to experience higher average selling prices as we shift our product mix
to our next-generation processor, the TM8000, during the second half of 2003.

Net revenue recognized in fiscal 2003 included license revenue, which was
earned in connection with a technology license agreement executed during the
first half of the year. This licensing revenue made up less than 10% and less
than 5%, of our revenue for the three and six month periods ended June 30,
2003, respectively. Revenues for the three and six month periods ended June
30, 2002 did not include any license revenues. We expect licensing
opportunities to be an increasing source of revenue for us in the future.

Gross Margin

Gross margin was 1.1% for the second quarter of fiscal 2003, compared to
25.5% in the same period last year. For the first six months of fiscal 2003,
gross margin was 14.6% compared to 27.7% in the same period last year. During
the first six months of both fiscal 2003 and 2002, gross margin was adversely
affected by unabsorbed overhead costs as our production related infrastructure
exceeded our needs. The decline in gross margin for the three and six month
periods in fiscal 2003 from the same period in fiscal 2002 was primarily due to
lower average selling prices and adjustments to our inventory in response to
lower average selling prices expected in future periods for some of our
products. The decline contributed by these factors was partially offset by
decreases in costs of products sold, sales of a limited amount of previously
reserved inventory, and the 100% margin recognized on all licensing revenue.

Research and Development

Research and development (R&D) costs for the second quarter of fiscal 2003
decreased 36.5% to $12.2 million from $19.2 million for the same period last
year. R&D costs for the first six months of fiscal 2003 decreased 33.8% to
$24.7 million from $37.3 million for the same period last year. The majority
of the decrease is due to lower compensation and benefit costs and consultant
fees as we reduced our workforce in the third quarter of fiscal 2002. We also
recognized in the second quarter of 2002 a charge of $1.6 million for
engineering related silicon and mask sets for products for which the Company
ceased development. The majority of R&D

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spending in the first six months 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 second quarter of
fiscal 2003 decreased 27.4% to $6.3 million from $8.7 million for the same
period last year. SG&A costs for the first six months of fiscal 2003 decreased
22.1% to $13.0 million from $16.7 million for the same period last year. 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 increases in other areas,
including higher corporate insurance costs and expenditures for patent
protection of our inventions. We additionally had lower travel costs during
the first six months of fiscal 2003 as we implemented a restricted travel
policy within that period in response to the outbreak of SARS in the
Asia-Pacific region. As the restricted travel policy has now been lifted, we
expect travel costs to return to historic levels.

Restructuring Charges

In the second quarter of fiscal 2002, we recorded restructuring charges of
$10.6 million as a result of the Companys decision to cease development and
productization of the TM6000 microprocessor. The restructuring charges
consisted primarily of lease costs, equipment write-offs and other costs as we
identified a number of leased facilities and leased equipment that were no
longer required. Other than future lease payments for our vacated facilities,
the majority of our restructuring activities were completed in 2002. We
evaluated the restructuring reserve balance as of June 30, 2003 and determined
no adjustments were needed.

Amortization of Deferred Charges, Patents and Patent Rights

Amortization charges for the first six months 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 second quarter of fiscal 2003 were $2.6 million, compared
to $2.8 million in the same period last year. For the first six months of
fiscal 2003, the amortization and accretion charges were $5.3 million, compared
to $5.7 million in the same period last year.

Stock Compensation

Total stock compensation charges during the second quarter of fiscal 2003
were $1.1 million, compared to a $2.6 million credit in the same period last
year. For the first six months of fiscal 2003, stock compensation charges
were $1.5 million, compared to $2.2 million in the same period last year.
There were two components to stock compensation expense during these 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 $585,000 during the second quarter of fiscal 2003, compared
to $130,000 in the same period last year. Net amortization for the first six
months of fiscal 2003 was $1.2 million, compared to $2.2 million in the same
period last year. On a year-to-date basis, 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. Variable stock compensation for the second quarter of fiscal 2003
amounted to $510,000, compared to a credit of $2.7 million for the same period
last year. For the first six months of fiscal 2003 variable stock compensation
was $290,000, compared to $48,000 for the same period last year.

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Interest and Other Income and Interest Expense

Interest and other income in the second quarter of fiscal 2003 was
$312,000, compared to $1.4 million in the same period last year. Interest and
other income for the first six months of fiscal 2003 was $1.0 million, compared
to $3.2 million in the same period last year. The decreases are due to
decreases in the average invested cash balances during the 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 in the
second quarter of fiscal 2003 was $123,000, compared to $142,000 in the same
period last year. Interest expense for the first six months of fiscal 2003 was
$247,000, compared to $470,000 for the same period last year. The decrease is
primarily 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 June 30, 2003 we had $89.1 million in cash, cash
equivalents and short-term investments compared to $129.5 million at December
31, 2002.

Net cash used in operating activities was $31.6 million for the first six
months of fiscal 2003. This was primarily the result of the net loss of $42.1
million, as well a decrease in accounts payable and accrued liabilities during
the period. This was partially offset by decreases in accounts receivable and
inventory.

Net cash provided by investing activities was $53.5 million for the first
six months of fiscal 2003, and consisted primarily of $63.2 million net
proceeds from the maturity of available-for-sale investments. These proceeds
were partially offset by a $9.0 million partial settlement of long-term payable
obligations for purchased patents and patent rights, as well as $659,000 in
purchases of capital equipment.

Net cash provided by financing activities was $1.1 million for the first
six months of fiscal 2003, and consisted primarily of $1.5 million net proceeds
from option exercises and employee stock purchase plan purchases. These
proceeds were partially offset by payments of $423,000 for debt and capital
lease obligations.

At June 30, 2003, we had $39.6 million in cash and cash equivalents and
$49.5 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 12 to 48 months.
At June 30, 2003, we had the following contractual obligations:

|                                   |  |                        |        |                  |  |                |        |               |  |   |        |  |  |   |       | 
|---------------------------------- |  | ---------------------- | ------ | ---------------- |  | -------------- | ------ | ------------- |  | - | ------ |  |  | - | ----- | 
|                                   |  | Payments Due by Period
|                                   |  |                       
|                                   |  | Total                  |        | Less Than 1 Year |  | 1-4 Years      |        | After 4 Years
|                                   |  |                        |        |                  |  |                |        |              
|Contractual Obligations            |  |                        |        |                  |  | (In thousands) |        |               |  |  
|Capital Lease Obligations          |  | $                      | 1,196  |                  |  | $              | 639    |               |  | $ | 557    |  |  |   |      | 
|Operating Leases                   |  | $                      | 22,578 |                  |  | $              | 4,368  |               |  | $ | 13,439 |  |  | $ | 4,771 | 
|Unconditional Purchase Obligations |  | $                      | 3,770  |                  |  | $              | 3,770  |               |  |   |       |  |  |   |      | 
|Other Long Term Obligations        |  | $                      | 30,500 |                  |  | $              | 14,500 |               |  | $ | 16,000 |  |  |   |      | 

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. On July
17, 2003, we filed a Form S-3 shelf registration statement with the Securities
and Exchange Commission. The shelf registration statement provides for the
possible future offer and sale by us of up to $100,000,000 in common stock,
preferred stock, secured or unsecured debt securities and warrants, from time
to time. The shelf registration statement became effective on July 29, 2003.

Although we are currently not a party to any agreement or letter of intent
for a potential acquisition or business combination, we

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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

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 $42.1 million in the first six
months of fiscal 2003, $110.0 million in fiscal 2002, $171.3 million in fiscal
2001 and $97.7 million in fiscal 2000. As of June 30, 2003, we had an
accumulated deficit of $497.0 million. 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. Although we expect licensing opportunities to be
an increasing source of revenue for us in the future, we need to generate
substantial future revenue from product sales under our current business model.
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 Microprocessors.

We have historically derived the majority of our revenue from the sale of
our 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 microprocessors. Therefore, our future operating results might
continue to depend on the demand for products by existing and future customers.
If our 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 products in a timely manner, demand for our
products may fail to increase, or may diminish. If demand for our 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
through parts 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

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Manufacturing Yields, Delays in Product Deliveries and Increased Expenses.

Transitioning to new manufacturing technologies involves extensive
redesigning of products and modifying the manufacturing processes for the
products. Difficulties in shifting to smaller geometry process technologies and
other new manufacturing processes have led to delays in product deliveries and
increased expenses. In particular, during the third and fourth quarters of
fiscal 2001 and to a lesser extent the first quarter of fiscal 2002, we
experienced difficulties in bringing our products into volume production and
distribution. As a result, in part, of these delays, our net 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 In Part Upon Our Ability to Penetrate the Notebook
Computer Market.

Our success depends in part upon our ability to sell our 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 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 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 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.

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



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

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



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

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;                                                                                                      

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| |  |  | changes in demand by the end users of our customers products;                                             
| | - |  | -----------------------------------------------------------------------------------------------------------
|
| |  |  | variability of our customers product life cycles; and                                                     
|
| |  |  | economic and market conditions in the semiconductor industry and in the industries served by our customers.

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

Our Reduction In Workforce May Adversely Affect the 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 workforce reduction, we 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 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;                              

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| |  |  | recruitment or departure of key personnel;                                                                 
| | - |  | -----------------------------------------------------------------------------------------------------------
|
| |  |  | the gain or loss of significant orders;                                                                    
|
| |  |  | the gain or loss of significant customers; and                                                             
|
| |  |  | changes in the estimates of our operating performance or changes in recommendations by securities analysts.

In addition, the stock market generally and the market for semiconductor
and other technology-related stocks in particular 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
19Table of Contents

claims against us by our customers or others. In addition, these problems
might divert our technical and other resources from other development efforts.
Moreover, we would likely lose, or experience a delay in, market acceptance of
the affected product or products, and we could lose credibility with our
current and prospective customers. This is particularly significant as we are a
new entrant to a market dominated by large well-established companies.

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

Sales to three customers in the aggregate accounted for 63% of net product
revenue in the first six months of fiscal 2003. These customers are located in
Asia, which subjects us to economic cycles in that area. We expect that a small
number of 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.                  

20



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##### Table of Contents



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

The demand for our products depends upon many factors and is difficult to
forecast. Many shipments of our products may be made near the end of the fiscal
quarter, which makes it difficult to estimate demand for our products. We
expect that it will become more difficult to forecast demand as we introduce
new 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 product,
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. 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 subject
to additional earthquakes in the future. Any earthquake or other natural
disaster in Taiwan could materially disrupt TSMCs
21Table of Contents

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 Outbreak of SARS in the Asia-Pacific Region and Its Continued Spread Could
Harm Our Business.

The outbreak of severe acute respiratory syndrome, or SARS, 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. Although the magnitude of probable SARS cases has been
controlled, our business could be harmed if the number of cases of SARS
increases or spreads to other areas, including the United States.

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. Software
incompatibilities that are significant or are perceived to be significant could
hinder our products from 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
22Table of Contents

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.

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

23



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

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

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

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

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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 July 31, 2003, the closing
bid price of our common stock was $1.66 per share. Delisting could reduce the
ability of holders of our common stock to purchase or sell shares as quickly
and as inexpensively as they have done historically. For instance, failure to
obtain listing on another market or exchange may make it more difficult for
traders to sell our securities. Broker-dealers may be less willing or able to
sell or make a market in our common stock. Not maintaining a listing on a major
stock market may result in a decrease in the trading price of our common stock
due to a decrease in liquidity, reduced analyst coverage and less interest by
institutions and individuals in investing in our common stock.

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

We may acquire companies and technology to expand our business and for
other strategic reasons. Integrating newly acquired organizations and
technologies into our company could put a strain on our resources and be
expensive and time consuming. We may not be successful in integrating acquired
businesses or technologies and may not achieve anticipated revenue and cost
benefits. In addition, future acquisitions could result in potentially dilutive
issuances of equity securities or the incurrence of debt, contingent
liabilities or 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.

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##### Table of Contents



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



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

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

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 customer concerns about our viability;                  
|
| |  |  | respond to competitive pressures; or                               
|
| |  |  | acquire complementary businesses or technologies.                  

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On July 17, 2003, we filed a Form S-3 shelf registration statement with
the Securities and Exchange Commission, which provides for the possible future
offer and sale by us of up to $100,000,000 in common stock, preferred stock,
secured or unsecured debt securities and warrants, from time to time. The
shelf registration statement became effective on July 29, 2003. However, if we
were to raise additional funds through the issuance of equity or convertible
debt securities using this registration statement or otherwise, 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 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 June 30, 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

The Securities and Exchange Commission defines the term disclosure
controls and procedures to mean a companys controls and other procedures that
are designed to ensure that information required to be disclosed in the reports
that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commissions rules and forms. Our Chief Executive
Officer and Chief Financial Officer have concluded, based on the evaluation of
the effectiveness of our disclosure controls and procedures by our management,
with the participation of our Chief Executive Officer and our Chief Financial
Officer, as of the end of the period covered by this report, that our
disclosure controls and procedures were effective for this purpose

During the second quarter of fiscal 2003, there have been no changes in
our internal control over financial reporting that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.




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

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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 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

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Not Applicable.

Use of Proceeds From Sales of Registered Securities

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

As of June 30, 2003, we paid $14.5 million of the net proceeds to IBM
under the terms of our amended license agreement, $1.1 million to Quickturn
Design Systems to repay indebtedness incurred in conjunction with equipment
purchases in 1998, approximately $13.9 million in property and equipment
purchases and $29.5 million for the purchase of intellectual property and

related assets from Seiko Epson and other intellectual property owners. We have
also paid approximately $222.2 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



|(a) |  | The Annual Meeting of Stockholders of Transmeta was held on May 29,
2003.                                                                                                                                                                                                                  
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | At the Annual Meeting, our stockholders elected each of the following
nominees as Class III directors, each for a term of three years and until
his successor has been elected and qualified or until his earlier
resignation, death or removal. The vote for each director was as follows:

|               |  |             |             |          |  |  |           | 
|-------------- |  | ----------- | ----------- | -------- |  |  | --------- | 
|               |  | Total Votes
|               |  |            
|Nominees       |  | For         |             | Withheld
|               |  |             |             |         
|William P. Tai |  |             | 111,492,314 |          |  |  | 2,559,658 | 
|Rick Timmins   |  |             | 112,796,464 |          |  |  | 1,255,508 | 



|(c) |  | At the Annual Meeting, our stockholders adopted the following resolution
by the vote indicated:
|--- |  | -----------------------------------------------------------------------------------------------



| |  |  | To ratify the selection of Ernst & Young LLP as our independent auditors
for 2003.
| |  |  | ----------------------------------------------------------------------------------

|        |  |             |             | 
|------- |  | ----------- | ----------- | 
|        |  | Total Votes
|        |  |            
|For     |  |             | 113,355,223 | 
|Against |  |             | 646,829     | 
|Abstain |  |             | 49,920      | 




Item 5.Other Information

Not Applicable.




Item 6.Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits.
| | --- |  | ---------

The following exhibits are filed herewith:

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|               |  |                                                                                                                                              
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit Title                                                                                                                                
|               |  |                                                                                                                                              
|31.1           |  | Certification by Matthew R. Perry pursuant to 15 U.S.C.
Section 7241, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.  
|               |  |                                                                                                                                              
|31.2           |  | Certification by Svend-Olav Carlsen pursuant to 15 U.S.C.
Section 7241, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|               |  |                                                                                                                                              
|32.1*          |  | 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.  
|               |  |                                                                                                                                              
|32.2*          |  | 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.

*     As contemplated by SEC Release No. 33-8212, these exhibits are
furnished with this quarterly report on Form 10-Q and are not deemed filed with
the Securities and Exchange Commission and are not incorporated by reference in
any filing of Transmeta Corporation under the Securities Act of 1933 or the
Securities Exchange Act of 1934, including this quarterly report, whether made
before or after the date hereof and irrespective of any general incorporation
language in any filings.



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------

On April 17, 2003, we filed a current report on Form 8-K to issue a press
release announcing earnings for the quarter ended March 28, 2003. The
information furnished under that Form 8-K was intended to be furnished and not
deemed filed with the Securities and Exchange Commission, and is not
incorporated by reference in any filing of Transmeta Corporation under the
Securities Act of 1933 or the Securities Exchange Act of 1934, including this
quarterly report, whether made before or after the date of that Form 8-K and
irrespective of any general incorporation language in any filings.

On May 9, 2003, we filed a current report on Form 8-K to disclose the
amendment of guidelines governing the trading of securities by Company
personnel as to permit such persons, including its directors and executive
officers, to enter into written plans for trading Company stock in accordance
with Rule 10b5-1 of the Securities Exchange Act of 1934.

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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: August 6, 2003

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EXHIBIT INDEX

|               |  |                                                                                                                                              
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit Title                                                                                                                                
|               |  |                                                                                                                                              
|31.1           |  | Certification by Matthew R. Perry pursuant to 15 U.S.C.
Section 7241, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.  
|               |  |                                                                                                                                              
|31.2           |  | Certification by Svend-Olav Carlsen pursuant to 15 U.S.C.
Section 7241, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|               |  |                                                                                                                                              
|32.1*          |  | 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.  
|               |  |                                                                                                                                              
|32.2*          |  | 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.

*     As contemplated by SEC Release No. 33-8212, these exhibits are furnished
with this quarterly report on Form 10-Q and are not deemed filed with the
Securities and Exchange Commission and are not incorporated by reference in any
filing of Transmeta Corporation under the Securities Act of 1933 or the
Securities Exchange Act of 1934, including this quarterly report, whether made
before or after the date hereof and irrespective of any general incorporation
language in any filings.