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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION


Washington, D. C.
20549




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FORM 10-Q




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(Mark One)




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

For the Quarterly Period Ended September 30, 2002

OR

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

For the Transition Period from             to

Commission File Number 000-31803

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

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

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 [   ]

There were 135,771,547 shares of the Companys common stock, par value
$0.00001 per share, outstanding on September 30, 2002.



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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Condensed Consolidated Financial Statements                                          
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                              | 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 INDEX                
|EXHIBIT 99.1                 
|EXHIBIT 99.2                 



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##### Table of Contents



TRANSMETA CORPORATION

FORM 10-Q
Quarterly Period Ended September 30, 2002

TABLE OF CONTENTS

|                                        |  |                                                                                                                                                              |  |     
|--------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|                                        |  |                                                                                                                                                              |  | Page
|                                        |  |                                                                                                                                                              |  |     
|PART
          I. FINANCIAL INFORMATION
|Item 1.                                 |  | Unaudited
          Condensed Consolidated Financial Statements                                                                                              |  | 3   
|                                        |  | Unaudited
          Condensed Consolidated Balance Sheets as of September 30, 2002
          and December 31, 2001                                           |  | 3   
|                                        |  | Unaudited
          Condensed Consolidated Statements of Operations for the Three and Nine
          Months Ended September 30, 2002 and September 30, 2001. |  | 4   
|                                        |  | Unaudited
          Condensed Consolidated Statements of Cash Flows for the Nine Months
          Ended September 30, 2002 and September 30, 2001.           |  | 5   
|                                        |  | Notes
          to Unaudited Condensed Consolidated Financial Statements                                                                                     |  | 6   
|Item 2.                                 |  | Managements
          Discussion and Analysis of Financial Condition and Results of Operations                                                              |  | 9   
|Item 3.                                 |  | Quantitative
          and Qualitative Disclosures about Market Risk                                                                                         |  | 27  
|Item 4.                                 |  | Controls
          and Procedures                                                                                                                            |  | 27  
|PART
          II. OTHER INFORMATION   
|Item 1.                                 |  | Legal
          Proceedings                                                                                                                                  |  | 28  
|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                              |  | 30                                                                                                                                                          
|Certifications                          |  | 31                                                                                                                                                          

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1.Condensed Consolidated Financial Statements




TRANSMETA CORPORATION

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

ASSETS

|                                                                     |                                                                 |                                            |        |               |         |              |        |          |         | 
|-------------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------------------------ | ------ | ------------- | ------- | ------------ | ------ | -------- | ------- | 
|                                                                     |                                                                 |                                            |        | September 30, |         | December 31,
|                                                                     |                                                                 |                                            |        | 2002          |         | 2001(1)     
|                                                                     |                                                                 |                                            |        |               |         |             
|                                                                     |                                                                 |                                            |        | (unaudited)   |         |              |        |         
|Current assets:                                                      |                                                                 |                                            |        |               |         |              |        |         
|                                                                     | Cash and cash equivalents                                       |                                            | $      | 39,775        |         |              | $      | 57,747   |        
|                                                                     | Short-term investments                                          |                                            |        | 115,975       |         |              |        | 183,941  |        
|                                                                     | Accounts receivable, net                                        |                                            |        | 4,083         |         |              |        | 1,749    |        
|                                                                     | Inventories                                                     |                                            |        | 8,329         |         |              |        | 1,388    |        
|                                                                     | Prepaid expenses and other current assets                       |                                            |        | 3,546         |         |              |        | 7,091    |        
|                                                                     |                                                                 |                                            |        |               |         |              |        |         
|                                                                     |                                                                 | Total current assets                       |        |               | 171,708 |              |        |          | 251,916 | 
|                                                                    
|                                                                     | Property and equipment, net                                     |                                            |        | 8,790         |         |              |        | 11,622   |        
|                                                                     | Patents and patent rights, net                                  |                                            |        | 38,334        |         |              |        | 43,469   |        
|                                                                     | Other assets                                                    |                                            |        | 1,996         |         |              |        | 2,017    |        
|                                                                     |                                                                 |                                            |        |               |         |              |        |         
|                                                                     |                                                                 | Total assets                               |        | $             | 220,828 |              |        | $        | 309,024 | 
|                                                                     |                                                                 |                                            |        |               |         |              |        |         
|LIABILITIES AND STOCKHOLDERS EQUITY                                
|Current liabilities:                                                 |                                                                 |                                            |        |               |         |              |        |         
|                                                                     | Accounts payable                                                |                                            | $      | 2,452         |         |              | $      | 5,421    |        
|                                                                     | Accrued compensation and related
compensation liabilities       |                                            |        | 2,720         |         |              |        | 5,129    |        
|                                                                     | Other accrued liabilities                                       |                                            |        | 6,567         |         |              |        | 6,553    |        
|                                                                     | Accrued restructuring charges                                   |                                            |        | 2,964         |         |              |        |         |        
|                                                                     | Current portion of long-term debt and capital lease obligations |                                            |        | 640           |         |              |        | 2,661    |        
|                                                                     | Current portion of long-term payables                           |                                            |        | 15,000        |         |              |        | 15,000   |        
|                                                                     |                                                                 |                                            |        |               |         |              |        |         
|                                                                     |                                                                 | Total current liabilities                  |        |               | 30,343  |              |        |          | 34,764  | 
|                                                                    
|Long-term accrued restructuring charges                              |                                                                 |                                            | 5,947  |               |         |              |       |         
|Long-term debt and capital lease obligations, net of current portion |                                                                 |                                            |       |               |         |              | 391    |         
|Long-term payables, net of current portion                           |                                                                 |                                            | 23,313 |               |         |              | 28,904 |         
|Commitments and contingencies                                        |                                                                 |                                            |        |               |         |              |        |         
|Stockholders equity:                                                |                                                                 |                                            |        |               |         |              |        |         
|                                                                     | Preferred stock, $0.00001 par value (none issued)               |                                            |        |              |         |              |        |         |        
|                                                                     | Common stock, $0.00001 par value, at amounts paid in            |                                            |        | 600,909       |         |              |        | 603,464  |        
|                                                                     | Treasury stock                                                  |                                            |        | (2,439        | )       |              |        | (2,439   | )      
|                                                                     | Deferred stock compensation                                     |                                            |        | (4,229        | )       |              |        | (11,818  | )      
|                                                                     | Accumulated other comprehensive income                          |                                            |        | 226           |         |              |        | 720      |        
|                                                                     | Accumulated deficit                                             |                                            |        | (433,242      | )       |              |        | (344,962 | )      
|                                                                     |                                                                 |                                            |        |               |         |              |        |         
|                                                                     |                                                                 | Total stockholders equity                 |        |               | 161,225 |              |        |          | 244,965 | 
|                                                                     |                                                                 |                                            |        |               |         |              |        |         
|                                                                     |                                                                 | Total liabilities and stockholders equity |        | $             | 220,828 |              |        | $        | 309,024 | 
|                                                                     |                                                                 |                                            |        |               |         |              |        |         



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

(See accompanying notes)

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TRANSMETA CORPORATION

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

|                                                        |                                                             |                          |         |                    |        |                   |         |               |        |               |         |        |        |   |          |        |         | 
|------------------------------------------------------- | ----------------------------------------------------------- | ------------------------ | ------- | ------------------ | ------ | ----------------- | ------- | ------------- | ------ | ------------- | ------- | ------ | ------ | - | -------- | ------ | ------- | 
|                                                        |                                                             |                          |         | Three Months Ended |        | Nine Months Ended
|                                                        |                                                             |                          |         |                    |        |                  
|                                                        |                                                             |                          |         | September 30,      |        | September 30,     |         | September 30, |        | September 30,
|                                                        |                                                             |                          |         | 2002               |        | 2001              |         | 2002          |        | 2001         
|                                                        |                                                             |                          |         |                    |        |                   |         |               |        |              
|Net revenue                                             |                                                             | $                        | 6,443   |                    |        | $                 | 5,027   |               |        | $             | 18,129  |        |        | $ | 34,129   |       
|Cost of product revenue                                 |                                                             |                          | 3,994   |                    |        |                   | 2,837   |               |        |               | 12,447  |        |        |   | 47,244   |       
|                                                        |                                                             |                          |         |                    |        |                   |         |               |        |               |         |        |        |   |          |       
|Gross profit (loss)                                     |                                                             |                          | 2,449   |                    |        |                   | 2,190   |               |        |               | 5,682   |        |        |   | (13,115  | )     
|Operating expenses:                                     |                                                             |                          |         |                    |        |                   |         |               |        |               |         |        |        |   |          |       
|                                                        | Research
and development(1)(2)                              |                          |         | 13,707             |        |                   |         | 17,029        |        |               |         | 50,971 |        |   |          | 51,388 |        
|                                                        | In-process research and development                         |                          |         |                   |        |                   |         |              |        |               |         |       |        |   |          | 13,600 |        
|                                                        | Selling, general and
administrative(3)(4)                   |                          |         | 6,255              |        |                   |         | 8,776         |        |               |         | 22,926 |        |   |          | 26,625 |        
|                                                        | Restructuring charges(5)                                    |                          |         | 4,102              |        |                   |         |              |        |               |         | 14,726 |        |   |          |       |        
|                                                        | Amortization of deferred charges,
patents and patent rights |                          |         | 2,848              |        |                   |         | 5,024         |        |               |         | 8,544  |        |   |          | 12,512 |        
|                                                        | Amortization of deferred stock
compensation                 |                          |         | (1,651             | )      |                   |         | 4,046         |        |               |         | 595    |        |   |          | 15,823 |        
|                                                        |                                                             |                          |         |                    |        |                   |         |               |        |               |         |        |        |   |          |       
|                                                        |                                                             | Total operating expenses |         |                    | 25,261 |                   |         |               | 34,875 |               |         |        | 97,762 |   |          |        | 119,948 | 
|                                                        |                                                             |                          |         |                    |        |                   |         |               |        |               |         |        |        |   |          |       
|Operating loss                                          |                                                             |                          | (22,812 | )                  |        |                   | (32,685 | )             |        |               | (92,080 | )      |        |   | (133,063 | )     
|                                                        | Interest income                                             |                          |         | 1,135              |        |                   |         | 3,332         |        |               |         | 4,357  |        |   |          | 12,362 |        
|                                                        | Interest expense                                            |                          |         | (90                | )      |                   |         | (227          | )      |               |         | (534   | )      |   |          | (820   | )      
|                                                        |                                                             |                          |         |                    |        |                   |         |               |        |               |         |        |        |   |          |       
|Loss before income taxes                                |                                                             |                          | (21,767 | )                  |        |                   | (29,580 | )             |        |               | (88,257 | )      |        |   | (121,521 | )     
|                                                        | Provision (benefit) for income taxes                        |                          |         | (2                 | )      |                   |         | 5             |        |               |         | 23     |        |   |          | 22     |        
|                                                        |                                                             |                          |         |                    |        |                   |         |               |        |               |         |        |        |   |          |       
|Net loss                                                |                                                             | $                        | (21,765 | )                  |        | $                 | (29,585 | )             |        | $             | (88,280 | )      |        | $ | (121,543 | )     
|                                                        |                                                             |                          |         |                    |        |                   |         |               |        |               |         |        |        |   |          |       
|Net loss per share  basic and diluted                  |                                                             | $                        | (0.16   | )                  |        | $                 | (0.22   | )             |        | $             | (0.66   | )      |        | $ | (0.95    | )     
|                                                        |                                                             |                          |         |                    |        |                   |         |               |        |               |         |        |        |   |          |       
|Weighted average shares outstanding  basic
and diluted |                                                             |                          | 135,561 |                    |        |                   | 131,560 |               |        |               | 134,079 |        |        |   | 128,582  |       
|                                                        |                                                             |                          |         |                    |        |                   |         |               |        |               |         |        |        |   |          |       



---

|(1) |  | Excludes $973 and $1,237 in amortization of deferred stock compensation
for the three months ended September 30, 2002 and 2001, respectively, and
$3,675 and $8,289 for the nine months ended September 30, 2002 and 2001,
respectively.                                                                                                               
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Excludes $(288) and $0 in variable stock compensation for the three
months ended September 30, 2002 and 2001, respectively, and $(418) and $0
for the nine months ended September 30, 2002 and 2001, respectively.                                                                                                                                     
|   
|   
|   
|   
|(3) |  | Excludes $1,186 and $2,809 in amortization of deferred stock compensation
for the three months ended September 30, 2002 and 2001, respectively, and
$682 and $7,534 for the nine months ended September 30, 2002 and 2001,
respectively.                                                                                                               
|   
|   
|   
|   
|(4) |  | Excludes $(1,785) and $0 in variable stock compensation for the three
months ended September 30, 2002 and 2001, respectively, and $(1,607) and
$0 for the nine months ended September 30, 2002 and 2001, respectively.                                                                                                                                 
|   
|   
|   
|   
|(5) |  | Excludes $(1,737) and $0 in
amortization of deferred stock compensation related to employee
terminations
for the three months ended September 30, 2002 and 2001, respectively, and
$(1,737) and $0 in amortization of deferred stock compensation related to employee
terminations for the
nine months ended September 30, 2002 and 2001, respectively.

(See accompanying notes)

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TRANSMETA CORPORATION

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

|                                                       |                                                                       |                                                     |         |                   |        |               |          |          |          |  
|------------------------------------------------------ | --------------------------------------------------------------------- | --------------------------------------------------- | ------- | ----------------- | ------ | ------------- | -------- | -------- | -------- | -
|                                                       |                                                                       |                                                     |         | Nine Months Ended
|                                                       |                                                                       |                                                     |         |                  
|                                                       |                                                                       |                                                     |         | September 30,     |        | September 30,
|                                                       |                                                                       |                                                     |         | 2002              |        | 2001         
|                                                       |                                                                       |                                                     |         |                   |        |              
|Net cash used in operating activities                  |                                                                       | $                                                   | (75,088 | )                 |        | $             | (62,333  | )       
|                                                       |                                                                       |                                                     |         |                   |        |               |          |         
|Cash flows provided by/(used in) investing activities: |                                                                       |                                                     |         |                   |        |               |          |         
|                                                       | Purchase of available-for-sale investments                            |                                                     |         | (147,632          | )      |               |          | (221,806 | )       
|                                                       | Proceeds from sale or maturity of available-for-sale investments      |                                                     |         | 215,104           |        |               |          | 80,166   |         
|                                                       | Purchase of property and equipment                                    |                                                     |         | (3,185            | )      |               |          | (6,747   | )       
|                                                       | Repayment of loans to founders                                        |                                                     |         |                  |        |               |          | 5,446    |         
|                                                       | Payment to development partner                                        |                                                     |         | (9,000            | )      |               |          | (3,500   | )       
|                                                       | Purchase of intellectual property and other assets                    |                                                     |         | (198              | )      |               |          | (12,504  | )       
|                                                       |                                                                       |                                                     |         |                   |        |               |          |         
|                                                       |                                                                       | Net cash provided by/(used in) investing activities |         |                   | 55,089 |               |          |          | (158,945 | )
|                                                       |                                                                       |                                                     |         |                   |        |               |          |         
|Cash flows provided by/(used in) financing activities: |                                                                       |                                                     |         |                   |        |               |          |         
|                                                       | Expenses related to initial public offering of common stock           |                                                     |         |                  |        |               |          | (256     | )       
|                                                       | Proceeds
from sales of common stock under ESPP and stock option plans |                                                     |         | 4,440             |        |               |          | 2,558    |         
|                                                       | Repayment of debt and capital lease obligations                       |                                                     |         | (2,413            | )      |               |          | (3,803   | )       
|                                                       |                                                                       |                                                     |         |                   |        |               |          |         
|                                                       |                                                                       | Net cash provided by/(used in) financing activities |         |                   | 2,027  |               |          |          | (1,501   | )
|                                                       |                                                                       |                                                     |         |                   |        |               |          |         
|Change in cash and cash equivalents                    |                                                                       |                                                     | (17,972 | )                 |        |               | (222,779 | )       
|Cash and cash equivalents at beginning of period       |                                                                       |                                                     | 57,747  |                   |        |               | 259,744  |         
|                                                       |                                                                       |                                                     |         |                   |        |               |          |         
|Cash and cash equivalents at end of period             |                                                                       | $                                                   | 39,775  |                   |        | $             | 36,965   |         
|                                                       |                                                                       |                                                     |         |                   |        |               |          |         

(See accompanying notes)

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TRANSMETA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

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

The Companys fiscal year ends on the last Friday in December, and each
fiscal quarter ends on the last Friday of each calendar quarter. For ease of
presentation, the accompanying financial information has been shown as of
December 31 and calendar quarter ends for all annual and quarterly financial
statement captions. The three-month periods ended September 30, 2002 and
September 30, 2001 each consisted of 13 weeks. The first nine months of fiscal
2002 and fiscal 2001 each consisted of 39 weeks.

New Accounting Pronouncements

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

2. Net Loss per Share

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

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

|                                       |                                                                                |   |                                          |         |                   |   |               |         |               |   |       |         |   |   |       |          |  
|-------------------------------------- | ------------------------------------------------------------------------------ | - | ---------------------------------------- | ------- | ----------------- | - | ------------- | ------- | ------------- | - | ----- | ------- | - | - | ----- | -------- | -
|                                       |                                                                                |   | Three Months Ended                       |         | Nine Months Ended
|                                       |                                                                                |   |                                          |         |                  
|                                       |                                                                                |   | September 30,                            |         | September 30,     |   | September 30, |         | September 30,
|                                       |                                                                                |   | 2002                                     |         | 2001              |   | 2002          |         | 2001         
|                                       |                                                                                |   |                                          |         |                   |   |               |         |              
|                                       |                                                                                |   | (In thousands, except per share amounts)
|Basic and diluted:                     |                                                                                |   |                                          |         |                   |   |               |         |               |   |       |         |   |   |       |         
|                                       | Net loss                                                                       |   | $                                        | (21,765 | )                 |   | $             | (29,585 | )             |   | $     | (88,280 | ) |   | $     | (121,543 | )
|                                       |                                                                                |   |                                          |         |                   |   |               |         |               |   |       |         |   |   |       |         
|Basic and diluted:                     |                                                                                |   |                                          |         |                   |   |               |         |               |   |       |         |   |   |       |         
|                                       | Weighted average shares outstanding                                            |   |                                          | 135,690 |                   |   |               | 135,147 |               |   |       | 134,303 |   |   |       | 132,865  |  
|                                       | Less: Weighted average shares
subject to repurchase                            |   |                                          | (129    | )                 |   |               | (3,587  | )             |   |       | (224    | ) |   |       | (4,283   | )
|                                       |                                                                                |   |                                          |         |                   |   |               |         |               |   |       |         |   |   |       |         
|                                       | Weighted average shares used in
computing basic and diluted net
loss per share |   |                                          | 135,561 |                   |   |               | 131,560 |               |   |       | 134,079 |   |   |       | 128,582  |  
|                                       |                                                                                |   |                                          |         |                   |   |               |         |               |   |       |         |   |   |       |         
|Net loss per share  basic and diluted |                                                                                | $ | (0.16                                    | )       |                   | $ | (0.22         | )       |               | $ | (0.66 | )       |   | $ | (0.95 | )       
|                                       |                                                                                |   |                                          |         |                   |   |               |         |               |   |       |         |   |   |       |         

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The Company has excluded all outstanding stock options and shares subject
to repurchase from the calculation of basic and diluted net loss per share
because these securities are antidilutive for all periods presented. Options
and warrants to purchase 28,758,358 and 21,878,568 shares of common stock at
September 30, 2002 and September 30, 2001, 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.

3. Net Comprehensive Loss

Net comprehensive loss includes the Companys net loss, as well as
accumulated comprehensive income/(loss) on available-for-sale
investments. Net comprehensive loss for the three month and nine
month periods ending September 30, 2002 and 2001, respectively,
is as follows (in thousands):

|                                                                                        |  |                    |         |                   |  |               |         |               |  |   |         |   |  |   |          |  
|--------------------------------------------------------------------------------------- |  | ------------------ | ------- | ----------------- |  | ------------- | ------- | ------------- |  | - | ------- | - |  | - | -------- | -
|                                                                                        |  | Three Months Ended |         | Nine Months Ended
|                                                                                        |  |                    |         |                  
|                                                                                        |  | September 30,      |         | September 30,     |  | September 30, |         | September 30,
|                                                                                        |  | 2002               |         | 2001              |  | 2002          |         | 2001         
|                                                                                        |  |                    |         |                   |  |               |         |              
|Net loss                                                                                |  | $                  | (21,765 | )                 |  | $             | (29,585 | )             |  | $ | (88,280 | ) |  | $ | (121,543 | )
|Net
change in other comprehensive income/(loss)  unrealized
gain/(loss) on investments |  |                    | (19     | )                 |  |               | 271     |               |  |   | (494    | ) |  |   | 874      |  
|                                                                                        |  |                    |         |                   |  |               |         |               |  |   |         |   |  |   |          |  
|Net
Comprehensive loss                                                                  |  | $                  | (21,784 | )                 |  | $             | (29,314 | )             |  | $ | (88,774 | ) |  | $ | (120,669 | )
|                                                                                        |  |                    |         |                   |  |               |         |               |  |   |         |   |  |   |          |  

4. Concentration of Risks

Transmeta operates in one segment, the development, marketing and selling
of hardware and software technologies used primarily in mobile computers. The
Company also currently operates in one geographic region and is evaluated by
management on a single segment basis. Sales in Japan and Taiwan accounted for
65% and 33% of net revenue, respectively, for the third quarter of fiscal 2002,
compared to 54% and 44%, respectively, for the same period last year. Sales in
Japan and Taiwan accounted for 83% and 16% of net revenue, respectively, during
the first nine months of fiscal 2002, compared to 65% and 26% of net revenue,
respectively, for the same period last year. Sales made in all other countries
during the periods presented accounted for less than 10% of net revenue.

Sales to three customers accounted for 27%, 21% and 14% of net revenue for
the third quarter of fiscal 2002 compared to the same three customers
accounting for less than 10% individually of net revenue in same period last
year. Further, during the third quarter of fiscal 2001, three other customers
accounted for more than 10% of net revenue with 42%, 27% and 14% of net revenue
for that period. Sales to two customers accounted for 41% and 30% of net
revenue in the first nine months of fiscal 2002, compared to sales to four
customers accounting for 28%, 18%, 12% and 11% of net revenue in the first nine
months of fiscal 2001.

As of September 30, 2002, four customers accounted for more than 10% of
the Companys accounts receivable balance, with 25%, 22%, 11% and 11%,
respectively. This compares to the same four customers accounting for
16%, 0%, 20% and
0%, respectively, at December 31, 2001. Further, there were an
additional two customers accounting for more than 10% of our accounts receivable balance as of
December 31, 2001, with 44%, and 12%, respectively.

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):

|                 |  |               |       |              |  |   |       | 
|---------------- |  | ------------- | ----- | ------------ |  | - | ----- | 
|                 |  | September 30, |       | December 31,
|                 |  | 2002          |       | 2001        
|                 |  |               |       |             
|Work in progress |  | $             | 6,227 |              |  | $ | 838   | 
|Finished goods   |  |               | 2,102 |              |  |   | 550   | 
|                 |  |               |       |              |  |   |       | 
|                 |  | $             | 8,329 |              |  | $ | 1,388 | 
|                 |  |               |       |              |  |   |       | 

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6. Restructuring Charges

On July 18, 2002 and in connection with Transmetas decision to cease the
development and productization of the TM6000 microprocessor, the Company
terminated approximately 195 employees and contractors. As a result, the
Company 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 approximately 195 employees and contractors that
were terminated on July 18, 2002, approximately 44 were sales, marketing, and
administrative employees and approximately 151 were research and development
personnel. The Companys workforce reduction was completed in the third
quarter of fiscal 2002. Additionally, the Company vacated all excess
facilities as of September 30, 2002.

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

|                                                          |  |                      |        |      |  |          |       |                |  |   |       |               |  |           |       | 
|--------------------------------------------------------- |  | -------------------- | ------ | ---- |  | -------- | ----- | -------------- |  | - | ----- | ------------- |  | --------- | ----- | 
|                                                          |  | Cumulative Drawdowns
|                                                          |  |                      |        |      |  |          |       |                |  |  
|                                                          |  |                      |        |      |  |          |       |                |  |   |       |               |  | Provision
|                                                          |  | Restructuring        |        |      |  |          |       |                |  |   |       | Balance as at
|                                                          |  | Charges              |        | Cash |  | Non-Cash |       | Sept. 30, 2002
|                                                          |  |                      |        |      |  |          |       |               
|Charges
recorded in the quarter ended June 30, 2002:      |  |                      |        |      |  |          |       |                |  |   |       |               |  |           |       | 
|Building leasehold costs                                  |  | $                    | 8,854  |      |  | $        |      |                |  | $ | 284   |               |  | $         | 8,570 | 
|Property and equipment and software costs                 |  |                      | 1,629  |      |  |          | 35    |                |  |   | 1,442 |               |  |           | 152   | 
|Other                                                     |  |                      | 141    |      |  |          | 141   |                |  |   |      |               |  |           |      | 
|                                                          |  |                      |        |      |  |          |       |                |  |   |       |               |  |           |       | 
|                                                          |  |                      | 10,624 |      |  |          | 176   |                |  |   | 1,726 |               |  |           | 8,722 | 
|                                                          |  |                      |        |      |  |          |       |                |  |   |       |               |  |           |       | 
|Charges recorded in the quarter ended September 30, 2002:
|Workforce reduction                                       |  |                      | 4,102  |      |  |          | 3,913 |                |  |   |      |               |  |           | 189   | 
|                                                          |  |                      |        |      |  |          |       |                |  |   |       |               |  |           |       | 
|                                                          |  | $                    | 14,726 |      |  | $        | 4,089 |                |  | $ | 1,726 |               |  | $         | 8,911 | 
|                                                          |  |                      |        |      |  |          |       |                |  |   |       |               |  |           |       | 

7. Legal Proceedings

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

Beginning in June 2001, the directors and certain officers of Transmeta
were sued in three purported shareholder derivative actions filed in the
Superior Courts of the State of California for the Counties of Santa Clara and
San Mateo. In October 2001, those cases were consolidated in and by the
Superior Court for Santa Clara County into a single action entitled In re
Transmeta Corporation Derivative Litigation, Master File No. CV 799491. In
April 2002, plaintiffs filed a consolidated amended complaint. In June 2002,
plaintiffs filed a second amended complaint. Like its antecedents, the second
amended complaint is based upon the same general allegations set out in the
purported federal class action described above. In May and June 2002, Transmeta
and the individual defendants filed two demurrers to the second amended
complaint. In July 2002, the Court sustained Transmetas demurrer based on
plaintiffs lack of standing, ordered plaintiffs to file an amended complaint,
and deferred consideration of the individual defendants

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demurrer as moot. The Company believes that the allegations in the second
amended complaint and its antecedents are without merit and intends to
challenge the complaint and to defend the consolidated action vigorously.

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

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

8. Subsequent Event

In October 2002, the
Company granted to employees options to purchase 4,822,000 shares of
the Company's common stock. The exercise price of the options granted
is $0.95, which is equal to the fair value of the common stock at the
grant date. These options vest over a three year period.




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

Caution Regarding Forward-Looking Statements

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

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

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

Overview

We develop and sell software-based microprocessors and develop additional
hardware and software technologies that enable computer manufacturers to build
mobile Internet computers, which are portable computing and communication
devices that are

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compatible with PC software and deliver the high performance required to
run standard PC and Internet applications while also offering long battery
life. We rely on independent, third party contractors to perform manufacturing,
assembly and test functions. Our fabless approach allows us to focus on
designing, developing and marketing our products and to significantly reduce
the amount of capital needed to invest in manufacturing products.

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

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

We derive a significant portion of our net revenues from Asia. Sales to
two customers located in Japan accounted for 41% and 30%, respectively, of our
net revenue during the first nine months of fiscal 2002. This compares to four
customers in Japan accounting for 28%, 18% 12% and 11%, respectively, of our
net revenue during the same period last year. The loss of a major customer, or
the delay of significant orders from these customers could reduce or delay our
recognition of revenue. All of our sales to date have been denominated in U.S.
dollars, and we expect that most of our sales in the future will be denominated
in U.S. dollars. Our sales during the first nine months of fiscal years 2002
and 2001 were primarily made to the notebook computer market. If our Crusoe
products fail to achieve widespread acceptance in the notebook computer market
we may not achieve revenue sufficient to sustain our business.

Cost of revenue consists primarily of the costs of manufacturing, assembly
and test of our silicon chips, and compensation and associated costs related to
manufacturing support, logistics and quality assurance personnel. Our gross
margin each quarter is affected by a number of factors, including competitive
pricing, mix, foundry pricing, yields, production flow costs and speed
distribution 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 recorded deferred stock compensation representing the difference
between the deemed fair value of our common stock at the date of grant for
accounting purposes and the exercise price of these options. Deferred stock
compensation is presented as a reduction of stockholders equity and is
amortized on the graded vesting method. As of September 30, 2002, approximately
$4.2 million was recorded on our balance sheet, which will be amortized through
2004 using an accelerated graded method.

Historically we have incurred significant losses. As of September 30,
2002, we had an accumulated deficit of $433.2 million. We expect to incur
substantial losses for the foreseeable future. We also expect to incur
significant research and development and selling, general and administrative
expenses. As a result, if our revenue does not increase substantially, our
operating results will be adversely affected, and we will not achieve
profitability. During the fourth quarter of fiscal 2001 and into the first
quarter of fiscal 2002 our revenue was primarily impacted by production
difficulties. Additionally, beginning in the second quarter of fiscal 2001 and
continuing through the third quarter of fiscal 2002 our net revenues have been
impacted by the slow worldwide and Japanese economies. If we experience
additional production constraints or if economic conditions do not improve, or
worsen, we would continue to experience adverse impacts on our revenue and
operating results.

For ease of presentation, the accompanying financial information has been
shown as of December 31 and calendar quarter ends for all annual and quarterly
financial statement captions. The three-month period ended September 30, 2002
and September 30, 2001 each consisted of 13 weeks. The first nine months of
fiscal 2001 and 2002 each consisted of 39 weeks.

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New Accounting Pronouncements

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

Critical Accounting Policies

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

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



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

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

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

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Restructuring Charges.We accrue for restructuring costs when we make a
commitment to a firm exit plan that specifically identifies all significant
actions to be taken in conjunction with our response to a change in our
strategic plan, product demand, increased costs or other environmental factors.
Our assumptions used in determining the estimation of restructuring expenses
include the determination of the period that it will take to sublet our vacated
premises, the market price that we will be able to command for the subleased
space and the discounted interest rate that we are using to determine the
present value of our future lease obligations. Any significant variation in
these estimates compared to actual results may have a material impact on our
restructuring expenses and our operating results. We reassess the prior
restructuring accruals on a quarterly basis to reflect changes in the costs of
the restructuring activities, and we record new restructuring accruals as
commitments are incurred. During the second quarter of fiscal 2002, we
recorded restructuring charges of $10.6 million primarily related to lease
costs and equipment write-offs. We recorded restructuring charges of $4.1
million related to a reduction in workforce during the third quarter of fiscal
2002.

Revenue Recognition.In accordance with several accounting pronouncements,
including Securities and Exchange Commission Staff Accounting Bulletin 101, our
revenue recognition policy stipulates that we recognize revenue from product
sales no sooner than transfer of title, which is typically upon shipment, and
that we provide for expected returns and warranty costs at that time. Prior to
2000, we primarily generated license revenue. Such license revenue was
recognized when earned, which occurred when agreed-upon deliverables were
provided, or milestones were met and confirmed by our licensees. Also, we
recognized license revenue only if payments received were non-refundable and
not subject to any future performance obligation. Our revenue policy also
incorporates FASBs SFAS 48, which governs revenue recognition when the right
of return exists, such as the case with most products shipped to our
distributors. With respect to products shipped to distributors, we generally
defer recognition of product revenue until the distributors sell our products
to their customers. On occasion, however, we will sell products with End of
Life status to our distributors under special arrangements without any price
protection or return privileges for which we recognize revenue upon transfer of
title, typically upon shipment.

At the end of each accounting period, we make a determination of certain
factors including sales returns and allowances, which could affect the amount
of revenue recorded for the period. Sales returns provisions include
considerations for known but unprocessed sales returns and estimation for
unknown returns. At September 30, 2002, consistent with this policy, the
reserve balance for sales returns was $299,000. Revenue in earlier periods did
not include material provisions for sales returns or allowances. We do not
expect sales returns or allowances to be significant in the future; however, if
our recorded provisions are not adequate, our revenues could be negatively
impacted.

Results of Operations

Net Revenue.Net revenue for the third quarter of fiscal 2002 was $6.4
million, compared to $5.0 million for the same period last year. Net revenue
for the first nine months of fiscal 2002 was $18.1 million compared to $34.1
for the same period last year. The decrease for the nine month periods year
over year are due to several factors, including production
difficulties at the beginning of fiscal 2002, as well as unfavorable
global economic conditions and reduced capital spending, particularly
in Japan. Demand for our products continues to depend in large part upon sales
by our OEM customers of notebook computers that incorporate our products. Sales
to two customers accounted for more than 10% each and for 71% in the aggregate
of net revenue for the first nine months of fiscal 2002 compared to four
customers accounting for more than 10% each and 72% in the aggregate of net
revenue for the same period last year.

Gross Profit.Gross margin is the percentage derived from dividing gross
profit by net revenue. 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. Gross margin in
the third quarter of fiscal 2002 was 38.0%, compared to 43.6% for the same
period last year. Gross margin for the first nine months of fiscal 2002 was
31.3% compared to (38.4)% for the same period last year. The decrease in gross
margin in the third quarter of fiscal 2002 compared to the third quarter of
fiscal 2001 is primarily the result of lower average selling prices due to a
more competitive economic environment, as well as under-absorbed overhead
costs, both of which were partially offset by our reversal of previously
recorded inventory-related charges. The increase in gross margin for the first
nine months of fiscal 2002 compared to the first nine months of fiscal 2001 is
primarily a result of the $28.1 million charge to cost of product revenue
during the second quarter of fiscal 2001 primarily related to the write off of
excess inventory.

Research and Development.Research and development (R&D) expenses in the
third quarter of fiscal 2002 were $13.7 million, compared to $17.0 million for
the same period last year. R&D expenses for the first nine months of fiscal
2002 were $51.0 million compared to $51.4 million for the same period last
year. The decrease in the quarter to quarter comparison is primarily the result
of decreased headcount and expenditures during the third quarter of fiscal 2002
resulting from our decision to cease development and productization of the
TM6000 microprocessor.

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

Selling, General and Administrative.Selling, general and administrative
(SG&A) expenses in the third quarter of fiscal 2002 were $6.3 million, compared
to $8.8 million for the same period last year. SG&A expenses were $22.9 million
for the first nine months of fiscal 2002 compared to $26.6 million for the same
period last year. The decreases for both comparative periods is primarily the
result of decreased compensation and related costs associated with lower
headcount resulting from our restructuring program, which was implemented in
the third quarter of fiscal 2002. In addition, we reduced our spending at
industry trade-shows during the first nine months of fiscal 2002 compared to
the same period last year.

Restructuring Charges.On July 18, 2002 and in connection with our
decision to cease the development and productization of the TM6000
microprocessor, we terminated approximately 195 employees and contractors. As a
result, we 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, we paid approximately $531,000 for previously accrued
compensation in the third quarter of fiscal 2002 in connection with the
employee terminations. Of the approximately 195 employees and contractors that
were terminated on July 18, 2002, approximately 44 were sales, marketing, and
administrative employees and approximately 151 were research and development
personnel. Our workforce reduction was completed in the third quarter of fiscal
2002. Additionally, we vacated all excess facilities as of September 30, 2002.

Amortization of Deferred Charges, Patents and Patent Rights.In connection
with amortization of certain patents and patent rights acquired during the
first and second quarter of fiscal 2001, we recorded amortization of $2.8
million in the third quarter of fiscal 2002, compared to $2.7 million for the
same period last year. We recorded amortization of $8.5 million for the first
nine months of fiscal 2002 compared to $4.5 million for the same period last
year. Increased amortization
expense for the first nine months of fiscal 2002 compared to the same
period last year is a result of acquiring other patents
and patent rights during the first and second quarter of fiscal 2001 and not
realizing the full amortization expense until thereafter.

In connection with the amortization of deferred charges as a result of
entering into technology license agreements with IBM in 1997 and Toshiba in
1998, we amortized $2.3 million in the third quarter of fiscal 2001 and $8.0
million in the first nine months of fiscal 2001. Amortization of the IBM and
Toshiba deferred charges ceased at the end of the fourth quarter of fiscal 2001
when, as a result of applying our accounting policies related to long-lived
assets, we wrote down the value of these assets to zero. As a result of writing
off these deferred charges, we will not incur future amortization expense of
approximately $2.3 million per quarter.

Stock Compensation.Amortization of deferred stock compensation associated
with options granted prior to November 2000, net of cancellation, was $422,000
in the third quarter of fiscal 2002 compared to $4.0 million for the same
period last year. Net amortization for the first nine months of fiscal 2002 was
$2.6 million compared to $15.8 million for the same period last year. The
decrease is primarily a result of amortizing the deferred charge on
an accelerated graded method, as well as a credit recorded
to stock compensation expense of $1.7 million in the third quarter
of fiscal 2002 related to our workforce reduction. The total credit to deferred stock expense for
all cancellations for the nine month period ended September 30,
2002 was $3.2 million.

We apply variable
accounting for certain stock option grants, which is
included in deferred stock compensation. Stock compensation for the third quarter of fiscal 2002 included a
credit of $2.1 million recorded to stock compensation
expense due to a lower market
price of our stock at the end of the third quarter of fiscal 2002 compared to
the market price of our stock at the end of the second quarter of fiscal 2002.
Net stock compensation charges for the first nine months of fiscal 2002
included a credit of $2.0 million related to variable stock compensation. We
account for variable stock compensation awards because, during the fourth
quarter of fiscal 2001, we did not enforce the recourse provisions of certain
employee notes associated with option exercises. Therefore, we account for all
outstanding notes as if they had terms equivalent to non-recourse notes, even
though the terms of these notes were not in fact changed from recourse to
non-recourse. As a result, we have and will continue to record variable stock
compensation expense on the associated stock awards until the notes are paid.
This variable stock compensation charge is based on the

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excess, if any, of the current market price of our stock as of period-end
over the purchase price of the stock award, adjusted for vesting and prior
stock compensation expense recognized on the stock award.

Interest Income.Interest income in the third quarter of fiscal 2002 was
$1.1 million, compared to $3.3 million for the same period last year. Interest
income for the first nine months of fiscal 2002 was $4.4 million compared to
$12.4 million for the same period last year. The decrease is primarily due to
lower average yields as a result of re-investing matured securities at lower
rates of return than originally invested. Further, the decrease is due to lower
cash balances as a result of funding operations. We invest in highly liquid
securities, which have been affected by declining interest rates.

Interest Expense.Interest expense for the third quarter of fiscal 2002
was $90,000, compared to $227,000 for the same period last year. Interest
expense was $534,000 for the first nine months of fiscal 2002 compared to
$820,000 for the same period last year.

Provision for
Income Taxes.We recorded a benefit for income taxes of
$2,000 for the third quarter of fiscal 2002, compared to a provision
of $5,000 recorded for
same period last year. We recorded a provision for income taxes of $23,000 for
the first nine months of fiscal 2002 compared to $22,000 for the same period
last year. All tax provisions recorded relate to state, local and foreign
taxes, and tax refunds.

Liquidity and Capital Resources

Cash Flows

As of September 30, 2002 we had $155.8 million in cash and cash
equivalents and short-term investments, a decrease of $85.9 million from
December 31, 2001.

Net cash used in operating activities during the first nine months of
fiscal 2002 was $75.1 million, compared to $62.3 million used during the same
period last year. Although our net loss for the first nine months of fiscal
2002 was $33.3 million lower than the same period last year, our net cash used
to fund operating activities during the first nine months of fiscal 2002 was
net $12.8 million more than that of the same period last year. This is a result
of several factors, such as a decrease in net non-cash adjustments to cash used
during the first nine months of fiscal 2002 of $24.2 million compared to $47.6
million for the same period last year. Significant decreases in non-cash
adjustments for the first nine months of fiscal 2002 compared to the same
period last year include $15.2 million in stock compensation, $13.6 million of
in-process research and development and $4.0 million related to the
amortization of deferred charges, which were partially offset by the $10.6
million increase related to restructuring charges recorded in the second
quarter of fiscal 2002. The decrease in non-cash adjustments were partially
offset by an increase in changes in operating assets and liabilities
of approximately $11.0 million in the first nine months of
fiscal 2002 compared to a decrease of $11.7 million for the same period last year. Significant changes to operating assets
and liabilities for the first nine months of fiscal 2002 include $6.9 million
used for inventory purchases compared to a $13.4 million reduction in inventory
balances for the same period last year as a result of the inventory write-offs.

Net cash provided by investing activities during the first nine months of
fiscal 2002 was $55.1 million, compared to $158.9 million used during the same
period last year. Net cash provided by investing activities in the first nine
months of fiscal 2002 consisted primarily of $67.5 million net proceeds from
the maturity of available-for-sale investments, partially offset by the $9.0
million partial settlement of long-term payable obligations for patents and
patent rights and purchases of property and equipment of
$3.2 million. Net cash used in investing activities during the same period
last year was primarily the net result of investing $141.6 million in excess
cash in available-for-sale investment securities and the partial payment
obligations of $16.0 million related to the purchase of patents and patent
rights, as well as purchases of property and equipment of
$6.7 million.

Net cash provided by financing activities during the first nine months of
fiscal 2002 was $2.0 million, compared to $1.5 million used during the same
period last year. Net cash provided by financing activities during the first nine months of fiscal 2002
was primarily due to proceeds from option exercises and employee stock purchase
plan purchases of $4.4 million, partially offset by the repayment of debt and lease
obligations of $2.4 million. Net cash used in financing
activities during the same period last year is primarily
attributable to the repayment of debt and lease obligations of
$3.8 ,million, partially offset
by proceeds from option exercises and employee stock purchase plan
purchases of $2.6 million.

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Uses of Liquidity

At September 30, 2002, we had $39.8 million in cash and cash equivalents
and $116.0 million in available-for-sale investments. We lease our facilities
under non-cancelable operating leases expiring in 2008, and we lease certain
equipment and software under non-cancelable leases with terms ranging from 36
to 48 months. At September 30, 2002, we had the following contractual
obligations:

|                                   |  |                        |        |                  |  |           |        |               |  |   |        |  |  |   |       | 
|---------------------------------- |  | ---------------------- | ------ | ---------------- |  | --------- | ------ | ------------- |  | - | ------ |  |  | - | ----- | 
|                                   |  | Payments Due by Period
|                                   |  |                       
|Contractual Obligations            |  | Total                  |        | Less Than 1 Year |  | 1-3 Years |        | After 4 Years
|                                   |  |                        |        |                  |  |           |        |              
|                                   |  | (In thousands)        
|Long Term Debt                     |  | $                      | 157    |                  |  | $         | 157    |               |  |   |       |  |  |   |      | 
|Capital Lease Obligations          |  | $                      | 483    |                  |  | $         | 483    |               |  |   |       |  |  |   |      | 
|Operating Leases                   |  | $                      | 25,488 |                  |  | $         | 4,156  |               |  | $ | 13,096 |  |  | $ | 8,236 | 
|Unconditional Purchase Obligations |  | $                      | 7,089  |                  |  | $         | 7,089  |               |  |   |       |  |  |   |      | 
|Other Long Term Obligations        |  | $                      | 45,500 |                  |  | $         | 15,000 |               |  | $ | 30,500 |  |  |   |      | 

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

Risks That May Affect Future Results

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

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

We have a history of substantial losses and expect to incur further
significant losses. We incurred net losses of $88.3 million in the first nine
months of fiscal 2002, $171.3 million in 2001, $97.7 million in 2000 and $41.1
million in 1999. As of September 30, 2002, we had an accumulated deficit of
$433.2 million. Historically, we have increased our research and development,
sales and marketing, and administrative expenses over time. Although we have
recently taken steps to reduce operating expenses, we cannot assure you that
our operating expenses will not increase in future periods. We also expect to
incur substantial non-cash charges relating to the amortization of deferred
charges, patents and patent rights and deferred stock and variable stock
compensation, which will serve to increase our net losses further. Our net
revenue must increase if we are to achieve profitability under our current
business model. We cannot assure you that our revenue will increase, so we may
never achieve profitability. Even if we achieve profitability, we may not be
able to sustain or increase profitability on a quarterly or an annual basis.

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

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

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address these risks, uncertainties, expenses, delays and difficulties, the
value of an investment in our common stock would decline further.

We Depend Upon Increasing Demand for Our Crusoe Microprocessors.

We expect to derive virtually all of our revenue for the foreseeable
future from the sale of our Crusoe microprocessors, which we only began to ship
in volume in September 2000. Since September 2000 we have recognized
substantially all of our revenue from sales of our Crusoe microprocessors.
Therefore, our future operating results will depend on the demand for Crusoe
products by existing and future customers. If our Crusoe microprocessors are
not widely accepted by the market due to performance, price, compatibility or
any other reason, or if, following acceptance, we fail to enhance our Crusoe
products in a timely manner, demand for our products may fail to increase, or
may diminish. If demand for our Crusoe products does not increase, our revenue will not
increase and the value of an investment in our common stock would likely
decline further.

We Are Subject to General Economic and Market Conditions.

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

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

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

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

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

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

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

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

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

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



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

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



| |  |  | fluctuations in manufacturing yields;                                    
| | - |  | -------------------------------------------------------------------------
|
| |  |  | cancellations, changes or delays of deliveries to us by our manufacturer;

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

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



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

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

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

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

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

Our success depends heavily upon the contributions of our key management
and technical personnel, whose knowledge, leadership and technical expertise
would be difficult to replace. Many of these individuals have been with us for
several years and have developed specialized knowledge and skills relating to
our technology and business. Others, including our president and chief
executive officer, have joined us in these management roles only very recently.
In April 2002, Matthew R. Perry joined us as chief executive officer and
president, replacing Murray A. Goldman and R. Hugh Barnes, who served in
positions of chief executive officer and president and chief operating officer,
respectively, from October 2001 to April 2002. Svend-Olav Carlsen, our vice
president of finance and corporate controller, began serving as acting chief
financial officer in June 2002. In August 2002, Ray Holzworth joined us as vice
president of operations. Our success will depend in part upon the ability of
these new executives to work effectively together and with the rest of our
employees to continue to develop our technology and manage the operation and
growth of our business. All of our executive officers and key personnel are
employees at will. We have no employment contracts and do not maintain key
person insurance on any of our personnel. We might not be able to execute on
our business plan if we were to lose the services of any of our key personnel.
If any of these individuals were to leave Transmeta unexpectedly, we could face
substantial difficulty in hiring qualified successors and could experience a
loss in productivity while any such successor develops the necessary training
and experience.

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

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



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

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

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

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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
and Advanced Micro Devices and licensees of technology from ARM Holdings and
MIPS Technologies.

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

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

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

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

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

Sales to two customers in the aggregate accounted for 71% of net revenue
in the first nine months of fiscal 2002. These customers are located in Japan,
which subjects us to economic cycles in that country. We expect that a small
number of OEM customers and distributors will continue to account for a
significant portion of our revenue. Our future success will depend upon the
timing and size of future purchase orders, if any, from these customers and new
customers and, in particular:



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

We have entered into distributor agreements and rely in part on
distributors for sales of our products in large territories, including Taiwan,
Hong Kong, China and North America. These agreements do not contain minimum
purchase commitments. Additionally, we

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are in the process of entering into agreements with sales representatives
in North America and Europe. Any distributor or sales 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 net 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 a smooth and timely transition would be unlikely. As a result, we could
lose potential sales and fail to meet existing obligations to our customers. In
addition, if TSMC were to change the terms under which it manufactures for us,
our manufacturing costs could increase.

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



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

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

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

The lead-time required to fabricate large volumes of wafers is often
longer than the lead-time our customers provide to us for delivery of their
product requirements. Therefore, we often must place our orders in advance of
expected purchase orders from our customers. As a result, we have only a
limited ability to react to fluctuations in demand for our products, which
could cause us to have either too much or too little inventory of a particular
product. If demand does not develop as we expect, we could have excess
production. Excess production would result in excess inventories of finished
products, which would use cash and could result in inventory write-downs and
write-offs. We have limited capability to reduce ongoing production once wafer
fabrication has commenced. For example, due to the sudden and significant
decrease in actual and forecasted demand for our products during the second and
third quarters of 2001, we recorded a net charge of $25.6 million to cost of
net revenue related to excess inventory and related purchase commitments.
Further, as we introduce product enhancements and new products, and improve our
manufacturing processes, demand for our existing products decreases.
Conversely, if demand exceeds our expectations, TSMC, might not be able to
fabricate wafers as quickly as we need them. Also, ASE, which provides 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

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

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

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

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

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

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

Our products are designed to function as components of a system. Our
customers use our products in systems that have differing specifications and
that require various other components, such as dynamic random access memory, or
DRAM, and other

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

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

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

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

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

The Evolution of Our Business Could Place Significant Strain on Our Management
Systems, Infrastructure and Other Resources, and Our Business May Not Succeed
if We Fail to Manage Effectively.

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

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

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

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

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



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

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

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

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

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

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

We believe that our success will depend in part upon our proprietary
technology. We rely on a combination of patents, copyrights, trademarks, trade
secret laws and contractual obligations with employees and third parties to
protect our proprietary rights. These legal protections provide only limited
protection and may be time consuming and expensive to obtain and enforce. If we
fail to protect our

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proprietary rights adequately, our competitors might gain access to our
technology. As a result, our competitors might offer similar products and we
might not be able to compete successfully in our market. Moreover, despite our
efforts to protect our proprietary rights, unauthorized parties may copy
aspects of our products and obtain and use information that we regard as
proprietary. Also, our competitors may independently develop similar, but not
infringing, technology, duplicate our products, or design around our patents or
our other intellectual property. In addition, other parties may breach
confidentiality agreements or other protective contracts with us, and we may
not be able to enforce our rights in the event of these breaches. Furthermore,
we expect that we will increase our international operations in the future, and
the laws of many foreign countries do not protect our intellectual property
rights to the same extent as the laws of the United States. We may be required
to spend significant resources to monitor and protect our intellectual property
rights.

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

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

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

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

Our common stock is listed on the Nasdaq National Market. The Nasdaq Stock
Markets Marketplace Rules impose requirements for companies listed on the
Nasdaq National Market to maintain their listing status. One of these
requirements is that we must maintain a minimum closing bid price of $1.00 per
share for our common stock. If we fail to meet this requirement for 30
consecutive business days, we will receive a deficiency notice from Nasdaq.
Upon receipt of this notice, we would then have 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
November 8, 2002, the closing bid price of our common stock was
$1.05 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.

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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 to sell
products in Taiwan, Hong Kong and China, and are currently in the process of
adding sales representatives in Europe. In attempting to conduct and expand
business internationally, we are exposed to various risks that could adversely
affect our international operations and, consequently, our operating results,
including:



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

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

Our Certificate of Incorporation and Bylaws, Stockholder Rights Plan and
Delaware Law Contain Provisions That Could Discourage or Prevent a Takeover,
Even if an Acquisition Would Be Beneficial to Our Stockholders.

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



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

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

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

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



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

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




Item 3.Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk.Our cash equivalents and available-for-sale
investments are exposed to financial market risk due to fluctuations in
interest rates, which may affect our interest income. As of September 30, 2002,
our cash equivalents and available-for-sale investments included money market
funds and short and medium term corporate bonds and earned interest at an
average rate of approximately 2.3%. Due to the relative short-term nature of
our investment portfolio, our interest income is extremely vulnerable to sudden
changes in market interest rates. Assuming a decline of 10% in the market
interest rates at September 30, 2002, with consistent cash equivalents and
available-for-sale investment balances, interest income for the remaining
quarter of fiscal 2002 would be adversely affected by approximately $90,000. We
do not use our investment portfolio for trading or other speculative purposes.

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




Item 4.Controls and Procedures

Evaluation of
Disclosure Controls and Procedures. Regulations under the Securities
Exchange Act of 1934 require public companies to maintain disclosure controls
and procedures, which are defined 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 Commissions rules and forms. Our chief executive
officer and chief financial officer, based on their evaluation of our
disclosure controls and procedures within 90 days before the filing date of
this report, concluded that our disclosure controls and procedures were
effective for this purpose.

Changes in Internal Controls.There were no significant changes in our
internal controls or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.

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PART II. OTHER INFORMATION




Item 1.Legal Proceedings

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

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

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

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




Item 2.Changes in Securities and Use of Proceeds

Recent Sales of Unregistered Securities

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None

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 September 30, 2002, we had paid $5.0 million of the net proceeds to
IBM under the terms of our amended license agreement, $3.5 million to IBM under
the terms of our original license agreement, $1.1 million to Quickturn Design
Systems to repay indebtedness incurred in conjunction with equipment purchases
in 1998, approximately $10.8 million in property and equipment purchases and
$20.7 million for the purchase of intellectual property and related assets from
Seiko Epson and other intellectual property owners. We have also paid
approximately $171.8 million in ordinary operating expenses. The remaining net
proceeds have been invested in short-term interest bearing, investment-grade
securities.




Item 3.Defaults upon Senior Securities

Not Applicable.




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

Not Applicable.




Item 5.Other Information

Our audit committee has considered whether any
reasonably anticipated non-audit services to be rendered by Ernst & Young LLP
during the course of fiscal 2002 are compatible with maintaining Ernst & Young
LLPs independence as auditors of our fiscal 2002 consolidated
financial statements, and have approved the anticipated non-audit services,
maintaining they would not impair Ernst & Young LLPs independence. The audit
committee has approved the following non-audit services to be
performed by Ernst & Young LLP: quarterly review of the unaudited condensed
consolidated financial statements as of March 31, June 30, and September 30,
2002; and state and local tax, as well as regulatory, compliance services.




Item 6.Exhibits and Reports on Form 8-K

(a)  Exhibits.

The following exhibits are filed herewith:

|               |  |                                                                                                                                               |  |  |  | 
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit Number |  | Exhibit Title                                                                                                                                 |  |  |  | 
|               |  |                                                                                                                                               |  |  |  | 
|99.1           |  | Certification by Matthew R. Perry pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.  
|              
|              
|              
|              
|99.2           |  | Certification by Svend-Olav Carlsen pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

(b)  Reports on Form 8-K

Not applicable.

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SIGNATURES

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



|Date: November 11, 2002 | TRANSMETA CORPORATION
|----------------------- | ---------------------



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

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CERTIFICATIONS

I, Matthew R. Perry, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: November 11, 2002



| | By: | /s/ MATTHEW R. PERRY                   
| | --- | ---------------------------------------
| |     | Matthew R. PerryChief Executive Officer

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CERTIFICATIONS

I, Svend-Olav Carlsen, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: November 11, 2002



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

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EXHIBIT INDEX

|               |  |                                                                                                                                               |  |  |  | 
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit Number |  | Exhibit Title                                                                                                                                 |  |  |  | 
|               |  |                                                                                                                                               |  |  |  | 
|99.1           |  | Certification by Matthew R. Perry pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.  
|              
|              
|              
|              
|99.2           |  | Certification by Svend-Olav Carlsen pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

33