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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549


FORM 10-Q

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

For the Quarterly Period Ended September 30, 2003

OR

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

For the Transition Period from         to

Commission File Number 000-31803

TRANSMETA CORPORATION

(Exact name of registrant as specified in its charter)


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

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

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



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

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

There were 141,306,529 shares of the Companys common stock, par value
$0.00001 per share, outstanding on October 20, 2003.



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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Condensed Consolidated Financial Statements                                          
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                              | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 2. Changes in Securities and Use of Proceeds                                            
|                              | Item 3. Defaults upon Senior Securities                                                      
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 5. Other Information                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   
|EXHIBIT INDEX                
|EXHIBIT 10.23                
|EXHIBIT 31.1                 
|EXHIBIT 31.2                 
|EXHIBIT 32.1                 
|EXHIBIT 32.2                 



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TRANSMETA CORPORATION

FORM 10-Q
Quarterly Period Ended September 30, 2003

TABLE OF CONTENTS

|           |  |                                                                                       |    |                                                                                                                                         |    |      |   | 
|---------- |  | ------------------------------------------------------------------------------------- | -- | --------------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | - | 
|           |  |                                                                                       |    |                                                                                                                                         |    | Page
|           |  |                                                                                       |    |                                                                                                                                         |    |     
|           |  |                                                                                       |    | PART I. FINANCIAL INFORMATION                                                                                                           |    |      |   | 
|Item 1.    |  | Unaudited Condensed Consolidated Financial Statements                                 |    |                                                                                                                                         | 3  |     
|           |  |                                                                                       |    | Unaudited Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002                                          |    |      | 3 | 
|           |  |                                                                                       |    | Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2003 and September 30, 2002 |    |      | 4 | 
|           |  |                                                                                       |    | Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2003 and September 30, 2002           |    |      | 5 | 
|           |  |                                                                                       |    | Notes to Unaudited Condensed Consolidated Financial Statements                                                                          |    |      | 6 | 
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |    |                                                                                                                                         | 10 |     
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                            |    |                                                                                                                                         | 28 |     
|Item 4.    |  | Controls and Procedures                                                               |    |                                                                                                                                         | 28 |     
|           |  |                                                                                       |    | PART II. OTHER INFORMATION                                                                                                              |    |      |   | 
|Item 1.    |  | Legal Proceedings                                                                     |    |                                                                                                                                         | 28 |     
|Item 2.    |  | Changes in Securities and Use of Proceeds                                             |    |                                                                                                                                         | 29 |     
|Item 3.    |  | Defaults Upon Senior Securities                                                       |    |                                                                                                                                         | 30 |     
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |    |                                                                                                                                         | 30 |     
|Item 5.    |  | Other Information                                                                     |    |                                                                                                                                         | 30 |     
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                      |    |                                                                                                                                         | 30 |     
|Signatures |  |                                                                                       | 32 |                                                                                                                                        

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PART I. FINANCIAL INFORMATION




Item 1.Condensed Consolidated Financial Statements

TRANSMETA CORPORATION




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

|                                                                     |                                                                 |                                            |        |               |         |              |        |          |         | 
|-------------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------------------------ | ------ | ------------- | ------- | ------------ | ------ | -------- | ------- | 
|                                                                     |                                                                 |                                            |        | September 30, |         | December 31,
|                                                                     |                                                                 |                                            |        | 2003          |         | 2002(1)     
|                                                                     |                                                                 |                                            |        |               |         |             
|                                                                     |                                                                 |                                            |        | (unaudited)   |         |              |        |         
|ASSETS                                                               |                                                                 |                                            |        |               |         |              |        |         
|Current assets:                                                      |                                                                 |                                            |        |               |         |              |        |         
|                                                                     | Cash and cash equivalents                                       |                                            | $      | 35,600        |         |              | $      | 16,613   |        
|                                                                     | Short-term investments                                          |                                            |        | 38,833        |         |              |        | 112,837  |        
|                                                                     | Accounts receivable, net                                        |                                            |        | 1,406         |         |              |        | 4,060    |        
|                                                                     | Inventories                                                     |                                            |        | 7,401         |         |              |        | 10,937   |        
|                                                                     | Prepaid expenses and other current assets                       |                                            |        | 4,389         |         |              |        | 4,722    |        
|                                                                     |                                                                 |                                            |        |               |         |              |        |         
|                                                                     |                                                                 | Total current assets                       |        |               | 87,629  |              |        |          | 149,169 | 
|                                                                     | Property and equipment, net                                     |                                            |        | 5,938         |         |              |        | 9,574    |        
|                                                                     | Patents and patent rights, net                                  |                                            |        | 31,483        |         |              |        | 36,623   |        
|                                                                     | Other assets                                                    |                                            |        | 1,775         |         |              |        | 2,189    |        
|                                                                     |                                                                 |                                            |        |               |         |              |        |         
|                                                                     |                                                                 | Total assets                               |        | $             | 126,825 |              |        | $        | 197,555 | 
|                                                                     |                                                                 |                                            |        |               |         |              |        |         
|LIABILITIES AND STOCKHOLDERS EQUITY                                 |                                                                 |                                            |        |               |         |              |        |         
|Current liabilities:                                                 |                                                                 |                                            |        |               |         |              |        |         
|                                                                     | Accounts payable                                                |                                            | $      | 1,057         |         |              | $      | 2,311    |        
|                                                                     | Accrued compensation and related compensation liabilities       |                                            |        | 2,563         |         |              |        | 3,195    |        
|                                                                     | Other accrued liabilities                                       |                                            |        | 6,302         |         |              |        | 8,216    |        
|                                                                     | Accrued restructuring charges                                   |                                            |        | 1,672         |         |              |        | 2,549    |        
|                                                                     | Current portion of long-term payables                           |                                            |        | 14,500        |         |              |        | 16,000   |        
|                                                                     | Current portion of long-term debt and capital lease obligations |                                            |        | 425           |         |              |        | 865      |        
|                                                                     |                                                                 |                                            |        |               |         |              |        |         
|                                                                     |                                                                 | Total current liabilities                  |        |               | 26,519  |              |        |          | 33,136  | 
|Long-term accrued restructuring charges, net of current portion      |                                                                 |                                            | 4,483  |               |         |              | 5,456  |         
|Long-term payables, net of current portion                           |                                                                 |                                            | 12,712 |               |         |              | 17,449 |         
|Long-term debt and capital lease obligations, net of current portion |                                                                 |                                            | 441    |               |         |              | 667    |         
|Commitments and contingencies                                        |                                                                 |                                            |        |               |         |              |        |         
|Stockholders equity:                                                |                                                                 |                                            |        |               |         |              |        |         
|                                                                     | Preferred stock, $0.00001 par value (none issued)               |                                            |        |              |         |              |        |         |        
|                                                                     | Common stock, $0.00001 par value, at amounts paid in            |                                            |        | 606,814       |         |              |        | 601,119  |        
|                                                                     | Treasury stock                                                  |                                            |        | (2,439        | )       |              |        | (2,439   | )      
|                                                                     | Deferred stock compensation                                     |                                            |        | (1,046        | )       |              |        | (3,039   | )      
|                                                                     | Accumulated other comprehensive income (loss)                   |                                            |        | (11           | )       |              |        | 134      |        
|                                                                     | Accumulated deficit                                             |                                            |        | (520,648      | )       |              |        | (454,928 | )      
|                                                                     |                                                                 |                                            |        |               |         |              |        |         
|                                                                     |                                                                 | Total stockholders equity                 |        |               | 82,670  |              |        |          | 140,847 | 
|                                                                     |                                                                 |                                            |        |               |         |              |        |         
|                                                                     |                                                                 | Total liabilities and stockholders equity |        | $             | 126,825 |              |        | $        | 197,555 | 
|                                                                     |                                                                 |                                            |        |               |         |              |        |          |        



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

(See accompanying notes)

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TRANSMETA CORPORATION




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

|                                                        |                                                             |                          |         |                    |        |                   |         |               |        |               |         |        |        |   |         |        |        | 
|------------------------------------------------------- | ----------------------------------------------------------- | ------------------------ | ------- | ------------------ | ------ | ----------------- | ------- | ------------- | ------ | ------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                        |                                                             |                          |         | Three Months Ended |        | Nine Months Ended
|                                                        |                                                             |                          |         |                    |        |                  
|                                                        |                                                             |                          |         | September 30,      |        | September 30,     |         | September 30, |        | September 30,
|                                                        |                                                             |                          |         | 2003               |        | 2002              |         | 2003          |        | 2002         
|                                                        |                                                             |                          |         |                    |        |                   |         |               |        |              
|Net revenue                                             |                                                             | $                        | 2,688   |                    |        | $                 | 6,443   |               |        | $             | 13,759  |        |        | $ | 18,129  |       
|Cost of revenue                                         |                                                             |                          | 3,073   |                    |        |                   | 3,994   |               |        |               | 12,523  |        |        |   | 12,447  |       
|                                                        |                                                             |                          |         |                    |        |                   |         |               |        |               |         |        |        |   |         |       
|Gross profit (loss)                                     |                                                             |                          | (385    | )                  |        |                   | 2,449   |               |        |               | 1,236   |        |        |   | 5,682   |       
|Operating expenses:                                     |                                                             |                          |         |                    |        |                   |         |               |        |               |         |        |        |   |         |       
|                                                        | Research and development(1)(2)                              |                          |         | 12,452             |        |                   |         | 13,707        |        |               |         | 37,121 |        |   |         | 50,971 |       
|                                                        | Selling, general and administrative(3)(4)                   |                          |         | 5,978              |        |                   |         | 6,255         |        |               |         | 18,959 |        |   |         | 22,926 |       
|                                                        | Restructuring charge(5)                                     |                          |         |                   |        |                   |         | 4,102         |        |               |         |       |        |   |         | 14,726 |       
|                                                        | Amortization of deferred charges, patents and
patent rights |                          |         | 2,628              |        |                   |         | 2,848         |        |               |         | 7,902  |        |   |         | 8,544  |       
|                                                        | Stock compensation                                          |                          |         | 2,302              |        |                   |         | (1,651        | )      |               |         | 3,833  |        |   |         | 595    |       
|                                                        |                                                             |                          |         |                    |        |                   |         |               |        |               |         |        |        |   |         |       
|                                                        |                                                             | Total operating expenses |         |                    | 23,360 |                   |         |               | 25,261 |               |         |        | 67,815 |   |         |        | 97,762 | 
|                                                        |                                                             |                          |         |                    |        |                   |         |               |        |               |         |        |        |   |         |       
|Operating loss                                          |                                                             |                          | (23,745 | )                  |        |                   | (22,812 | )             |        |               | (66,579 | )      |        |   | (92,080 | )     
|                                                        | Interest and other income                                   |                          |         | 203                |        |                   |         | 1,135         |        |               |         | 1,222  |        |   |         | 4,357  |       
|                                                        | Interest expense                                            |                          |         | (116               | )      |                   |         | (88           | )      |               |         | (363   | )      |   |         | (557   | )     
|                                                        |                                                             |                          |         |                    |        |                   |         |               |        |               |         |        |        |   |         |       
|Net loss                                                |                                                             | $                        | (23,658 | )                  |        | $                 | (21,765 | )             |        | $             | (65,720 | )      |        | $ | (88,280 | )     
|                                                        |                                                             |                          |         |                    |        |                   |         |               |        |               |         |        |        |   |         |       
|Net loss per share  basic and diluted                  |                                                             | $                        | (0.17   | )                  |        | $                 | (0.16   | )             |        | $             | (0.47   | )      |        | $ | (0.66   | )     
|                                                        |                                                             |                          |         |                    |        |                   |         |               |        |               |         |        |        |   |         |       
|Weighted average shares outstanding  basic and diluted |                                                             |                          | 139,844 |                    |        |                   | 135,561 |               |        |               | 138,674 |        |        |   | 134,079 |       
|                                                        |                                                             |                          |         |                    |        |                   |         |               |        |               |         |        |        |   |         |       



---

|(1) |  | Excludes $190 and $973 in amortization of deferred stock compensation for
the three months ended September 30, 2003 and 2002, respectively, and $924
and $3,675 for the nine months ended September 30, 2003 and September 30,
2002, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Excludes $135 and $(288) in variable stock compensation for the three
months ended September 30, 2003 and 2002, respectively, and $170 and
$(418) for the nine months ended September 30, 2003 and September 30,
2002, respectively.              
|   
|(3) |  | Excludes $115 and $1,186 in amortization of deferred stock compensation
for the three months ended September 30, 2003 and 2002, respectively, and
$621 and $682 for the nine months ended September 30, 2003 and September
30, 2002, respectively.
|   
|(4) |  | Excludes $1,862 and $(1,785) in variable stock compensation for the three
months ended September 30, 2003 and 2002, respectively, and $2,118 and
$(1,607) for the nine months ended September 30, 2003 and September 30,
2002, respectively.      
|   
|(5) |  | Excludes $(1,737) in amortization of deferred stock compensation related
to employee terminations for the three and nine months ended September 30,
2002.                                                                                         

(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,
|                                                 |                                                                             |                                                                       |                                                             |         | 2003              |        | 2002         
|                                                 |                                                                             |                                                                       |                                                             |         |                   |        |              
|Cash flows from operating activities:            |                                                                             |                                                                       |                                                             |         |                   |        |               |        
|                                                 | Net loss                                                                    |                                                                       | $                                                           | (65,720 | )                 |        | $             | (88,280 | )       
|                                                 | Adjustments to reconcile net loss to net cash used in operating activities: |                                                                       |                                                             |         |                   |        |               |         |         
|                                                 |                                                                             |                                                                       | Stock compensation                                          |         |                   | 3,833  |               |         |          | 595    |  
|                                                 |                                                                             |                                                                       | Depreciation                                                |         |                   | 4,470  |               |         |          | 4,424  |  
|                                                 |                                                                             |                                                                       | Amortization of other assets                                |         |                   | 370    |               |         |          | 128    |  
|                                                 |                                                                             |                                                                       | Amortization of deferred charges, patents and patent rights |         |                   | 7,902  |               |         |          | 8,543  |  
|                                                 |                                                                             |                                                                       | Non-cash restructuring charges                              |         |                   |       |               |         |          | 1,630  |  
|                                                 | Changes in operating assets and liabilities:                                |                                                                       |                                                             |         |                   |        |               |         |         
|                                                 |                                                                             |                                                                       | Accounts receivable                                         |         |                   | 2,654  |               |         |          | (2,334 | )
|                                                 |                                                                             |                                                                       | Inventories                                                 |         |                   | 3,536  |               |         |          | (6,941 | )
|                                                 |                                                                             |                                                                       | Prepaid expenses and other current assets                   |         |                   | 357    |               |         |          | 3,598  |  
|                                                 |                                                                             |                                                                       | Accounts payable and accrued liabilities                    |         |                   | (3,800 | )             |         |          | (5,364 | )
|                                                 |                                                                             |                                                                       | Accrued restructuring charges                               |         |                   | (1,851 | )             |         |          | 8,913  |  
|                                                 |                                                                             |                                                                       |                                                             |         |                   |        |               |        
|Net cash used in operating activities            |                                                                             |                                                                       | (48,249                                                     | )       |                   |        | (75,088       | )      
|                                                 |                                                                             |                                                                       |                                                             |         |                   |        |               |        
|Cash flows from investing activities:            |                                                                             |                                                                       |                                                             |         |                   |        |               |        
|                                                 |                                                                             | Purchase of available-for-sale investments                            |                                                             |         | (83,775           | )      |               |         | (147,632 | )     
|                                                 |                                                                             | Proceeds from sale or maturity of available-for-sale investments      |                                                             |         | 157,634           |        |               |         | 215,104  |       
|                                                 |                                                                             | Purchase of property and equipment                                    |                                                             |         | (834              | )      |               |         | (3,185   | )     
|                                                 |                                                                             | Payments of patents and patent rights                                 |                                                             |         | (9,000            | )      |               |         | (9,000   | )     
|                                                 |                                                                             | Other assets                                                          |                                                             |         | (59               | )      |               |         | (198     | )     
|                                                 |                                                                             |                                                                       |                                                             |         |                   |        |               |        
|Net cash provided by investing activities        |                                                                             |                                                                       | 63,966                                                      |         |                   |        | 55,089        |        
|                                                 |                                                                             |                                                                       |                                                             |         |                   |        |               |        
|Cash flows from financing activities:            |                                                                             |                                                                       |                                                             |         |                   |        |               |        
|                                                 |                                                                             | Proceeds from sales of common stock under ESPP and stock option plans |                                                             |         | 3,854             |        |               |         | 4,440    |       
|                                                 |                                                                             | Repayment of debt and capital lease obligations                       |                                                             |         | (584              | )      |               |         | (2,413   | )     
|                                                 |                                                                             |                                                                       |                                                             |         |                   |        |               |        
|Net cash provided by financing activities        |                                                                             |                                                                       | 3,270                                                       |         |                   |        | 2,027         |        
|                                                 |                                                                             |                                                                       |                                                             |         |                   |        |               |        
|Change in cash and cash equivalents              |                                                                             |                                                                       | 18,987                                                      |         |                   |        | (17,972       | )      
|Cash and cash equivalents at beginning of period |                                                                             |                                                                       | 16,613                                                      |         |                   |        | 57,747        |        
|                                                 |                                                                             |                                                                       |                                                             |         |                   |        |               |        
|Cash and cash equivalents at end of period       |                                                                             | $                                                                     | 35,600                                                      |         |                   | $      | 39,775        |        
|                                                 |                                                                             |                                                                       |                                                             |         |                   |        |               |         |         

(See accompanying notes)

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TRANSMETA CORPORATION




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission and accounting principles generally accepted in the United
States for interim financial information. However, certain information or
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed, or omitted, pursuant to such rules and regulations. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United Sates requires management to make estimates
and assumptions that affect the amounts reported in the financial statements.
Actual results could differ from those estimates. Significant estimates made
in preparing the financial statements include inventory valuations, long-lived
and intangible asset valuations, restructuring charges and revenue reserves.
In the opinion of management, the statements include all adjustments (which are
of a normal and recurring nature) necessary for the fair presentation of the
results of the interim periods presented. These financial statements should be
read in conjunction with our audited consolidated financial statements and the
notes thereto included in the Companys Form 10-K for the year ended December
31, 2002. The results of operations for the three months and nine months ended
September 30, 2003 are not necessarily indicative of the operating results for
the full fiscal year or any future period.

The financial statements of the Company have been presented based on the
assumption that the Company will continue as a going concern. The Company,
however, has a history of substantial losses, and expects to incur
future
losses. Demonstrating the effects of these losses on its cash balances, during
the past twelve months the Companys cash and cash equivalents and short-term
investments balances have decreased $81.3 million, from $155.7 million at
September 30, 2002 to $74.4 million at September 30,
2003. As the Company shifts its
product mix to its next generation processor, the Efficeon TM8000,
and as it
continues to develop new or enhance existing products or services in line with
its business model, the Company expects that, as a result of an
increased level of operations, it will need to increase its working
capital, and accordingly, the net cash used to fund operating
activities will increase, exceeding its current cash and cash equivalents and
short-term investments balances, and that it will need to raise additional
funds during the next twelve months to fund its operations and
satisfy its
current debt obligations. If it is unable to raise
additional funds, the Company is positioned to modify its current business
model to leverage its intellectual property assets to permit the Company to continue operating on a modified
business model for a period that extends at least twelve months beyond
September 30, 2003.

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 26, 2003 and
September 27, 2002 each consisted of 13 weeks. The first nine months of fiscal
2003 and 2002 each consisted of 39 weeks.

2. Stock Based Compensation

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

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

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

|                                                                                                                               |  |                                          |         |                   |  |               |         |               |  |   |         |   |  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------- | ------- | ----------------- |  | ------------- | ------- | ------------- |  | - | ------- | - |  | - | -------- | -
|                                                                                                                               |  | Three Months Ended                       |         | Nine Months Ended
|                                                                                                                               |  |                                          |         |                  
|                                                                                                                               |  | September 30,                            |         | September 30,     |  | September 30, |         | September 30,
|                                                                                                                               |  | 2003                                     |         | 2002              |  | 2003          |         | 2002         
|                                                                                                                               |  |                                          |         |                   |  |               |         |              
|                                                                                                                               |  | (in thousands, except per share amounts)
|Net loss, as reported                                                                                                          |  | $                                        | (23,658 | )                 |  | $             | (21,765 | )             |  | $ | (65,720 | ) |  | $ | (88,280  | )
|Add: Stock-based employee compensation expense
included in reported net loss, net of related tax
effects                       |  |                                          | 2,302   |                   |  |               | (1,651  | )             |  |   | 3,833   |   |  |   | 595      |  
|Less: Total stock-based employee compensation
expense under fair value based method for all
awards, net of related tax effects |  |                                          | (13,621 | )                 |  |               | (8,050  | )             |  |   | (36,690 | ) |  |   | (29,842  | )
|Pro forma net loss                                                                                                             |  | $                                        | (34,977 | )                 |  | $             | (31,466 | )             |  | $ | (98,577 | ) |  | $ | (117,527 | )
|Basic and diluted net loss per share  as reported                                                                             |  | $                                        | (0.17   | )                 |  | $             | (0.16   | )             |  | $ | (0.47   | ) |  | $ | (0.66    | )
|Basic and diluted net loss per share  pro forma                                                                               |  | $                                        | (0.25   | )                 |  | $             | (0.23   | )             |  | $ | (0.71   | ) |  | $ | (0.88    | )

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

|                        |  |                     |      |                   |  |                     |      |                     |  |      |      |      |  |      |      |      |  |  |      |   |  |  |      |   |  |  |      |   |  |  |      |  
|----------------------- |  | ------------------- | ---- | ----------------- |  | ------------------- | ---- | ------------------- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|                        |  | Options             |      | ESPP             
|                        |  |                     |      |                  
|                        |  | Three Months        |      | Nine Months Ended |  | Three Months        |      | Nine Months        
|                        |  | Ended September 30, |      | September 30,     |  | Ended September 30, |      | Ended September 30,
|                        |  |                     |      |                   |  |                     |      |                    
|                        |  | 2003                |      | 2002              |  | 2003                |      | 2002                |  | 2003 |      | 2002 |  | 2003 |      | 2002
|                        |  |                     |      |                   |  |                     |      |                     |  |      |      |      |  |      |      |     
|Expected volatility     |  |                     | 0.92 |                   |  |                     | 0.83 |                     |  |      | 0.86 |      |  |      | 1.31 |      |  |  | 1.03 |   |  |  | 1.10 |   |  |  | 1.03 |   |  |  | 1.17 |  
|Expected life in years  |  |                     | 4.0  |                   |  |                     | 4.0  |                     |  |      | 4.0  |      |  |      | 4.0  |      |  |  | 0.5  |   |  |  | 0.5  |   |  |  | 0.5  |   |  |  | 0.5  |  
|Risk-free interest rate |  |                     | 2.7  | %                 |  |                     | 2.8  | %                   |  |      | 2.3  | %    |  |      | 4.2  | %    |  |  | 1.2  | % |  |  | 2.1  | % |  |  | 1.3  | % |  |  | 2.5  | %
|Expected dividend yield |  |                     | 0    |                   |  |                     | 0    |                     |  |      | 0    |      |  |      | 0    |      |  |  | 0    |   |  |  | 0    |   |  |  | 0    |   |  |  | 0    |  

3. Net Loss per Share

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

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

|                                       |                                                                                |   |                                              |         |                   |   |               |         |               |   |       |         |   |   |       |         |  
|-------------------------------------- | ------------------------------------------------------------------------------ | - | -------------------------------------------- | ------- | ----------------- | - | ------------- | ------- | ------------- | - | ----- | ------- | - | - | ----- | ------- | -
|                                       |                                                                                |   | Three Months Ended                           |         | Nine Months Ended
|                                       |                                                                                |   |                                              |         |                  
|                                       |                                                                                |   | September 30,                                |         | September 30,     |   | September 30, |         | September 30,
|                                       |                                                                                |   | 2003                                         |         | 2002              |   | 2003          |         | 2002         
|                                       |                                                                                |   |                                              |         |                   |   |               |         |              
|                                       |                                                                                |   | (in thousands, except for per share amounts)
|Basic and diluted:                     |                                                                                |   |                                              |         |                   |   |               |         |               |   |       |         |   |   |       |        
|                                       | Net loss                                                                       |   | $                                            | (23,658 | )                 |   | $             | (21,765 | )             |   | $     | (65,720 | ) |   | $     | (88,280 | )
|Basic and diluted:                     |                                                                                |   |                                              |         |                   |   |               |         |               |   |       |         |   |   |       |        
|                                       | Weighted average shares outstanding                                            |   |                                              | 139,844 |                   |   |               | 135,690 |               |   |       | 138,682 |   |   |       | 134,303 |  
|                                       | Less: Weighted average shares
subject to repurchase                            |   |                                              |        |                   |   |               | (129    | )             |   |       | (8      | ) |   |       | (224    | )
|                                       |                                                                                |   |                                              |         |                   |   |               |         |               |   |       |         |   |   |       |        
|                                       | Weighted average shares used in
computing basic and diluted net
loss per share |   |                                              | 139,844 |                   |   |               | 135,561 |               |   |       | 138,674 |   |   |       | 134,079 |  
|                                       |                                                                                |   |                                              |         |                   |   |               |         |               |   |       |         |   |   |       |        
|Net loss per share  basic and diluted |                                                                                | $ | (0.17                                        | )       |                   | $ | (0.16         | )       |               | $ | (0.47 | )       |   | $ | (0.66 | )      
|                                       |                                                                                |   |                                              |         |                   |   |               |         |               |   |       |         |   |   |       |         |  

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The Company has excluded all outstanding stock options from the
calculation of basic and diluted net loss per share because these securities
are antidilutive for all periods presented. Options and warrants to purchase
35,532,096 and 28,758,358 shares of common stock at September 30, 2003 and
2002, respectively, were not included in the computation of diluted net loss
per share. These securities, had they been dilutive, would have been included
in the computation of diluted net loss per share using the treasury stock
method. Outstanding shares subject to repurchase have also been excluded from
the calculation of net loss per share.

4. Net Comprehensive Loss

Net comprehensive loss includes the Companys net loss, as well as changes
to the accumulated other comprehensive loss on available-for-sale investments.
Net comprehensive loss for the three and nine month periods ended September 30,
2003 and 2002, respectively, is as follows (in thousands):

|                                                                        |  |                    |         |                   |  |               |         |               |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------- |  | ------------------ | ------- | ----------------- |  | ------------- | ------- | ------------- |  | - | ------- | - |  | - | ------- | -
|                                                                        |  | Three Months Ended |         | Nine Months Ended
|                                                                        |  |                    |         |                  
|                                                                        |  | September 30,      |         | September 30,     |  | September 30, |         | September 30,
|                                                                        |  | 2003               |         | 2002              |  | 2003          |         | 2002         
|                                                                        |  |                    |         |                   |  |               |         |              
|Net loss                                                                |  | $                  | (23,658 | )                 |  | $             | (21,765 | )             |  | $ | (65,720 | ) |  | $ | (88,280 | )
|Net change in other
comprehensive loss -
unrealized loss on
investments |  |                    | (36     | )                 |  |               | (19     | )             |  |   | (145    | ) |  |   | (494    | )
|                                                                        |  |                    |         |                   |  |               |         |               |  |   |         |   |  |   |         |  
|Net comprehensive loss                                                  |  | $                  | (23,694 | )                 |  | $             | (21,784 | )             |  | $ | (65,865 | ) |  | $ | (88,774 | )
|                                                                        |  |                    |         |                   |  |               |         |               |  |   |         |   |  |   |         |  

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,
|                 |  | 2003          |       | 2002        
|                 |  |               |       |             
|Work in progress |  | $             | 4,926 |              |  | $ | 8,545  | 
|Finished goods   |  |               | 2,475 |              |  |   | 2,392  | 
|                 |  |               |       |              |  |   |        | 
|                 |  | $             | 7,401 |              |  | $ | 10,937 | 
|                 |  |               |       |              |  |   |        | 

During
the three and nine months ended September 30, 2003, the Company made adjustments of
$868,000 and $1.1 million, respectively, compared to $937,000 and
$2.6 million for the same periods in the prior year, to decrease the value of its inventory in response to
lower demand and lower average selling prices expected in future
periods for some of its products. The adjustments resulted in writing
down these materials to a lower of cost or market value of $4.7
million as of September 30, 2002. Accordingly, gross margin may benefit from future sales of
these parts to the extent that the associated revenue exceeds their
currently adjusted values. During the first nine months of fiscal
2003 the Company has seen a minimal effect on gross margins resulting
from the sale of previously reserved inventory, whereas during the
third quarter of fiscal 2002 the Company recognized $700,000 in
gross margin related to the sale of inventory for which the value had
been written down in previous periods.

6. Revenue Recognition

The Company recognizes revenue from products sold when persuasive evidence
of an arrangement exists, the price is fixed or determinable, shipment is made
and collectibility is reasonably assured. The Company accrues for estimated
sales returns, and other allowances at the time of shipment. Certain of the
Companys product sales are made to distributors under agreements allowing for
price protection and/ or right of return on unsold products. The Company
defers recognition of revenue on these sales until the distributors sell the
products. The Company may also sell certain products with End of Life status
to its distributors under special arrangements without price protection or
return privileges for which revenue is recognized upon transfer of title,
typically shipment.

The Company recognizes license revenue from technology license agreements
when earned, which generally occurs when agreed-upon deliverables are provided,
or milestones are met and confirmed by licensees. Additionally, license
revenues are recognized only if payments received are non-refundable and not
subject to any future performance obligation by the Company. Licensing revenue was $323,000 and $850,000 for
the three and nine month periods ended September 30, 2003,
respectively. The corresponding periods in fiscal 2002 did not
include any licensing revenues.

7. Product Warranty

Transmeta typically provides a warranty that includes factory repair
services or replacement as needed for replacement parts on its

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products for a
period of one year from shipment. Transmeta records a provision for estimated
warranty costs when the revenue on product sales is recognized. Actual warranty
costs have been within managements expectations to date and have not been
material.

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

8. Restructuring Charges

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

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

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

|                         |  |              |       |           |  |               |       |      |  |   |     |            |  |   |       | 
|------------------------ |  | ------------ | ----- | --------- |  | ------------- | ----- | ---- |  | - | --- | ---------- |  | - | ----- | 
|                         |  | Provision    |       |           |  |               |       |      |  |   |     | Provision 
|                         |  | Balance at   |       |           |  |               |       |      |  |   |     | Balance at
|                         |  | December 31, |       | Drawdowns |  | September 30,
|                         |  |              |       |           |  |              
|                         |  | 2002         |       | Cash      |  | Non-Cash      |       | 2003
|                         |  |              |       |           |  |               |       |     
|Building leasehold costs |  | $            | 7,903 |           |  | $             | 1,830 |      |  | $ | (82 | )          |  | $ | 6,155 | 
|Workforce reduction      |  |              | 102   |           |  |               |      |      |  |   | 102 |            |  |   |      | 
|                         |  |              |       |           |  |               |       |      |  |   |     |            |  |   |       | 
|                         |  | $            | 8,005 |           |  | $             | 1,830 |      |  | $ | 20  |            |  | $ | 6,155 | 
|                         |  |              |       |           |  |               |       |      |  |   |     |            |  |   |       | 

9. Legal Proceedings

Beginning in June 2001, Transmeta, its directors, and certain of its
officers were named as defendants in several putative shareholder class actions
that were consolidated in and by the United States District Court for the
Northern District of California as In re Transmeta Corporation Securities
Litigation, Case No. C 01-02450 WHA. The complaints purported to allege a class
action on behalf of persons who purchased Transmeta common stock between
November 7, 2000 and July 19, 2001, and alleged violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5
promulgated thereunder, and Sections 11 and 15 of the Securities Act of 1933,
as amended. In March 2002, the Court granted in part and denied in part
defendants motions to dismiss the consolidated amended complaint. In May 2002,
the Court granted in part and denied in part defendants motion to dismiss the
second amended complaint, and denied plaintiffs motion for leave to file a
third amended complaint. In June 2002, defendants answered the second amended
complaint as to the sole surviving claim. In July 2002, defendants filed a
motion for summary judgment relating to that claim. In July 2002, plaintiffs
moved for class certification and initiated discussion of a proposed
settlement. The Company and the individual defendants believe that the
complaints are without merit and deny any liability, but because they also wish
to avoid the continuing waste of management time and expense of litigation,
they entered into an agreement in October 2002 to settle all claims that might
have been brought in this action for approximately $5.5 million,
all of which monies have been fully funded by
defendants director and officer liability insurance. In March 2003, after
proper class notice and hearings, the Court approved the settlement and entered
judgment for defendants, dismissing the action. In April 2003, a plaintiffs law firm that was not selected by the
Court to serve as class counsel filed a notice of appeal relating to certain
Court orders addressing that firms applications to the Court for attorneys
fees. In August 2003, on appellants own motion, the Court of Appeals
dismissed the appeal.

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Beginning in June 2001, the directors and certain officers of Transmeta
were named as defendants in four purported shareholder derivative actions that
were consolidated in and by the Superior Court for Santa Clara County in In re
Transmeta Corporation Derivative Litigation, Master File No. CV 799491. The
complaints were based upon the same matters alleged in the shareholder class
action described above. In July 2002, the Court sustained the Companys
demurrer with leave to amend based on plaintiffs lack of standing, and
deferred consideration of the individual defendants demurrer on the merits.
The Company and the individual defendants believe that the
complaints are without merit and deny any liability, but because they also wish
to avoid the continuing waste of management time and expense of litigation,
they entered into an agreement to settle all claims that might have been
brought in this action. The settlement includes a payment of
approximately $300,000 in fees to counsel for the derivative
plaintiffs and shall be fully funded by defendants
director and officer liability insurance. In October 2003, upon motion and after a
hearing, the Court approved the settlement and entered an order dismissing the
consolidated derivative action as to all defendants.

Beginning in June 2001, the Company, certain of its directors and
officers, and certain of the underwriters for its initial public offering were
named as defendants in three putative shareholder class actions that were
consolidated in and by the United States District Court for the Southern
District of New York in In re Transmeta Corporation Initial Public Offering
Securities Litigation, Case No. 01 CV 6492. The complaints allege that the
prospectus issued in connection with the Companys initial public offering on
November 7, 2000 failed to disclose certain alleged actions by the underwriters
for that offering, and alleges claims against the Company 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. Similar actions have been filed against more
than 300 other companies that issued stock in connection with other initial
public offerings during 1999-2000. Those cases have been coordinated for
pretrial purposes as In re Initial Public Offering Securities Litigation,
Master File No. 21 MC 92 (SAS). In July 2002, the Company joined in a
coordinated motion to dismiss filed on behalf of multiple issuers and other
defendants. In February 2003, the Court granted in part and denied in part the
coordinated motion to dismiss, and issued an order regarding the pleading of
amended complaints. Plaintiffs subsequently proposed a settlement offer to all
issuer defendants, which settlement would provide for payments by
issuers insurance carriers if plaintiffs fail to recover a
certain amount from underwriter defendants. Although the Company and the individual defendants believe
that the complaints are without merit and deny any liability, but because they
also wish to avoid the continuing waste of management time and expense of
litigation, they accepted plaintiffs proposal to settle all claims that might
have been brought in this action. The Company and the individual Transmeta
defendants expect that their share of the global settlement will be fully
funded by their director and officer liability insurance. Although the Company and the Transmeta defendants have
approved the settlement in principle, it remains subject to several procedural
conditions, as well as formal approval by the Court. It is possible that the
parties may not reach a final written settlement agreement or that the Court
may decline to approve the settlement in whole or part. In the event that the
parties do not reach agreement on the final settlement, the Company and the
Transmeta defendants believe that they have meritorious defenses and intend to
defend any remaining action vigorously.




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

Caution Regarding Forward-Looking Statements

The following discussion and analysis should be read in conjunction with
the condensed consolidated financial statements and the related notes contained
in this report and with the information included in the Companys Annual Report
on Form 10-K for the year ended December 31, 2002 and subsequent reports filed
with the Securities and Exchange Commission (SEC). The information contained in
this report is not a complete description of our business or the risks
associated with an investment in our common stock. We urge you to carefully
review and consider the various disclosures made by us in this report and in
our other reports filed regularly with the SEC, some of which reports discuss
our business in greater detail.

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

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

Overview

We develop and sell software-based microprocessors and develop additional
hardware, software, and system technologies that enable manufacturers to build
highly efficient computing systems characterized by low power consumption,
reduced heat dissipation and the high performance required to run standard x86
compatible programs. We originally developed our family of Crusoe
microprocessors for lightweight notebook computers and other mobile computing
devices, but we have developed and are continuing to develop microprocessors
and additional technologies suitable for a variety of existing and emerging end
markets in which energy and thermal efficiency along with x86 software
compatibility are desirable. We rely on independent, third party contractors to
perform manufacturing, assembly and test functions. Our fabless approach allows
us to focus on designing, developing and marketing our products and to
significantly reduce the amount of capital needed to invest in manufacturing
infrastructure.

From our inception in March 1995 through January 2000, we were engaged
primarily in research and development. In 1999, we began focusing on achieving
design wins with original equipment manufacturers, or OEMs, in addition to our
ongoing development activities. In January 2000, we introduced our Crusoe
family of microprocessors and began recognizing product revenue from sales of
these microprocessors in the first half of 2000 and have continued to
do so to date. Through June 30, 2000, product
shipments consisted of development systems and prototypes. In October 2003, we
introduced the Efficeon TM8000 family of microprocessors, which are our next
generation x-86 compatible processors. We are seeing interest in
Efficeon processors for designs beginning in 2004 in the mainstream consumer
notebook segment. These microprocessors are targeted for use in notebook
computers characterized by the need for fast responsiveness, long battery life,
small form factors and rich multimedia experience. These microprocessors are
also targeted for use in new classes of devices, such as tablet PCs,
ultra-personal computers, high density servers and new embedded processor
applications. Our initial releases of Efficeon will be manufactured by TSMC
using its 130 nanometer manufacturing technology. We expect that a future
version of Efficeon will be manufactured by Fujitsu Microelectronics using its 90 nanometer
manufacturing technology. We expect to be dependent on sales of our current
and successive generation microprocessors for the foreseeable future.

We sell our products directly to OEMs and, to a lesser extent, through
distributors, stocking representatives and manufacturers representatives. We
have added manufacturers representatives and distributors in Europe and
manufacturers representatives in North America. Etron Corporation Ltd. is our
manufacturers representative for Korea. Uniquest, Siltrontech Electronics and
Edom Technology are our primary distributors in Hong Kong and Taiwan, and All
American Semiconductor is our exclusive distributor in North America. Inno
Micro Corporation and Shinden Hightex Corporation have been added as
distributors for Japan. Our distributors have provisions in their agreements
specifying inventory levels, price protection policies and rights of return
policies for non end-of-life products. As needed, we will continue to add
representation to our current sales and distribution network.

The majority of our sales have been to a limited number of customers and
sales are highly concentrated. Additionally, we derive a significant portion of
our revenue from customers located in Asia. In the first nine months of fiscal
2003, sales to three customers, each of whom is located in Asia, accounted for
23%, 23% and 18%, respectively, of our net revenue. For the same period in the
prior year, those customers accounted for less than 10%, less than 10%, and
30%, respectively. In addition, a customer that had accounted for less than 10%
of our net revenue for the first nine months of fiscal 2003 accounted for 41%
of our net revenue for the same period last year. The loss of a major customer
or the delay of significant orders from these customers could reduce or delay
our recognition of revenue. Five of our customers accounted for 91% of our
accounts receivable balance as of September 30, 2003. Two of these customers
accounted for 52% and 15%, respectively, of our accounts receivable balance as
of December 31, 2002. Each of the other three customers represented less than
10% of our accounts receivable at December 31, 2002.

All of our product sales to date have been denominated in U.S. dollars and
we expect that most of our sales in the future will be denominated in U.S.
dollars. We have not engaged in any foreign currency hedging activities,
although we may do so in the future. Our product sales in the first nine months
of fiscal years 2003 and 2002 were primarily made to the lightweight and other
mobile personal computer (PC) markets. If our products fail to achieve
widespread acceptance in these markets we may not achieve revenue
sufficient to sustain our business.

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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. On occasion,
cost of revenue may additionally include a component for adjustments to the
valuation of certain inventories based on lower demand and average selling
prices expected in future periods. Gross margin is the percentage derived from
dividing gross profit by revenue. Our gross margin each quarter is affected by
a number of factors, including competitive pricing, mix, foundry pricing,
yields, production flow costs and speed distribution of our products. Research
and development expenses consist primarily of salaries and related overhead
costs associated with employees engaged in research, design and development
activities, as well as the cost of masks, wafers and other materials and
related test services and equipment used in the development process. Selling,
general and administrative expenses consist of salaries and related overhead
costs for sales, marketing and administrative personnel and legal and
accounting services.

We previously recorded deferred stock compensation representing the
difference between the deemed fair value of our common stock at the date of
grant for accounting purposes and the exercise price of these options. Deferred
stock compensation is presented as a reduction of stockholders equity and is
amortized on an accelerated method. As of September 30, 2003, approximately
$1.0 million was recorded on our balance sheet, which will be amortized through
2004.

Historically we have incurred significant losses. As of September 30,
2003, we had an accumulated deficit of $520.6 million. We expect to incur
substantial losses for the foreseeable future. We also expect to incur
significant research and development and selling, general and administrative
expenses. As a result, if our revenue does not increase substantially, our
operating results will be adversely affected, and we will not achieve
profitability. During the fourth quarter of fiscal 2001 and into the first
quarter of fiscal 2002 our revenue was negatively impacted by production
difficulties. Additionally, beginning in the second quarter of fiscal 2001 and
continuing through the first nine months of fiscal 2003 our net product
revenues have been adversely affected by the slow worldwide and particularly,
Japanese economies. If we experience additional production constraints or if
economic conditions do not improve, or worsen, we would continue to experience
adverse impacts on our revenue and operating results.

For ease of presentation, the accompanying financial information has been
shown as of December 31 and calendar quarter ends for all annual and quarterly
financial statement captions. The three-month periods ended September 30, 2003
and 2002 each consisted of 13 weeks and ended on September 26 and 27,
respectively. The first nine months of fiscal 2003 and 2002 each consisted of
39 weeks.

Critical Accounting Policies

The process of preparing financial statements requires the use of
estimates on the part of our management. The estimates used by management are
based on our historical experiences combined with managements understanding of
current facts and circumstances. Certain of our accounting policies are
considered critical as they are both important to the portrayal of our
financial condition and results and require significant or complex judgment on
the part of management. For a description of what we believe to be our most
critical accounting policies and estimates, refer to our Annual Report on Form
10-K for the year ended December 31, 2002 filed with the Securities and
Exchange Commission on March 27, 2003. There have been no changes in any of our
critical accounting policies since December 31, 2002.

Results of Operations

Net Revenue

Net revenue of $2.7 million for the third quarter of fiscal 2003
represented a decrease of 58.3% from $6.4 million for the same period last
year. This decrease can be primarily attributed to a decline in demand for our
TM5800 processor from notebook manufacturers, as the processor has nearly
reached the end of its cycle in the notebook computing segment. To a lesser
extent, as this product has matured, the decrease in average selling prices
also contributed to the decrease in revenue. For the third quarter of fiscal
2003, our unit shipments decreased 44.3% while our average selling prices have
decreased 24.1% from the same period in the prior year, excluding the effects
of a $905,000 one-time sale of previously reserved inventory in the third
quarter of fiscal 2002. Net revenue of $13.8 million for the first nine months
of fiscal 2003 represented a decrease of 24.1% from $18.1 million for the same
period last year. This year to date decrease from the same period in the prior
year can be attributed to a decrease in the average selling prices. For the
nine months ended September 30, 2003, our unit shipments increased 22.1% as we
increased sales into the tablet PC market, and as we expanded our international sales into Europe and China.
During the same period, our average selling prices decreased 39.2% from the
corresponding period in the prior year, excluding the effects of a one-time
sale of previously reserved inventory in the third quarter of fiscal 2002.
Pricing pressure on the TM5800 has increased and may continue to
increase as the product has matured and as
the processor transitions into geographies and market segments that
traditionally demand lower average selling prices. We will continue to manufacture the
TM5800 as we plan to sell the processor into market
segments such as the embedded and ultra personal computer markets, from which
we expect the processor to derive the majority of its future revenue. We expect
to experience higher average selling prices as we shift our product mix to our
next-generation processor, the Efficeon TM8000.

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We
currently derive our product revenue primarily from microprocessors used in
mobile computing devices and, to a lesser extent, the embedded processor
applications. Net revenue recognized in the first nine months of fiscal 2003
also included license revenue, which was earned in connection with a technology
license agreement executed during the first half of the year. This licensing
revenue was $323,000 and $850,000 for the three and nine month periods ended
September 30, 2003, respectively. The remaining $100,000 of
license revenue from this agreement
is expected to be recognized in the fourth quarter of fiscal 2003. The corresponding
periods in fiscal 2002 did not include any license revenues.

Gross Margin

Gross margin was negative 14.3% for the third quarter of fiscal 2003,
compared to 38.0% in the same period last year. For the first nine months of
fiscal 2003, gross margin was 9.0% compared to 31.3% in the same period last
year. Excluding the effects of a one-time sale of previously reserved
inventory in the third quarter of 2002, which contributed 10.3% to our gross
margin during that period, the decline in gross margin is primarily due to
lower average selling prices of our products. For the three and nine months
ended September 30, 2003, average selling prices decreased 24.1% and 39.2% from
the same periods in the prior year. The lower average selling prices resulted
from pricing pressures on our TM5800 product as it has nearly reached the end
of its cycle in the notebook computing segment this year. One factor
offsetting the decline in gross margin was the lower average costs of products
sold, which decreased 9.3% and 16.8%, respectively, for the three and nine
months ended September 30, 2003 from the same periods in the prior year.
Another factor offsetting the general decrease in gross margin was the 100%
margin recognized on licensing revenues of $323,000 and $850,000, respectively,
for the three and nine months ended September 30, 2003. Additionally, we
recorded a benefit of $571,000 and $1.2 million, respectively, for the three
and nine month periods in fiscal 2002 related to the reversal of previously
accrued inventory-related purchase commitments due to favorable settlements of
such purchase commitments.

During the first nine months of both fiscal 2003 and 2002, our gross
margin was adversely affected by adjustments to our inventory
valuation in
response to lower demand and lower average selling prices expected in future
periods for some of our products. For the three and nine months ended
September 30, 2003, these adjustments totaled $868,000 and $1.1 million,
respectively, compared to $937,000 and $2.6 million for the same periods in the
prior year. The adjustments resulted in writing down these materials to a lower
of cost or market value of $4.7 million. Accordingly, gross margin may benefit from future
sales of these parts to the extent that the associated revenue exceeds their
currently adjusted values. Gross margin was also adversely affected during the
first nine months of fiscal 2002 and 2003 by unabsorbed overhead costs as our
production related infrastructure exceeded our needs. For the three and nine
months ended September 30, 2003, these costs were $465,000 and $1.6 million,
respectively, compared to $419,000 and $1.3 million for the same periods in the
prior year. As we shift our product mix to the new Efficeon  TM8000
processor, we expect overall gross margins to benefit from
increased utilization of our manufacturing overhead.

Research and Development

Research and development (R&D) costs for the third quarter of fiscal 2003
decreased 9.2% to $12.5 million from $13.7 million for the same period last
year. The decrease in the quarter to quarter comparison is primarily
due to decreased headcount and expenditures resulting from our
workforce reduction in the third quarter of fiscal 2002. R&D costs for the first nine months of fiscal 2003 decreased 27.2% to
$37.1 million from $51.0 million for the same period last year. The majority
of the decrease for the nine month period can be attributed to our workforce
reduction in the third quarter of fiscal 2002, which resulted in lower
compensation and benefit costs, consultant fees, recruiting costs and certain
equipment related expenses. We also recognized in the second quarter of 2002 a
charge of $1.6 million for engineering related silicon and mask sets for
products for which the Company ceased development. The majority of R&D spending
in the first nine months of fiscal 2003 was for our next-generation
microprocessor, the Efficeon TM8000. We additionally devoted research and
development resources towards our recently announced LongRun2 power management
technology. The remaining portion was for sustaining engineering efforts on
our TM5800 microprocessor.

Selling, General and Administrative

Selling, general and administrative (SG&A) costs for the third quarter of
fiscal 2003 decreased 4.4% to $6.0 million from $6.3 million for the same
period last year. The decrease in the quarter to quarter comparison is primarily
due to decreased headcount and expenditures resulting from our
workforce reduction in the third quarter of fiscal 2002. SG&A costs for the first nine months of fiscal 2003
decreased 17.3% to $19.0 million from $22.9 million for the same period last
year. The majority of this decrease is due to lower compensation and benefit
costs, consultant
fees and recruiting costs related to our reduction in workforce in the
third quarter of fiscal 2002. As a result of our 2002 restructuring

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charge, we
also recorded lower facilities-related charges, including rent and building
maintenance costs. During the first nine months of fiscal 2003, we had lower
travel and conference related costs as we implemented a restricted travel
policy within that period in response to the outbreak of SARS in the
Asia-Pacific region. As the restricted travel policy has now been lifted, we
expect travel costs to return to historic levels. These decreases were partly
offset by increases in other areas, including higher corporate insurance costs
and expenditures for patent protection of our inventions.

Restructuring Charges

In the first nine months of fiscal 2002, we recorded restructuring charges
of $14.7 million as a result of the Companys decision to cease development and
productization of the TM6000 microprocessor. The restructuring charges
consisted primarily of lease costs, equipment write-offs and other costs as we
identified a number of leased facilities and leased equipment that were no
longer required. Other than future lease payments for our vacated facilities,
the majority of our restructuring activities were completed in 2002. We
evaluated the restructuring reserve balance as of September 30, 2003 and
determined no adjustments were needed.

Amortization of Deferred Charges, Patents and Patent Rights

Amortization charges for the first nine months of fiscal 2003 and 2002
primarily relate to various patents and patent rights acquired from Seiko Epson
and others during fiscal 2001. Additionally, we accreted interest payable in
relation to amounts due for certain technology license agreements. The
amortization and accretion charges for these license agreements, patents and
patent rights in the third quarter of fiscal 2003 were $2.6 million, compared
to $2.8 million in the same period last year. For the first nine months of
fiscal 2003, the amortization and accretion charges were $7.9 million, compared
to $8.5 million in the same period last year.

Stock Compensation

Total stock compensation charges during the third quarter of fiscal 2003
were $2.3 million, compared to a $1.7 million credit in the same period last
year. For the first nine months of fiscal 2003, stock compensation charges
were $3.8 million, compared to $0.6 million in the same period last year.
There were two components to stock compensation expense during these periods.

The first component is the amortization of deferred stock compensation
associated with options granted prior to November 2000, net of cancellations,
which amounted to $305,000 during the third quarter of fiscal 2003, compared to
$422,000 in the same period last year. Net amortization for the first nine
months of fiscal 2003 was $1.5 million, compared to $2.6 million in the same
period last year. On a year-to-date basis, the decrease is primarily a result
of amortizing the deferred charge on an accelerated method in accordance with
our accounting policy, as well as a decrease in the number of outstanding
options affecting the compensation charge as a result of cancellations in
connection with our reduction in workforce in the third quarter of fiscal 2002.

The second component is the application of variable accounting for certain
stock option grants, the effect of which is included in deferred stock
compensation. During the fourth quarter of fiscal 2001, we did not enforce the
recourse provisions of certain employee notes associated with option exercises.
Therefore, we account for all other outstanding notes as if they had terms
equivalent to non-recourse notes, even though the terms of these notes were not
in fact changed from recourse to non-recourse. As a result, we have and will
continue to record adjustments related to variable stock option accounting on
the associated stock awards until the notes are paid. This variable stock
compensation charge is based on the excess, if any, of the current market price
of our stock as of the period-end over the purchase price of the stock award,
adjusted for vesting and prior stock compensation expense recognized on the
stock award. Variable stock compensation for the third quarter of fiscal 2003
amounted to $2.0 million, compared to a credit of $2.1 million for the same
period last year. For the first nine months of fiscal 2003 variable stock
compensation was $2.3 million, compared to a credit of $2.0 million for the
same period last year.

Interest and Other Income and Interest Expense

Interest and other income in the third quarter of fiscal 2003 was
$203,000, compared to $1.1 million in the same period last year. Interest and
other income for the first nine months of fiscal 2003 was $1.2 million,
compared to $4.4 million in the same period last year. The decreases are due
to lower average invested cash balances during fiscal 2003 as we continue to
use cash to fund operations, as well as a decrease in interest rates earned on
investments during the period. As we continue to use cash to fund operations,
our investment balances will decrease and as a result our interest income is
expected to decrease over time. Interest expense in the third quarter of fiscal
2003 was $116,000, compared to $88,000 in the same period last year. Interest
expense for the first nine months of fiscal 2003 was $363,000, compared to
$557,000 for the same period last year. This decrease is primarily the result
of lower average
debt balances due to several lease-financing arrangements expiring during
2002.

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Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through
sales of equity securities and, to a lesser extent, from product and license
revenue and lease financing. At September 30, 2003 we had $74.4 million in
cash, cash equivalents and short-term investments compared to $129.5 million at
December 31, 2002.

Net cash used in operating activities was $48.2 million for the first nine
months of fiscal 2003. This was primarily the result of the net loss of $65.7
million, as well a decrease in accounts payable and accrued liabilities during
the period. This was partially offset by decreases in accounts receivable and
inventory.

Net cash provided by investing activities was $64.0 million for the first
nine months of fiscal 2003, and consisted primarily of $73.9 million net
proceeds from the maturity of available-for-sale investments. These proceeds
were partially offset by a $9.0 million partial settlement of long-term payable
obligations for purchased patents and patent rights, as well as $834,000 in
purchases of capital equipment.

Net cash provided by financing activities was $3.3 million for the first
nine months of fiscal 2003, and consisted primarily of $3.9 million net
proceeds from option exercises and employee stock purchase plan purchases.
These proceeds were partially offset by payments of $584,000 for debt and
capital lease obligations.

At September 30, 2003, we had $35.6 million in cash and cash equivalents
and $38.8 million in short-term investments. We lease our facilities under
non-cancelable operating leases expiring in 2008, and we lease equipment and
software under non-cancelable leases with terms ranging from 12 to 48 months.
At September 30, 2003, we had the following contractual obligations:

|                                   |  |                |        |                  |  |                        |        |               |  |   |        |  |  |   |       | 
|---------------------------------- |  | -------------- | ------ | ---------------- |  | ---------------------- | ------ | ------------- |  | - | ------ |  |  | - | ----- | 
|                                   |  |                |        |                  |  | Payments Due by Period
|                                   |  |                |        |                  |  |                       
|                                   |  | Total          |        | Less Than 1 Year |  | 1-4 Years              |        | After 4 Years
|                                   |  |                |        |                  |  |                        |        |              
|                                   |  | (in thousands)
|Contractual Obligations            |  |                |        |                  |  |                        |        |               |  |   |        |  |  |   |       | 
|Capital Lease Obligations          |  | $              | 933    |                  |  | $                      | 469    |               |  | $ | 464    |  |  |   |      | 
|Operating Leases                   |  | $              | 21,467 |                  |  | $                      | 4,362  |               |  | $ | 13,527 |  |  | $ | 3,578 | 
|Unconditional Purchase Obligations |  | $              | 4,949  |                  |  | $                      | 4,949  |               |  |   |       |  |  |   |      | 
|Other Long Term Obligations        |  | $              | 30,500 |                  |  | $                      | 14,500 |               |  | $ | 16,000 |  |  |   |      | 
|                                   |  |                |        |                  |  |                        |        |               |  |   |        |  |  |   |       | 
|Total                              |  | $              | 57,849 |                  |  | $                      | 24,280 |               |  | $ | 29,991 |  |  | $ | 3,578 | 



During
the past twelve months, our cash and cash equivalents and
short-term investments balances have decreased $81.3 million, from $155.7
million at September 30, 2002 to $74.4 million at September 30, 2003. This
decrease includes payments of $15.0 million that were made in satisfaction of
long term debt obligations. As we shift our product mix to our next generation
processor, the Efficeon TM8000, and as we continue to develop new or enhance
existing products or services in line with our business model, we
expect that, as a result of an increased level of operations, we will
need to increase our working capital, and accordingly,
the net cash which we will use in our operating activities will increase,
exceeding our current cash and cash equivalents and short-term investments
balances, and that we will need to raise additional funds during the next
twelve months to fund our operations and satisfy our current debt
obligations.
If we are unable to raise additional funds, the
Company is positioned to modify its current business model to leverage its
intellectual property assets to
permit the Company to continue operating on a modified business model for a
period that extends at least twelve months beyond September 30, 2003.

Our capital requirements will depend on many factors, including but not
limited to 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. Although we are currently not a party to
any agreement or letter of intent for 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 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. On July 17,
2003, we filed a Form S-3 shelf registration statement with the Securities and
Exchange Commission. The shelf registration statement became effective on July
29, 2003. The shelf registration statement provides for the possible future
offer and sale by us of up to $100,000,000 in common stock, preferred stock,
secured or unsecured debt
securities and warrants, from time to time.

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Risks That Could Affect Future Results

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

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

We have a history of substantial losses and expect to incur further
significant losses. We incurred net losses of $65.7 million in the first nine
months of fiscal 2003, $110.0 million in fiscal 2002, $171.3 million in fiscal
2001 and $97.7 million in fiscal 2000. As of September 30, 2003, we had an
accumulated deficit of $520.6 million. Although we have recently taken steps to
reduce operating expenses, we cannot assure you that our operating expenses
will not increase in future periods. We also expect to incur substantial
non-cash charges relating to the amortization of deferred charges, patents and
patent rights and deferred stock and variable stock compensation, which will
serve to increase our net losses further. Our revenue must increase if we are
to achieve profitability under our current business model. We cannot assure you
that our revenue will increase, so we may never achieve profitability. Even if
we achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or an annual basis.

Our Business Is Difficult to Forecast.

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. In addition, we do not
expect that our new product, the Efficeon TM8000 microprocessor, will be
available for shipment in volume production until the first half of 2004.
Thus, we have only a very limited operating history with our products. This
limited history makes it difficult to forecast our business. Until 2000, we
derived substantially all of our revenue from license fees. Although we expect
licensing opportunities to be an increasing source of revenue for us in the
future, we need to generate substantial future revenue from product sales under
our current business model. Our ability to manufacture our products in
production quantities and the revenue and income potential of our products and
business are unproven. You should consider our chances of financial and
operational success in light of the risks, uncertainties, expenses, delays and
difficulties associated with new businesses in highly competitive technology
fields, many of which may be beyond our control. If we fail to address these
risks, uncertainties, expenses, delays and difficulties, the value of an
investment in our common stock would decline further.

Our Future Operating Results will Depend Significantly on Sales of our New
Efficeon TM8000 Products.

Our future revenue and gross margins will be influenced in large part by
the level of sales of our new Efficeon TM8000 products. Therefore, our future
operating results will depend on the demand for these products from future
customers. If we experience delays in product deliveries, our target customers
could design a competitors microprocessor into their product, which would lead
to lost sales and impede our ability to generate market interest in our new
microprocessor. If these products are not widely accepted by the market due to
performance, price, compatibility or any other reason, or if, following
acceptance, we fail to enhance these products in a timely manner, significant
demand for our new products may fail to materialize.

We Also Depend Upon Increasing Demand for Our Crusoe Microprocessors.

We have historically derived the majority of our revenue from the sale of
our Crusoe microprocessors, which we only began to ship in volume in September
2000. Therefore, our future operating results might continue to depend on the
demand for our 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 products in a timely manner, demand for our products may fail to
increase, or may diminish. If demand for our Crusoe products does not increase,
our revenue will not increase and the value of an investment in our common
stock would likely decline further.

We Are Subject to General Economic and Market Conditions.

Our business is subject to the effects of general economic conditions in
the United States and worldwide, and, in particular, market conditions in the
semiconductor and notebook computer industries. In fiscal 2001, 2002 and
through parts of fiscal 2003, our operating

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results were adversely affected by
unfavorable global economic conditions and reduced information technology
spending, particularly
in Japan, where we currently generate a substantial portion of our
revenue. These adverse conditions resulted in decreased demand for notebook
computers and, as a result, our products, which are components of notebook
computers. Further, demand for our products decreases as computer manufacturers
seek to manage their component and finished product inventory levels. If the
economic conditions in Japan and worldwide do not improve, or worsen, we may
continue to experience material adverse effects on our business, operating
results, and financial condition.

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

Transitioning to new manufacturing technologies involves extensive
redesigning of products and modifying the manufacturing processes for the
products. Difficulties in shifting to smaller geometry process technologies and
other new manufacturing processes have led to delays in product deliveries and
increased expenses. In particular, during the third and fourth quarters of
fiscal 2001 and to a lesser extent the first quarter of fiscal 2002, we
experienced difficulties in bringing our products into volume production and
distribution. As a result, in part, of these delays, our net product revenue in
2001 declined from $10.5 million in the second quarter to $5.0 million in the
third quarter and then to $1.5 million in the fourth quarter.

We intend to use Fujitsu Microelectronics to manufacture our initial 90
nanometer Efficeon TM8000 microprocessors. We have not worked with Fujitsu in
the past, and therefore, could experience difficulties in bringing these
products to volume production. If we experience delays in product deliveries,
our target customers could design a competitors microprocessor into their
product, which would lead to lost sales and impede our ability to increase our
revenue. Further, problems associated with manufacturing processes divert
engineering personnel from product development and other tasks.

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

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

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

The growth of our business depends in part on acceptance and use of our
products in new classes of devices such as tablet PCs, ultra-personal
computers, high density servers and new embedded processor applications. We
depend on the ability of our target customers to develop new products and
enhance existing products for these markets that incorporate our products and
to introduce and promote their products successfully. These new markets often
rely on newly developed technologies, which will require extensive development
and marketing before widespread acceptance is achieved, so the new markets may
grow slowly, if at all. If the new markets do not grow as we anticipate, our
target customers do not incorporate our products into theirs, or our products
are not widely accepted by end users, our growth would be impeded and we will
not be able to factor the related revenues into our growth in the future. In
addition, manufacturers within emerging markets may have widely varying
requirements. To meet the requirements of different manufacturers and markets,
we may be required to change our product design or features, sales methods or
pricing policies. The costs of addressing these requirements could be
substantial and could delay or prevent any improvement in our operating
results.

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

The semiconductor industry has historically been cyclical, and
characterized by wide fluctuations in product supply and demand. From time to
time, the industry has also experienced significant downturns, often in
connection with, or in anticipation of, maturing product cycles and declines in
general economic conditions. Industry downturns have been characterized by
diminished product demand, production overcapacity and accelerated decline of
average selling prices, and in some cases have lasted for more than a year.

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The
industry experienced a downturn of this type in 1997 and 1998, and has been
experiencing a downturn again since 2001. Our net
product revenue has decreased in response to industry-wide fluctuations,
and could decrease further. In addition, we may determine to lower our prices
of our products to increase or maintain market share, which would likely
decrease our operating results.

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

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

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



| |  |  | 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;                                                                                 
|
| |  |  | the availability of new products for volume shipment and customer demand for those products;                                                              
|
| |  |  | 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 as well as the amount of
license revenues for a period.                                                       

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



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

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| |   |  | 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.

We Might Not Experience Growth
in Our Licensing Revenues.

Although licensing revenues constituted approximately 12% of our total
revenues for the three months ended September 30, 2003, these revenues have not
accounted for more than 10% of our total revenues in recent periods subsequent
to September 2000. License transactions often have a long sales cycle and can
result in additional liability, such as indemnification obligations. In
addition, the amount of revenue we recognize under our license transactions can
depend significantly upon product sales by the licensees, over which we will
have no control. While we anticipate that we will continue to license our
technology to licensees, we cannot predict the timing or the extent of any
future licensing revenue, and recent levels of license revenues may not be
indicative of future periods.

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

Our success depends heavily upon the contributions of our key management
and technical personnel, whose knowledge, leadership and technical expertise
would be difficult to replace. Many of these individuals have been with us for
several years and have developed specialized knowledge and skills relating to
our technology and business. Others have joined us in senior management roles
only recently. In March 2003, Arthur L. Swift joined us as senior vice
president of marketing. Our success will depend in part upon the ability of
new executives to work effectively together and with the rest of our employees
to continue to develop our technology and manage the operation and growth of
our business. All of our executive officers and key personnel are employees at
will. We have no employment contracts and do not maintain key person insurance
on any of our personnel. We might not be able to execute on our business plan
if we were to lose the services of any of our key personnel. If any of these
individuals were to leave Transmeta unexpectedly, we could face substantial
difficulty in hiring qualified successors and could experience a loss in
productivity while any such successor develops the necessary training and
experience.

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

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



| |  |  | variations in our quarterly results;
| | - |  | ------------------------------------

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| |  |  | 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 experienced a decline during
2000, 2001 and through 2002, and could decline further, which could cause the
market price of our common stock to fall for reasons not necessarily related to
our business, results of operations or financial condition. The market price of
our stock also might decline in reaction to events that affect other companies
in our industry even if these events do not directly affect us. Accordingly,
you may not be able to resell your shares of common stock at or above the price
you paid. Securities class action litigation is often brought against a company
following a period of volatility in the market price of its securities, and we
have settled or are defending several purported shareholder class action or
derivative lawsuits. Although we believe that those lawsuits lack merit, it is
likely that the lawsuits will divert managements attention and resources from
other matters, which could also adversely affect our business and the price of
our stock.

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

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

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

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

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

Highly complex products such as our microprocessors may contain hardware
or software defects or bugs for many reasons,

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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 three customers in the aggregate accounted for 64% of net product
revenue in the first nine months of fiscal 2003. These customers are located in
Asia, which subjects us to economic cycles in that area as well as the
geographic areas in which they sell their products containing our
microprocessors. We expect that a small number of customers and distributors
will continue to account for a significant portion of our revenue. Our future
success will depend upon the timing and size of future purchase orders, if any,
from these customers and new customers and, in particular:



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

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

Our Dependence on TSMC and, in the future, Fujitsu Microelectronics 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 for all of our
current products. We currently intend to rely on Fujitsu Microelectronics to
manufacture our initial 90 nanometer TM8000 products. We do not have a
manufacturing agreement with TSMC that guarantees any particular production
capacity or any particular price from TSMC. We may not have guaranteed
production capacity with Fujitsu Microelectronics, although we have yet to
enter into a definitive manufacturing agreement with them. 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 and we expect that
this will also be the case with respect to Fujitsu. The absence of dedicated
capacity means that, with little or no notice, our manufacturers could refuse
to continue to fabricate all or some of the wafers that we require or change
the terms under which they fabricate wafers. If our manufacturers were to stop
manufacturing for us, we would likely be unable to replace the lost capacity in
a timely manner. Transferring to another manufacturer would require a
significant amount of time and money, and would be subject to all risks
incident to relying on third parties for wafer fabrication. As a result, we
could lose potential sales and fail to meet existing obligations to our
customers. In addition, if our manufacturers were to change the terms under
which they manufacture for us, our manufacturing costs could increase.

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

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| |  |  | 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.

The demand for our products depends upon many factors and is difficult to
forecast. Many shipments of our products may be made near the end of the fiscal
quarter, which makes it difficult to estimate demand for our products. We
expect that it will become more difficult to forecast demand as we introduce
new products and as competition in the markets for our products intensifies.
Significant unanticipated fluctuations in demand have caused, and in the future
could cause, problems in our operations.

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

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

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

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

We rely on ASE for the majority of our assembly and test services. As a
result, we do not directly control our product delivery schedules. This lack of
control could result in product shortages, which could increase our costs or
delay delivery of our products. We do not have a contract with ASE for test and
assembly services, and we typically procure these services from ASE on a per
order basis. ASE could cease to perform all of the services that we require, or
could change the terms upon which it performs services for

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us. Therefore, we
may not be able to obtain assembly and testing services for our products on
acceptable terms, or at all. If we are
required to find and qualify alternative assembly or testing services, we
could experience delays in product shipments, increased product costs or a
decline in product quality.

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

Our California facilities, including our principal executive offices, are
located near major earthquake fault lines. If there is a major earthquake or
any other natural disaster in a region where one of our facilities is located,
our business could be materially and adversely affected. In addition, TSMC,
upon which we currently rely to fabricate our wafers, and ASE, upon which we
currently rely for the majority of our assembly and test services, are located
in Taiwan. Fujitsu, which we expect will fabricate a significant amount of our
wafers in the future, is located in Japan. Taiwan and Japan have experienced
significant earthquakes and could be subject to additional earthquakes in the
future. Any earthquake or other natural disaster in these areas could
materially disrupt our manufacturer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.

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

Another outbreak of severe acute respiratory syndrome, or SARS, may have a
negative impact on our business. We have employees located in Taiwan, and we
have our products manufactured and assembled in Taiwan. Our business may be
impacted by a variety of SARS-related factors, including but not limited to
disruptions in the operations of our offices, our partners, our customers, and
their partners; reduced sales in certain end-markets; and increased costs to
conduct our business abroad. Although the magnitude of probable SARS cases has
been controlled, our business could be harmed if the number of cases of SARS
increases or spreads to other areas, including the United States.

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

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

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

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

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

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

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

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Software applications, games or operating systems with machine-specific
routines programmed into them can result in specific incompatibilities. If a
particular software application, game or operating system is programmed in a
manner that makes it unable to respond correctly to our microprocessor, it will
appear to users of that software that our microprocessor is not compatible with
PC software. We might encounter incompatibilities in the future. Software
incompatibilities that are significant or are perceived to be significant could
hinder our products from market acceptance and we might not receive significant
revenue from product sales.

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

Our ability to implement our business plan in a rapidly evolving market
requires effective planning and management process. Changes in our business
plans could place significant strain on our management systems, infrastructure
and other resources. In addition, we expect that we will continue to improve
our financial and managerial controls and procedures. We will also need to
expand, train and manage our workforce worldwide. Furthermore, we expect that
we will be required to manage an increasing number of relationships with
suppliers, manufacturers, customers and other third parties. If we fail to
manage change effectively, our employee-related costs and employee turnover
could increase and our business may not succeed.

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

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

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

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



| |  |  | accurately define and design new products to meet market needs;                           
| | - |  | ------------------------------------------------------------------------------------------
|
| |  |  | design features that continue to differentiate our products from those of our competitors;
|
| |  |  | transition our products to new manufacturing process technologies;                        
|
| |  |  | identify emerging technological trends in our target markets;                             
|
| |  |  | anticipate changes in end-user preferences with respect to our customers products;       

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| |  |  | 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. We may incur
significant research and development manufacturing or other costs that would
harm our operating margins and financial conditions in our development efforts.
These efforts may not result in enhanced products, or in additional product
sales. Accordingly, these investments may not provide us with an acceptable
return, or any return at all.

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 Markets.

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

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

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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.

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

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

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

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



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

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

Our Certificate of Incorporation and Bylaws, Stockholder Rights Plan and
Delaware Law Contain Provisions That Could

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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.

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 have
a history of substantial losses, and expects to incur future
losses. Demonstrating the effects of these losses on our cash balances, during
the past twelve months our cash and cash equivalents and short-term
investments balances have decreased $81.3 million, from $155.7 million at
September 30, 2002 to $74.4 million at September 30, 2003. As we shift our
product mix to our next generation processor, the Efficeon TM8000, and as we
continue to develop new or enhance existing products or services in line with
our business model, we expect that, as a result of an increased level
of operations, we will need to increase our working capital, and
accordingly, the net cash used to fund operating
activities will increase, exceeding our current cash and cash equivalents and
short-term investments balances, and that we will need to raise additional
funds during the next twelve months to fund our operations and satisfy our
current debt obligations. We also might need to raise
additional funds to respond to other business contingencies, which could include the
need to:



| |  |  | fund expansion;                                   
| | - |  | --------------------------------------------------
|
| |  |  | fund marketing expenditures;                      
|
| |  |  | develop new products or enhance existing products;
|
| |  |  | enhance our operating infrastructure;             
|
| |  |  | hire additional personnel;                        
|
| |  |  | respond to customer concerns about our viability; 
|
| |  |  | respond to competitive pressures; or              
|
| |  |  | acquire complementary businesses or technologies. 

27



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On July 17, 2003, we filed a Form S-3 shelf registration statement with
the Securities and Exchange Commission, which provides for the possible future
offer and sale by us of up to $100,000,000 in common stock, preferred stock,
secured or unsecured debt securities and warrants, from time to time. The
shelf registration statement became effective on July 29, 2003. However, if we
were to raise additional funds through the issuance of equity or convertible
debt securities using this registration statement or otherwise, the percentage
ownership of our stockholders would be reduced, and these newly issued
securities might have rights, preferences or privileges senior to those of our
then-existing stockholders. Additional financing might not be available on
terms favorable to us, or at all. For example, in order to raise equity
financing, we may decide to sell our stock at a discount of our then current
trading price, which may have an adverse effect on our future trading price. If
adequate funds were not available or were not available on acceptable terms,
our ability to fund our operations, take advantage of unanticipated
opportunities, develop or enhance our products or otherwise respond to
competitive pressures would be significantly limited.

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

The Sarbanes-Oxley Act of 2002 that became law in July 2002 requires
changes in some of our corporate governance, public disclosure and compliance
practices. The Act also requires the SEC to promulgate new rules on a variety
of subjects. In addition to final rules and rule proposals already made by the
SEC, the National Association of Securities Dealers has proposed revisions to
its requirements for companies, such as us, that are Nasdaq-listed. We expect
these developments to increase our legal and financial compliance costs, and to
make some activities, such as SEC reporting requirements, more difficult.
Additionally, we expect these developments to make it more difficult and more
expensive for us to obtain director and officer liability insurance, and we may
be required to accept reduced coverage or incur substantially higher costs to
obtain coverage. These developments could make it more difficult for us to
attract qualified executive officers and attract and retain qualified members
of our board of directors, particularly to serve on our audit committee. We are
presently evaluating and monitoring regulatory developments and cannot estimate
the timing or magnitude of additional costs we may incur as a result.




Item 3.Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk.Our cash equivalents and available-for-sale
investments are exposed to financial market risk due to fluctuations in
interest rates, which may affect our interest income. Over the past few years,
we have experienced significant reductions in our interest income due in part
to declines in interest rates. These declines have led to interest rates that
are low by historical standards and we do not believe that further decreases in
interest rates will have a material impact on the interest income earned on our
cash equivalents and short-term investments held at September 30, 2003.

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




Item 4.Controls and Procedures

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

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




PART II. OTHER INFORMATION




Item 1.Legal Proceedings

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Beginning in June 2001, Transmeta, its directors, and certain of its
officers were named as defendants in several putative shareholder class actions
that were consolidated in and by the United States District Court for the
Northern District of California as In re Transmeta Corporation Securities
Litigation, Case No. C 01-02450 WHA. The complaints purported to allege a class
action on behalf of persons who purchased Transmeta common stock between
November 7, 2000 and July 19, 2001, and alleged violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5
promulgated thereunder, and Sections 11 and 15 of the Securities Act of 1933,
as amended. In March 2002, the Court granted in part and denied in part
defendants motions to dismiss the consolidated amended complaint. In May 2002,
the Court granted in part and denied in part defendants motion to dismiss the
second amended complaint, and denied plaintiffs motion for leave to file a
third amended complaint. In June 2002, defendants answered the second amended
complaint as to the sole surviving claim. In July 2002, defendants filed a
motion for summary judgment relating to that claim. In July 2002, plaintiffs
moved for class certification and initiated discussion of a proposed
settlement. The Company and the individual defendants believe that the
complaints are without merit and deny any liability, but because they also wish
to avoid the continuing waste of management time and expense of litigation,
they entered into an agreement in October 2002 to settle all claims that might
have been brought in this action for approximately $5.5 million,
all of which monies have been fully funded by
defendants director and officer liability insurance. In March 2003, after
proper class notice and hearings, the Court approved the settlement and entered
judgment for defendants, dismissing the action. In April 2003, a plaintiffs law firm that was not selected by the
Court to serve as class counsel filed a notice of appeal relating to certain
Court orders addressing that firms applications to the Court for attorneys
fees. In August 2003, on appellants own motion, the Court of Appeals
dismissed the appeal.

Beginning in June 2001, the directors and certain officers of Transmeta
were named as defendants in four purported shareholder derivative actions that
were consolidated in and by the Superior Court for Santa Clara County in In re
Transmeta Corporation Derivative Litigation, Master File No. CV 799491. The
complaints were based upon the same matters alleged in the shareholder class
action described above. In July 2002, the Court sustained the Companys
demurrer with leave to amend based on plaintiffs lack of standing, and
deferred consideration of the individual defendants demurrer on the merits.
The Company and the individual defendants believe that the
complaints are without merit and deny any liability, but because they also wish
to avoid the continuing waste of management time and expense of litigation,
they entered into an agreement to settle all claims that might have been
brought in this action. The settlement includes a payment of
approximately $300,000 in fees to counsel for the derivative
plaintiffs and shall be fully funded by defendants
director and officer liability insurance. In October 2003, upon motion and after a
hearing, the Court approved the settlement and entered an order dismissing the
consolidated derivative action as to all defendants.

Beginning in June 2001, the Company, certain of its directors and
officers, and certain of the underwriters for its initial public offering were
named as defendants in three putative shareholder class actions that were
consolidated in and by the United States District Court for the Southern
District of New York in In re Transmeta Corporation Initial Public Offering
Securities Litigation, Case No. 01 CV 6492. The complaints allege that the
prospectus issued in connection with the Companys initial public offering on
November 7, 2000 failed to disclose certain alleged actions by the underwriters
for that offering, and alleges claims against the Company 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. Similar actions have been filed against more
than 300 other companies that issued stock in connection with other initial
public offerings during 1999-2000. Those cases have been coordinated for
pretrial purposes as In re Initial Public Offering Securities Litigation,
Master File No. 21 MC 92 (SAS). In July 2002, the Company joined in a
coordinated motion to dismiss filed on behalf of multiple issuers and other
defendants. In February 2003, the Court granted in part and denied in part the
coordinated motion to dismiss, and issued an order regarding the pleading of
amended complaints. Plaintiffs subsequently proposed a settlement offer to all
issuer defendants, which settlement would provide for payments by
issuers insurance carriers if plaintiffs fail to recover a
certain amount from underwriter defendants. Although the Company and the individual defendants believe
that the complaints are without merit and deny any liability, but because they
also wish to avoid the continuing waste of management time and expense of
litigation, they accepted plaintiffs proposal to settle all claims that might
have been brought in this action. The Company and the individual Transmeta
defendants expect that their share of the global settlement will be fully
funded by their director and officer liability insurance. Although the Company and the Transmeta defendants have
approved the settlement in principle, it remains subject to several procedural
conditions, as well as formal approval by the Court. It is possible that the
parties may not reach a final written settlement agreement or that the Court
may decline to approve the settlement in whole or part. In the event that the
parties do not reach agreement on the final settlement, the Company and the
Transmeta defendants believe that they have meritorious defenses and intend to
defend any remaining action vigorously.




Item 2.Changes in Securities and Use of Proceeds

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Recent Sales of Unregistered Securities

Not Applicable.

Use of Proceeds From Sales of Registered Securities

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

As of September 30, 2003, we paid $14.5 million of the net proceeds to IBM
under the terms of our amended license agreement, $1.1 million to Quickturn
Design Systems to repay indebtedness incurred in conjunction with equipment
purchases in 1998, approximately $14.0 million in property and equipment
purchases and $29.5 million for the purchase of intellectual property and
related assets from Seiko Epson and other intellectual property owners. We have
also paid approximately $230.3 million to fund ordinary operating expenses.




Item 3.Defaults upon Senior Securities

Not Applicable.




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

Not Applicable.




Item 5.Other Information

Not Applicable.




Item 6.Exhibits and Reports on Form 8-K

(a)  Exhibits.

The following exhibits are filed herewith:

|               |  |                                                                                                                                               |  |  |  | 
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit Number |  | Exhibit Title                                                                                                                                 |  |  |  | 
|               |  |                                                                                                                                               |  |  |  | 
|10.23          |  | Retention and Severance Plan adopted on July 15, 2003.                                                                                       
|               |  |                                                                                                                                              
|31.1           |  | Certification by Matthew R. Perry pursuant to 15 U.S.C.
Section 7241, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.  
|               |  |                                                                                                                                              
|31.2           |  | Certification by Svend-Olav Carlsen pursuant to 15 U.S.C.
Section 7241, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|               |  |                                                                                                                                              
|32.1*          |  | Certification by Matthew R. Perry pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.  
|               |  |                                                                                                                                              
|32.2*          |  | Certification by Svend-Olav Carlsen pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

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

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(b)  Reports on Form 8-K

On July 17, 2003, we filed a current report on Form 8-K respecting a press
release we issued announcing earnings for the quarter ended June 27, 2003. The
information furnished under that Form 8-K was intended to be furnished and not
deemed filed with the Securities and Exchange Commission, and is not
incorporated by reference in any filing of Transmeta Corporation under the
Securities Act of 1933 or the Securities Exchange Act of 1934, including this
quarterly report, whether made before or after the date of that Form 8-K and
irrespective of any general incorporation language in any filings.

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SIGNATURES

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

| |  |                       |  |                                 
| |  | --------------------- |  | --------------------------------
| |  | TRANSMETA CORPORATION
| |  |                       |  |                                 
| |  | By:                   |  | /s/ SVEND-OLAV CARLSEN          
| |  |                       |  |                                 
| |  |                       |  | Svend-Olav Carlsen              
| |  |                       |  | Chief Financial Officer         
| |  |                       |  | (Principal Financial Officer and
| |  |                       |  | Duly Authorized Officer)        

Date: November 7, 2003

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EXHIBIT INDEX

|               |  |                                                                                                                                               |  |  |  | 
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit Number |  | Exhibit Title                                                                                                                                 |  |  |  | 
|               |  |                                                                                                                                               |  |  |  | 
|10.23          |  | Retention and Severance Plan adopted on July 15, 2003.                                                                                       
|               |  |                                                                                                                                              
|31.1           |  | Certification by Matthew R. Perry pursuant to 15 U.S.C.
Section 7241, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.  
|               |  |                                                                                                                                              
|31.2           |  | Certification by Svend-Olav Carlsen pursuant to 15 U.S.C.
Section 7241, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|               |  |                                                                                                                                              
|32.1*          |  | Certification by Matthew R. Perry pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.  
|               |  |                                                                                                                                              
|32.2*          |  | Certification by Svend-Olav Carlsen pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

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