##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period from                    to
 Commission File Number 000-31803
 TRANSMETA CORPORATION
 (Exact name of Registrant as specified in its charter)
 Delaware
    
    77-0402448(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification no.)
 2540 Mission College Boulevard, Santa Clara, CA 95054
(Address of principal executive offices, including zip code)
(408) 919-3000
(Registrants telephone number, including area code)
 þ o
  Large accelerated filer o

    

    Accelerated filer þ

    

    Non-accelerated filer   o
(Do not check if a smaller reporting company)

    

    Smaller reporting company o
 o þ




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TRANSMETA CORPORATION
FORM 10-Q
Quarterly Period Ended March 31, 2008
  
 TABLE OF CONTENTS
 PageCaution
Regarding Forward-Looking Statements
    
    
    2PART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Unaudited Condensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007
    
    
    3Unaudited Condensed Consolidated Statements of Operations for the Three Months ended
March 31, 2008 and 2007
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2008 and 2007
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    28PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 6. Exhibits
    
    
    36Signatures
    
    
    37INDEX
TO EXHIBITS
    
    
    38EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01EXHIBIT 32.02
  1




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##### Table of Contents



Caution Regarding Forward-Looking Statements
     Accounting Principles Board opinion
    
    APB OpinionBlack-Scholes-Merton valuation model
    
    BSM modelFASB Emerging Issues Task Force issue
    
    EITF IssueFASB Interpretation
    
    FINFASB Staff Accounting Position
    
    FSPFinancial Accounting Standards Board
    
    FASBSEC Staff Accounting Bulletin
    
    SABSecurities and Exchange Commission
    
    SECStatement of Financial Accounting Standards
    
    SFAS
  Advanced Micro Devices, Inc.
    
    AMDIntel Corporation
    
    IntelMicrosoft Corporation
    
    MicrosoftEpson Corporation
    
    EpsonSony Coporation
    
    Sony
 2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 TRANSMETA CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2008
    
    
    2007(1)(unaudited)(In thousands, except for share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    138,922
    
    
    $
    15,607Short-term investments
    
    
    19,921
    
    
    
    2,968Accounts receivable
    
    
    126
    
    
    
    163Other receivables, current
    
    
    19,138
    
    
    
    149,400Prepaid expenses and other current assets
    
    
    2,567
    
    
    
    2,476Total current assets
    
    
    180,674
    
    
    
    170,614Other receivables, long-term
    
    
    67,195
    
    
    
    85,200Property and equipment, net
    
    
    228
    
    
    
    284Patents and patent rights, net
    
    
    909
    
    
    
    2,388Other assets
    
    
    600
    
    
    
    800Total assets
    
    $
    249,606
    
    
    $
    259,286LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    765
    
    
    $
    341Accrued compensation
    
    
    13,128
    
    
    
    15,351Income tax payable
    
    
    23
    
    
    
    3,306Accrued restructuring costs
    
    
    980
    
    
    
    1,592Other accrued liabilities
    
    
    1,391
    
    
    
    1,028Current portion of deferred income from settlement and licensing
    
    
    23,460
    
    
    
    23,460Current portion of long-term payable
    
    
    733
    
    
    
    667Total current liabilities
    
    
    40,480
    
    
    
    45,745Long-term deferred income from settlement and licensing, net of current portion
    
    
    205,275
    
    
    
    211,140Long-term payables, net of current portion
    
    
    600
    
    
    
    800Total liabilities
    
    
    246,355
    
    
    
    257,685Commitments
and contingencies (notes 13 and 15)Stockholders equity:Convertible preferred stock, $0.00001 par value, at amounts paid in;
authorized shares  5,000,000. Issued and outstanding shares  1,000,000
and liquidation preference of $7.5 million, at March 31, 2008 and December
31, 2007
    
    
    6,966
    
    
    
    6,966Common stock, $0.00001 par value, at amounts paid in; authorized shares 
50,000,000. Issued and outstanding  12,132,410 shares at March 31, 2008
and 12,021,388 at December 31, 2007
    
    
    740,957
    
    
    
    739,268Treasury stock  39,843 shares at March 31, 2008 and December 31, 2007
    
    
    (2,439
    )
    
    
    (2,439
    )Accumulated
other comprehensive income
    
    
    31
    
    
    
    29Accumulated deficit
    
    
    (742,264
    )
    
    
    (742,223
    )Total stockholders equity
    
    
    3,251
    
    
    
    1,601Total liabilities and stockholders equity
    
    $
    249,606
    
    
    $
    259,286
 
 (1)
    
    Derived from Transmetas audited financial statements as of December 31, 2007 but does not
include all disclosures required by accounting principles generally
accepted in the United States.  3




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##### Table of Contents



TRANSMETA
CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months EndedMarch 31,
    
    
    March 31,2008
    
    
    2007(In thousands, except for per share data)Revenue:Product
    
    $
    253
    
    
    $
    142License
    
    
    240
    
    
    
    Service
    
    
    168
    
    
    
    1,997Total revenue
    
    
    661
    
    
    
    2,139Cost of revenue:Product
    
    
    3
    
    
    
    80Service(*)
    
    
    163
    
    
    
    1,138Impairment charge on inventories
    
    
    
    
    
    
    364Total cost of revenue
    
    
    166
    
    
    
    1,582Gross profit
    
    
    495
    
    
    
    557Operating expenses:Income from settlement and licensing
    
    
    (5,865
    )
    
    
    Research and development(*)
    
    
    2,850
    
    
    
    4,936Selling, general and administrative(*)
    
    
    4,342
    
    
    
    6,106Restructuring charges, net
    
    
    342
    
    
    
    6,723Amortization of patents and patent rights
    
    
    1,480
    
    
    
    1,712Impairment charge on long-lived and other assets
    
    
    
    
    
    
    294Total operating expenses
    
    
    3,149
    
    
    
    19,771Operating (loss) income
    
    
    (2,654
    )
    
    
    (19,214
    )Interest income and other, net
    
    
    2,615
    
    
    
    509Interest expense
    
    
    (2
    )
    
    
    (10
    )Income (loss) before income tax
    
    
    (41
    )
    
    
    (18,715
    )Provision for income taxes
    
    
    
    
    
    
    19Net income (loss)
    
    $
    (41
    )
    
    $
    (18,734
    )Net income (loss) per share  basic
    
    $
    (0.00
    )
    
    $
    (1.88
    )Net income (loss) per share  diluted
    
    $
    (0.00
    )
    
    $
    (1.88
    )Weighted average shares outstanding  basic and diluted
    
    
    12,113
    
    
    
    9,961Weighted average shares outstanding  diluted
    
    
    12,113
    
    
    
    9,961(*) Includes
stock-based compensation as follows:Cost of service revenue
    
    $
    82
    
    
    $
    3Research and development
    
    
    847
    
    
    
    (82
    )Selling, general and administrative
    
    $
    632
    
    
    $
    382
  4




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##### Table of Contents



TRANSMETA
CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Three Months EndedMarch 31,
    
    
    March 31,2008
    
    
    2007(In thousands)Cash flows from operating activities:Net loss
    
    $
    (41
    )
    
    $
    (18,734
    )Adjustments to reconcile net loss to net cash used in operating activities:Stock-based compensation expense
    
    
    1,561
    
    
    
    303Depreciation
    
    
    80
    
    
    
    176Gain on disposal of fixed assets, net
    
    
    (4
    )
    
    
    (89
    )Realized gain on marketable securities
    
    
    (14
    )
    
    
    Amortization of patents and patent rights
    
    
    1,479
    
    
    
    1,711Impairment charge on inventories
    
    
    
    
    
    
    364Impairment charge on long-lived and other assets
    
    
    
    
    
    
    294Non cash restructuring charges
    
    
    342
    
    
    
    6,723Changes in operating assets and liabilities:Accounts receivable, current
    
    
    37
    
    
    
    (144
    )Inventories
    
    
    
    
    
    
    (360
    )Prepaid expenses and other current assets
    
    
    (91
    )
    
    
    (3
    )Other receivables
    
    
    148,267
    
    
    
    Other assets
    
    
    200
    
    
    
    Accounts payable and accrued liabilities
    
    
    (1,556
    )
    
    
    (1,827
    )Income tax payable
    
    
    (3,283
    )
    
    
    (9
    )Deferred income from settlement and licensing
    
    
    (5,865
    )
    
    
    Deferred income
    
    
    
    
    
    
    (15
    )Advances from customers
    
    
    
    
    
    
    (1,320
    )Accrued restructuring charges
    
    
    (954
    )
    
    
    (4,389
    )Net cash provided by (used in) operating activities
    
    
    140,158
    
    
    
    (17,319
    )Cash flows from investing activities:Purchase of available-for-sale investments
    
    
    (44,685
    )
    
    
    Proceeds from sale or maturity of available-for-sale investments
    
    
    27,734
    
    
    
    11,000Proceeds from fixed asset disposals
    
    
    4
    
    
    
    92Purchase of property and equipment
    
    
    (24
    )
    
    
    (9
    )Net cash provided by (used in) investing activities
    
    
    (16,971
    )
    
    
    11,083Cash flows from financing activities:Proceeds from sales of common stock under employee stock purchase and
incentive option plans
    
    
    128
    
    
    
    1,504Net cash provided by financing activities
    
    
    128
    
    
    
    1,504Increase (decrease) in cash and cash equivalents
    
    
    123,315
    
    
    
    (4,732
    )Cash and cash equivalents at beginning of period
    
    
    15,607
    
    
    
    11,595Cash and cash equivalents at end of period
    
    $
    138,922
    
    
    $
    6,863
  5




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##### Table of Contents



TRANSMETA
CORPORATION
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Overview
 Formation and Business of the Company
  tm
 Basis of Presentation
  Reclassifications
  2. Recent Accounting Pronouncements
 The Fair Value Option for Financial
Assets and Financial Liabilities, Including an Amendment of FASB
Statement No. 115
 Business Combinations
 6




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##### Table of Contents



Non-controlling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 Effective Date of FASB
Statement No. 157 Fair Value
Measurements
 Determination of the Useful Life of Intangible
Asset Goodwill and Other
Intangible Assets Business Combinations,
  3. Net Comprehensive Loss
  Three Months EndedMarch 31,
    
    
    March 31,2008
    
    
    2007(In thousands)Net loss
    
    $
    (41
    )
    
    $
    (18,734
    )Net change in unrealized gain (loss) on investments
    
    
    (12
    )
    
    
    26Net change in foreign currency translation adjustments
    
    
    14
    
    
    
    47Net comprehensive loss
    
    $
    (39
    )
    
    $
    (18,661
    )
  March 31,
    
    
    December 31,2008
    
    
    2007(In thousands)Net unrealized loss on investments
    
    $
    (16
    )
    
    $
    (4
    )Cumulative foreign currency
translation adjustments
    
    
    47
    
    
    
    33Accumulated
other comprehensive income
    
    $
    31
    
    
    $
    29
 4. Income from Settlement and Licensing
  7




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##### Table of Contents



Interest on Receivables and Payables
  March 31, 2008
    
    
    December 31, 2007(In thousands)Non-interest bearing note, consisting ofPayments of 5 x $20 million (due Jan 2009-Jan 2013) as of March
31, 2008; plus the initial $150 million payment (due Jan 2008)
as of December 31, 2007
    
    $
    100,000
    
    
    $
    250,000Unamortized discount on $150
million initial payment,
based on 4.70% imputed
interest rate
    
    
    
    
    
    
    (600
    )Unamortized discount on $100
million of 2009-2013
payments, based on 5.41%
imputed interest rate
    
    
    (13,667
    )
    
    
    (14,800
    )Less unamortized discount based on imputed interest rates
    
    
    (13,667
    )
    
    
    (15,400
    )Present value of other receivables from Intel
    
    $
    86,333
    
    
    $
    234,600Other receivables, current
    
    
    19,138
    
    
    
    149,400Other receivables, long-term
    
    
    67,195
    
    
    
    85,200Present value of other receivables from Intel
    
    $
    86,333
    
    
    $
    234,600
  5. Financial Statement Components
 Property and Equipment
  March 31,
    
    
    December 31,2008
    
    
    2007(In thousands)Property and equipment, netLeasehold improvements
    
    $
    2,325
    
    
    $
    2,325Computer equipment
    
    
    3,543
    
    
    
    3,519Furniture and fixtures
    
    
    395
    
    
    
    395Computer software
    
    
    775
    
    
    
    7757,038
    
    
    
    7,014Less accumulated depreciation and amortization
    
    
    (6,810
    )
    
    
    (6,730
    )Total
    
    $
    228
    
    
    $
    284
 8




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##### Table of Contents



6.
Cash and Cash Equivalents, Marketable Securities and Fair Value of
Financial Instruments
   GrossUnrealized GainFair Value
    
    

Book Value
    
    
    (Loss)(In thousands)As of
March 31, 2008Money market funds
    
    $
    10,622
    
    
    $
    10,622
    
    
    $
    Federal agency paper
    
    
    89,976
    
    
    
    89,965
    
    
    
    11Commercial paper
    
    
    56,846
    
    
    
    56,873
    
    
    
    (27
    )Total cash
equivalents and marketable securities
    
    
    157,444
    
    
    
    157,460
    
    
    
    (16
    )Cash
    
    
    1,399
    
    
    
    1,399
    
    
    
    Total
cash, cash
equivalents
and short
term
investments
    
    $
    158,843
    
    
    $
    158,859
    
    
    $
    (16
    )As of December 31, 2007Money market funds
    
    $
    14,627
    
    
    $
    14,627
    
    
    $
    Federal agency paper
    
    
    
    
    
    
    
    
    
    
    Commercial paper
    
    
    2,968
    
    
    
    2,972
    
    
    
    (4
    )Total cash
equivalents and marketable securities
    
    
    17,595
    
    
    
    17,599Cash
    
    
    980
    
    
    
    980
    
    
    
    Total
cash, cash
equivalents
and short
term
investments
    
    $
    18,575
    
    
    $
    18,579
    
    
    $
    (4
    )
  March 31,
    
    
    December 31,2008
    
    
    2007(In thousands)Cash
    
    $
    1,399
    
    
    $
    980Cash equivalents
    
    
    137,523
    
    
    
    14,627Short term investments
    
    
    19,921
    
    
    
    2,968Total cash, cash equivalents and short term investments
    
    $
    158,843
    
    
    $
    18,575
  GrossUnrealized GainFair Value
    
    
    (Loss)(In thousands)As of March 31, 2008:Amounts maturing within one year
    
    $
    157,444
    
    
    $
    (16
    )Amounts maturing after one year, within five years
    
    
    
    
    
    
    Total cash
equivalents and marketable securities
    
    $
    157,444
    
    
    $
    (16
    )As of
December 31, 2007:Amounts maturing within one year
    
    $
    17,595
    
    
    $
    (4
    )Amounts maturing after one year, within five years
    
    
    
    
    
    
    Total cash
equivalents and marketable securities
    
    $
    17,595
    
    
    $
    (4
    )
 9




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##### Table of Contents



Fair
Value of Financial Instruments
 Fair Value Measurements
   Level 1
    
    -
    
    Inputs are quoted prices
(unadjusted) in active markets for identical assets or liabilities.Level 2
    
    -
    
    Inputs are quoted prices for similar assets or liabilities in an active
market, quoted prices for identical or similar assets or liabilities in
markets that are not active, inputs other than quoted prices that are
observable and market-corroborated inputs which are derived principally from
or corroborated by observable market data.Level 3
    
    -
    
    Inputs are derived from valuation techniques in which one or more significant
inputs or value drivers are unobservable (i.e., supported by little
or no market activity).
  (Level 1)
    
    (Level 2)Quoted Prices in ActiveBalance as of
    
    Markets of Identical
    
    Significant OtherMarch 31, 2008
    
    Assets
    
    Observable InputsAvailable-for-sale securities
    
    $
    157,444
    
    
    $
    10,622
    
    
    $
    146,822
  The Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment of FASB Statement
No. 115 Accounting for Certain Investments
in Debt and Equity Securities.
 10




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##### Table of Contents



7. Stock Based Compensation
 Share-Based Payment
   Three months ended March 31,2008
    
    
    2007(In thousands, except for per share data)Stock-based compensation expense by type of award:Employee stock options
    
    $
    1,519
    
    
    $
    934Employee stock purchase plan
    
    
    42
    
    
    
    (631
    )Total stock-based compensation
    
    
    1,561
    
    
    
    303Tax effect on stock-based compensation
    
    
    
    
    
    
    Net effect of stock-based compensation on net income (loss)
    
    $
    1,561
    
    
    $
    303Effect on earnings per share:Basic
    
    $
    0.13
    
    
    $
    0.03Diluted
    
    $
    0.13
    
    
    $
    0.03
 Stock Options and Employee Stock Purchase Plan (ESPP):
  Valuation Assumptions
  11




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##### Table of Contents





Three Months Ended March 31,Employee Stock Option Plans
    
    2008
    
    2007Risk-free interest rate
    
    
    2.2
    %
    
    
    4.7
    %Expected life in years
    
    
    3
    
    
    
    4Expected stock price volatility
    
    
    103
    %
    
    
    87
    %Weighted-average fair value of stock options granted
    
    $
    8.35
    
    
    $
    8.71
 Three Months Ended March 31,Employee Stock Purchase Plan (ESPP)
    
    2008
    
    2007Risk-free interest rate
    
    
    2.1
    %
    
    
    5.1
    %Expected life in years
    
    
    1.25
    
    
    
    1.25Expected stock price volatility
    
    
    151
    %
    
    
    71
    %Weighted-average fair value of purchase rights granted under the purchase plan
    
    $
    9.27
    
    
    $
    6.40
   Tax effects of stock-based compensation
  8. Employee Stock Option Plans
 Equity Incentive Plans
   12




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##### Table of Contents





Stock Options OutstandingWeightedAverageWeighted
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateShares Available
    
    
    Number of
    
    
    Exercise
    
    
    Term
    
    
    Intrinsic Valuefor Grant
    
    
    Shares
    
    
    Price
    
    
    (In Years)
    
    
    (In thousands)Balance at December 31, 2007
    
    
    1,429,195
    
    
    
    1,897,368
    
    
    $
    19.42Additional shares reserved
    
    
    601,069Options granted
    
    
    (16,000
    )
    
    
    16,000
    
    
    
    13.09Options exercised
    
    
    
    
    
    
    (122,000
    )
    
    
    Options forfeited / canceled / expired
    
    
    242,523
    
    
    
    (242,523
    )
    
    
    15.51Balance at March 31, 2008
    
    
    2,256,787
    
    
    
    1,548,845
    
    
    $
    21.50
    
    
    
    8.0
    
    
    $
    279Vested and expected to be vested
    
    
    
    
    
    
    1,251,355
    
    
    $
    23.33
    
    
    
    7.6
    
    
    $
    214Shares exercisable:March 31, 2008
    
    
    
    
    
    
    526,028
    
    
    $
    36.86
    
    
    
    4.8
    
    
    $
    50
   Outstanding
    
    ExercisableWeighted
    
    WeightedAverage
    
    Average
    
    
    
    
    
    WeightedShares
    
    Contractual
    
    Exercise
    
    Shares
    
    AverageRange of Exercise Prices
    
    Outstanding
    
    Life Years
    
    Price
    
    Exercisable
    
    Exercise Price$10.04 - $12.40
    
    
    158,000
    
    
    
    9.45
    
    
    $
    11.14
    
    
    
    35,789
    
    
    $
    11.51$13.00 - $13.32
    
    
    4,143
    
    
    
    7.37
    
    
    
    13.23
    
    
    
    1,143
    
    
    
    13.00$13.36 - $13.36
    
    
    802,800
    
    
    
    9.71
    
    
    
    13.36
    
    
    
    
    
    
    
    $13.40 - $15.00
    
    
    216,841
    
    
    
    6.85
    
    
    
    14.46
    
    
    
    155,050
    
    
    
    14.78$15.80 - $29.60
    
    
    155,575
    
    
    
    5.90
    
    
    
    25.08
    
    
    
    122,560
    
    
    
    24.08$31.40 - $62.20
    
    
    173,873
    
    
    
    3.02
    
    
    
    46.24
    
    
    
    173,873
    
    
    
    46.24$66.60 - $190.00
    
    
    33,129
    
    
    
    1.95
    
    
    
    137.05
    
    
    
    33,129
    
    
    
    137.05$223.40 - $223.40
    
    
    450
    
    
    
    3.10
    
    
    
    223.40
    
    
    
    450
    
    
    
    223.40$244.80 - $244.80
    
    
    600
    
    
    
    3.16
    
    
    
    244.80
    
    
    
    600
    
    
    
    244.80$260.20 - $260.20
    
    
    3,434
    
    
    
    3.13
    
    
    
    260.20
    
    
    
    3,434
    
    
    
    260.20$10.04 - $260.20
    
    
    1,548,845
    
    
    
    7.96
    
    
    $
    21.50
    
    
    
    526,028
    
    
    $
    36.86
 Par Value Stock Options
  13




---



##### Table of Contents



Employee Stock Purchase Plan
  9. Stockholders Equity
  Three Months EndedMarch 31,
    
    
    March 31,2008
    
    
    2007(In thousands)Beginning balance:
    
    $
    1,601
    
    
    $
    42,683Net loss
    
    
    (41
    )
    
    
    (18,734
    )Proceeds from stock option exercises and ESPP
    
    
    128
    
    
    
    1,504Stock-based compensation expense
    
    
    1,561
    
    
    
    270Other comprehensive income
    
    
    2
    
    
    
    73Ending balance:
    
    $
    3,251
    
    
    $
    25,796
  Three Months EndedMarch 31,
    
    
    March 31,2008
    
    
    2007Beginning balance:
    
    
    12,021,388
    
    
    
    9,893,820Shares issued from stock option exercises and ESPP
    
    
    13,622
    
    
    
    101,869Shares issued to employees as par value stock options
    
    
    122,000
    
    
    
    Stock repurchased and retired
    
    
    (24,600
    )
    
    
    Ending balance:
    
    
    12,132,410
    
    
    
    9,995,689
 Outstanding Warrants
  ExerciseIssuance
    
    Number of
    
    Price perDate
    
    Shares
    
    Share
    
    Expiration DateApril 1998
    
    
    12,000
    
    
    $
    25.00
    
    
    April 2008September 2007
    
    
    1,000,000
    
    
    $
    9.00
    
    
    September 20121,012,000
 14




---



##### Table of Contents



Series B Preferred Stock
   Warrants issued in September 2007
     15




---



##### Table of Contents



10. Earning (Loss) per Share
 Earnings Per Share
 Three Months EndedMarch 31,March 31, 2008
    
    
    2007(In thousands, except per shareamounts)Numerator:Net loss, as reported
    
    $
    (41
    )
    
    $
    (18,734
    )Denominator:Weighted average shares used to compute basic net loss
per share
    
    
    12,113
    
    
    
    9,961Dilutive potential shares
    
    
    
    
    
    
    Shares used to compute diluted net loss per share
    
    
    12,113
    
    
    
    9,961Basic and diluted net loss per share
    
    $
    (0.00
    )
    
    $
    (1.88
    )
  11. Restructuring Charges
   16




---



##### Table of Contents





Excess
    
    
    WorkforceFacilities
    
    
    Reduction
    
    
    Total(In thousands)Balance as of December 31, 2007
    
    $
    1,537
    
    
    $
    55
    
    
    $
    1,592Restructuring charges
    
    
    131
    
    
    
    
    
    
    
    131Change in estimates
    
    
    212
    
    
    
    (1
    )
    
    
    211Cash drawdowns
    
    
    (951
    )
    
    
    (3
    )
    
    
    (954
    )Balance as of March 31, 2008
    
    $
    929
    
    
    $
    51
    
    
    $
    980
  12. Business Segments and Major Customers
 Disclosure About
Segments of an Enterprise and Related Information,
  Three Months EndedMarch 31,
    
    March 31,2008
    
    2007Japan
    
    
    58
    %
    
    
    93
    %North America
    
    
    42
    %
    
    
    *
    %Other
    
    
    *
    %
    
    
    *
    %
 
     13. Commitments and Contingencies
   17




---



##### Table of Contents





Future Minimum Payments Due by PeriodRemainder ofTotal
    
    
    2008
    
    
    2009(In thousands)Operating leases(1)
    
    $
    1,024
    
    
    $
    1,024
    
    
    $
    Unconditional contractual obligations(2)
    
    
    1,333
    
    
    
    533
    
    
    
    800Total
    
    $
    2,357
    
    
    $
    1,557
    
    
    $
    800
 
 (1)
    
    Operating leases include agreements on building facilities, less remaining fiscal
2008 sublease income of $169,000.(2)
    
    Contractual obligations include agreements to purchase goods or services that are
enforceable and legally binding on Transmeta and that specify all significant terms,
including, fixed or minimum quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction. Purchase obligations also
include agreements for design tools and software for use in product development Indemnifications and warranties
    14. Income Taxes
 Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109 Accounting for
Income Taxes
     18




---



##### Table of Contents



15. Litigation and Asserted Claims
 Litigation
  In re Transmeta Corporation Initial Public Offering
Securities Litigation, In re Initial Public Offering Securities Litigation,
  Simmonds v. Morgan Stanley, et al.
 19




---



##### Table of Contents



Riley Investment Partners Investment Fund, L.P., et al. v. Horsley,
et al. (Transmeta Corp.),
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis of the financial condition and results of our operations
should be read in conjunction with the unaudited condensed consolidated financial statements and related
notes included elsewhere in this Quarterly Report on Form 10-Q . This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual results could differ
materially from those discussed below. Factors that could cause or contribute to such differences
include, but are not limited to, those identified below, and those discussed in the section titled
Risk Factors included in Item 1A of this Quarterly Report on Form 10-Q .
 Overview
    tm
  20




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##### Table of Contents



Results of Operations




Three Months EndedMarch 31,
    
    March 31,2008
    
    2007RevenueProduct
    
    
    38
    %
    
    
    7
    %License
    
    
    36
    %
    
    
    0
    %Service
    
    
    26
    %
    
    
    93
    %Total Revenue
    
    
    100
    %
    
    
    100
    %Costs of product
    
    
    0
    %
    
    
    4
    %Costs of license
    
    
    0
    %
    
    
    0
    %Costs of service(*)
    
    
    25
    %
    
    
    53
    %Impairment charges on long-lived assets
    
    
    0
    %
    
    
    17
    %Total cost of revenue
    
    
    25
    %
    
    
    74
    %Gross profit
    
    
    75
    %
    
    
    26
    %Operating expenses:Income from settlement and licensing
    
    
    (887
    %)
    
    
    0
    %Research and development(*)
    
    
    431
    %
    
    
    231
    %Selling, general and administrative(*)
    
    
    657
    %
    
    
    285
    %Restructuring
charges, net
    
    
    52
    %
    
    
    314
    %Amortization of patents and patent rights
    
    
    223
    %
    
    
    80
    %Impairment charge on long-lived and other assets
    
    
    0
    %
    
    
    14
    %Total operating expenses
    
    
    476
    %
    
    
    924
    %Operating loss
    
    
    (401
    %)
    
    
    (898
    %)Interest income and other, net
    
    
    396
    %
    
    
    23
    %Interest expense
    
    
    0
    %
    
    
    0
    %Income (loss) before income taxes
    
    
    (5
    %)
    
    
    (875
    %)Provision for income taxes
    
    
    0
    %
    
    
    1
    %Net income (loss)
    
    
    (5
    %)
    
    
    (876
    %)(*) Includes stock-based compensation as follows:Cost of service revenue
    
    
    12
    %
    
    
    0
    %Research and development
    
    
    128
    %
    
    
    (4
    %)Selling, general and administrative
    
    
    96
    %
    
    
    18
    %
 Total Revenue
  Three Months Ended$ Change
    
    
    % ChangeMarch 31,
    
    
    March 31,
    
    
    2008 to
    
    
    2008 to2008
    
    
    2007
    
    
    2007
    
    
    2007(In thousands)Product
    
    $
    253
    
    
    $
    142
    
    
    $
    111
    
    
    
    78
    %License
    
    
    240
    
    
    
    
    
    
    
    240
    
    
    
    n/aService
    
    
    168
    
    
    
    1,997
    
    
    
    (1,829
    )
    
    
    (92
    %)Total revenue
    
    $
    661
    
    
    $
    2,139
    
    
    $
    (1,478
    )
    
    
    (69
    %)
  21




---



##### Table of Contents



Product Revenue.
 License Revenue.
  Service Revenue.
  Customer Concentration Information
  Costs of Revenues
  Three Months EndedMarch 31,
    
    
    March 31,
    
    
    $ Change
    
    
    % Change2008
    
    
    2007
    
    
    2008 to 2007
    
    
    2008 to 2007(In thousands)Product(*)
    
    $
    3
    
    
    $
    80
    
    
    $
    (77
    )
    
    
    (96
    %)License
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    n/aService(*)
    
    
    163
    
    
    
    1,138
    
    
    
    (975
    )
    
    
    (86
    %)Impairment charge on inventories
    
    
    
    
    
    
    364
    
    
    
    (364
    )
    
    
    (100
    %)Total cost of revenue
    
    $
    166
    
    
    $
    1,582
    
    
    $
    (1,416
    )
    
    
    (90
    %)(*) Includes stock-based compensation as follows:Cost of product revenue
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    n/aCost of service revenue
    
    $
    82
    
    
    $
    3
    
    
    $
    79
    
    
    
    2633
    %
 22




---



##### Table of Contents



Cost of Product Revenue
  Cost of License Revenue
  Cost of Service Revenue
   Impairment Charges on Inventories
  Income from Settlement and Licensing
 Three Months EndedMarch 31,
    
    
    March 31,
    
    
    $ Change
    
    
    % Change2008
    
    
    2007
    
    
    2008 to 2007
    
    
    2008 to 2007(In thousands)Income from settlement and licensing
    
    $
    5,865
    
    
    $
    
    
    
    $
    5,865
    
    
    
    n/a
  23




---



##### Table of Contents



Research and Development
  Three Months EndedMarch 31,
    
    
    March 31,
    
    
    $ Change
    
    
    % Change2008
    
    
    2007
    
    
    2008 to 2007
    
    
    2008 to 2007(In thousands)Research and development expenses
    
    $
    2,003
    
    
    $
    5,018
    
    
    $
    (3,015
    )
    
    
    (60
    %)Stock-based compensation
    
    
    847
    
    
    
    (82
    )
    
    
    929
    
    
    
    n/aTotal research and development expenses
    
    $
    2,850
    
    
    $
    4,936
    
    
    $
    (2,086
    )
    
    
    (42
    %)
 Three Months EndedMarch 31,
    
    
    March 31,
    
    
    $ Change
    
    
    % Change2008
    
    
    2007
    
    
    2008 to 2007
    
    
    2008 to 2007(In thousands)Amount classified to costs of service revenue
    
    $
    81
    
    
    $
    1,099
    
    
    $
    (1,018
    )
    
    
    (93
    %)Stock-based compensation for cost of service revenue
    
    
    82
    
    
    
    3
    
    
    
    79
    
    
    
    2633
    %Total amount classified to cost of service revenue
    
    $
    163
    
    
    $
    1,102
    
    
    $
    (939
    )
    
    
    (85
    %)
  Selling, General and Administrative
 Three Months EndedMarch 31,
    
    
    March 31,
    
    
    $ Change
    
    
    % Change2008
    
    
    2007
    
    
    2008 to 2007
    
    
    2008 to 2007(In thousands)Selling, general and administrative expenses
    
    $
    3,710
    
    
    $
    5,724
    
    
    $
    (2,014
    )
    
    
    (35
    %)Stock-based compensation
    
    
    632
    
    
    
    382
    
    
    
    250
    
    
    
    65
    %Total selling, general and administrative expenses
    
    $
    4,342
    
    
    $
    6,106
    
    
    $
    (1,764
    )
    
    
    (29
    %)
  Restructuring
Charges, Net
 Three Months EndedMarch 31,
    
    
    March 31,
    
    
    $ Change
    
    
    % Change2008
    
    
    2007
    
    
    2008 to 2007
    
    
    2008 to 2007(In thousands)Restructuring
charges, net
    
    $
    342
    
    
    $
    6,723
    
    
    $
    (6,381
    )
    
    
    (95
    %)
  24




---



##### Table of Contents



Amortization of Patents and Patent Rights
 Three Months EndedMarch 31,
    
    
    March 31,
    
    
    $ Change
    
    
    % Change2008
    
    
    2007
    
    
    2008 to 2007
    
    
    2008 to 2007(In thousands)Amortization of patent and patent rights
    
    $
    1,480
    
    
    $
    1,712
    
    
    $
    (232
    )
    
    
    (14
    %)
  Impairment Charge on Long-Lived and Other Assets
 Three Months EndedMarch 31,
    
    
    March 31,
    
    
    $ Change
    
    
    % Change2008
    
    
    2007
    
    
    2008 to 2007
    
    
    2008 to 2007(In thousands)Impairment charges
    
    $
    
    
    
    $
    294
    
    
    $
    (294
    )
    
    
    (100
    %)
  Interest Income and Other, Net
 Three Months EndedMarch 31,
    
    
    March 31,
    
    
    $ Change
    
    
    % Change2008
    
    
    2007
    
    
    2008 to 2007
    
    
    2008 to 2007(In thousands)Interest income and other, net
    
    $
    2,615
    
    
    $
    509
    
    
    $
    2,106
    
    
    
    414
    %
  Interest Expense
 Three Months EndedMarch 31,
    
    
    March 31,
    
    
    $ Change
    
    
    % Change2008
    
    
    2007
    
    
    2008 to 2007
    
    
    2008 to 2007(In thousands)Interest expense
    
    $
    (2
    )
    
    $
    (10
    )
    
    $
    8
    
    
    
    (80
    %)
  25




---



##### Table of Contents



Provision for Income Taxes
 Three Months EndedMarch 31,
    
    
    March 31,
    
    
    $ Change
    
    
    % Change2008
    
    
    2007
    
    
    2008 to 2007
    
    
    2008 to 2007(In thousands)Provision for income taxes
    
    $
    
    
    
    $
    19
    
    
    $
    (19
    )
    
    
    (100
    %)
  Liquidity and Capital Resources
   Three Months EndedMarch 31,
    
    
    March 31,
    
    
    $ Change
    
    
    % Change2008
    
    
    2007
    
    
    2008 to 2007
    
    
    2008 to 2007(In thousands)Net cash provided by (used in) operating activities
    
    $
    140,158
    
    
    $
    (17,319
    )
    
    $
    157,477
    
    
    
    n/aNet cash provided by (used in) investing activities
    
    
    (16,971
    )
    
    
    11,083
    
    
    
    (28,054
    )
    
    
    (253
    %)Net cash provided by financing activities
    
    
    128
    
    
    
    1,504
    
    
    
    (1,376
    )
    
    
    (91
    %)Increase (decrease) in cash and cash equivalents
    
    $
    123,315
    
    
    $
    (4,732
    )
    
    $
    128,047
    
    
    
    n/a
 Operating activities
   Investing activities
    Financing activities
   26




---



##### Table of Contents



Contractual Obligations
  Future Minimum Payments Due by PeriodRemainder ofTotal
    
    
    2008
    
    
    2009(In thousands)Operating leases(1)
    
    $
    1,024
    
    
    $
    1,024
    
    
    $
    Unconditional contractual obligations(2)
    
    
    1,333
    
    
    
    533
    
    
    
    800Total
    
    $
    2,357
    
    
    $
    1,557
    
    
    $
    800
 
 (1)
    
    Operating leases include agreements on building facilities, less the remaining fiscal
2008 sublease income of $169,000. (2)
    
    Contractual obligations include agreements to purchase goods or services that are
enforceable and legally binding on us and that specify all significant terms, including: fixed
or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the
approximate timing of the transaction. Purchase obligations also include agreements for design
tools and software for use in product development Off-Balance Sheet Arrangements
  Critical Accounting Policies
   Recent Accounting Pronouncements
  
 Item 3 . Quantitative and Qualitative Disclosures about Market Risk
 Interest
Rate Risk.
 Foreign Currency Exchange Risk.
 27




---



##### Table of Contents



Item 4 . Controls and Procedures
 Disclosure Controls and Procedures
  Inherent Limitations on Effectiveness of Controls
  Changes in Internal Control over Financial Reporting
  28




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  In re Transmeta Corporation Initial Public Offering
Securities Litigation In re
Initial Public Offering Securities Litigation
  Simmonds v. Morgan Stanley, et
al.
 Riley Investment Partners Investment Fund, L.P., et al. v. Horsley,
et al. (Transmeta Corp.),
 29




---



##### Table of Contents



Item 1A. Risk Factors
 The factors discussed below are cautionary statements that identify important risk
factors that could cause actual results to differ materially from those anticipated in the
forward-looking statements in this Quarterly Report on Form 10-Q If any of the following risks
actually occurs, our business, financial condition and results of operations would suffer. In this
case, the trading price of our common stock could decline and investors might lose all or part of
their investment in our common stock.
 We substantially restructured our operations and changed our business plan in 2007, and we might
fail to operate successfully under our current business plan, which is unproven.
  We might lose key technical or management personnel, on whose knowledge, leadership and technical
expertise we rely. Such losses could prevent us from operating successfully under our current
business plan.
  Our recent restructuring and 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 such changes effectively.
  30




---



##### Table of Contents



Our current business plan depends on increasing our LongRun2 licensing revenue, and we might be
unsuccessful in our efforts to license our LongRun2 technology to other parties
  We have limited visibility regarding when and to what extent our licensees will use our LongRun2 or
other licensed technologies and we might be unsuccessful in our efforts to generate royalty
revenue
  
    
    the competition that our licensees face and the market acceptance of their products;
    
    the pricing policies of our licensees for their products incorporating our technology;
    
    the engineering, marketing and management capabilities of our licensees and technical
challenges unrelated to our technology that they face in developing their products; and
    
    the financial and other resources of our licensees.
  We face intense competition in the development of advanced technologies. Our customers and
competitors are much larger than we are and have significantly greater resources. We may not be
able to compete effectively
  We might be unable to keep pace with technological change in our industry, and our technology
offerings might not be competitive.
  We might experience payment disputes for amounts owed to us under our LongRun2 licensing
agreements, and such a dispute may harm our business results
  31




---



##### Table of Contents



We might experience payment disputes for amounts owed to us under our settlement, release and
license agreement with Intel, and such a dispute may harm our financial and operational outlook.
  We currently derive a substantial portion of our revenue from a small number of customers and
licensees, and our operating results would be adversely affected if any customer were to cancel,
reduce or delay a transaction.
   We may be unable to protect our proprietary technologies and defend our intellectual property
rights. Our competitors might gain access to our technologies, and we might not compete
successfully in our markets.
   Any dispute regarding our intellectual property may require us to indemnify certain licensees or
third parties, the cost of which could severely hamper our business operations and financial
condition
  We have significant international business relationships, which expose us to risk and
uncertainties.
 32




---



##### Table of Contents






    
    difficulties and costs of servicing international customers;
    
    fluctuations in currency exchange rates;
    
    unexpected changes in regulatory requirements, including imposition of currency exchange
controls;
    
    longer accounts receivable collection cycles;
    
    import or export licensing requirements;
    
    potentially adverse tax consequences;
    
    political and economic instability; and
    
    potentially reduced protection for intellectual property rights.
 Our operating results are difficult to predict and fluctuate significantly. A failure to meet the
expectations of investors could result in a substantial decline in our stock price.
  A sale of a substantial number of shares of our common stock may cause the price of our common
stock to decline
  The price of our common stock has been volatile and is subject to wide fluctuations
  
    
    variations in our quarterly results;
    
    market conditions in our industry, the industries of our customers and the economy as a
whole;
    
    announcements of technological innovations by us or by our competitors;
    
    introductions of new products or new pricing policies by us or by our competitors;
    
    acquisitions or strategic alliances by us or by our competitors;
    
    recruitment or departure of key personnel;
    
    the gain or loss of significant customers; and
    
    changes in the estimates of our operating performance or changes in recommendations by
securities analysts.
   33




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##### Table of Contents



We might need to raise additional financing, which might not be available or might be available
only on terms unfavorable to us or our stockholders
  
    
    fund expansion;
    
    develop or enhance our products or technologies;
    
    enhance our operating infrastructure;
    
    respond to competitive pressures; or
    
    acquire complementary businesses or technologies.
  Our certificate of incorporation and bylaws, stockholder rights plan and Delaware law contain
provisions that could discourage or prevent a takeover, even if an acquisition would be beneficial
to our stockholders
  
    
    establishing a classified board of directors so that not all members of our board may be
elected at one time;
    
    providing that directors may be removed only for cause and only with the vote of 66 2/3%
of our outstanding shares;
    
    requiring super-majority voting to amend some provisions in our certificate of
incorporation and bylaws;
    
    authorizing the issuance of blank check preferred stock that our board could issue to
increase the number of shares outstanding 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; and
    
    establishing advance notice requirements for nominations for election to our board or for
proposals that can be acted upon by stockholders at stockholder meetings.
  Our business is subject to potential tax liabilities, which could change our effective tax rate.
  34




---



##### Table of Contents




    
    the jurisdictions in which profits are determined to be earned and taxed;
    
    the resolution of issues arising from tax audits with various tax authorities;
    
    adjustments to deferred tax assets utilized in 2007 to reduce the tax effect of various
tax returns;
    
    adjustments to estimated taxes upon finalization of various tax returns;
    
    increases in expenses not deductible for tax purposes;
    
    changes in available tax credits and available net operating loss carryovers;
    
    changes in the valuation of any deferred tax assets and liabilities;
    
    changes in share-based compensation; or
    
    changes in tax laws or the interpretation of such tax laws and changes in generally
accepted accounting principles.
 Our results of operations could vary as a result of the methods, estimates, and judgments we use in
applying our accounting policies.
  We may develop or identify material weaknesses in our internal control over financial reporting.
  
 Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
   35




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##### Table of Contents



Total Numberof Shares
    
    Maximum Number ofTotal Number
    
    
    
    
    
    Average
    
    Purchased as Part
    
    Shares that May Yetof Shares
    
    Total
    
    Price Paid
    
    of Publicly Announced
    
    Be Purchased UnderPeriod
    
    Purchased
    
    Paid
    
    per Share
    
    Plans or Programs
    
    the Plans or Programs01/01/08 - 01/31/08
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    
    02/01/08 - 02/29/08
    
    
    12,100
    
    
    
    
    
    
    
    0.00001
    
    
    
    
    
    
    
    03/03/08 - 03/31/08
    
    
    12,500
    
    
    
    
    
    
    
    0.00001
    
    
    
    
    
    
    
    Total
    
    
    24,600
    
    
    $
    
    
    
    $
    0.00001
    
    
    
    
    
    
    
    
 
 Item 6. Exhibits
 ExhibitNumber
    
    Exhibit Title31.01
    
    Certification by Lester M. Crudele pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.31.02
    
    Certification by Sujan Jain pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.32.01*
    
    Certification by Lester M. Crudele pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.02*
    
    Certification by Sujan Jain 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. 36




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##### Table of Contents



SIGNATURES
  TRANSMETA CORPORATIONBy
    
    /s/ Sujan JainSujan JainExecutive Vice President and Chief Financial Officer(Principal Financial Officer and Duly AuthorizedDate:
May 12, 2008
    
    
    
    Officer)
 37




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##### Table of Contents



INDEX
TO
EXHIBITS
 ExhibitNumber
    
    Exhibit Title31.01
    
    Certification by Lester M. Crudele pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.31.02
    
    Certification by Sujan Jain pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.32.01*
    
    Certification by Lester M. Crudele pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.02*
    
    Certification by Sujan Jain 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. 38