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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 MARCH 30, 2001

                                       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)

<TABLE>
<S>                                            <C>
                   DELAWARE                                      77-0402448
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)
</TABLE>

                   3940 FREEDOM CIRCLE, SANTA CLARA, CA 95054
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

                                 (408) 919-3000
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

                            ------------------------

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

     There were 131,216,378 shares of the Company's common stock, par value
$0.00001 per share, outstanding on March 30, 2001.

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<PAGE>   2

                             TRANSMETA CORPORATION

                                   FORM 10-Q
                     QUARTERLY PERIOD ENDED MARCH 30, 2001

                               TABLE OF CONTENTS

                         PART I. FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                       PAGE
                                                                       ----
<S>      <C>                                                           <C>
Item 1.  Condensed Consolidated Financial Statements
         Condensed Consolidated Balance Sheets as of March 30, 2001
         (unaudited) and December 29, 2000...........................    1
         Condensed Consolidated Statements of Operations for the
         Three Months Ended March 30, 2001 and March 31, 2000
         (unaudited).................................................    2
         Condensed Consolidated Statements of Cash Flows for the
         Three Months Ended March 30, 2001 and March 31, 2000
         (unaudited).................................................    3
         Notes to Condensed Consolidated Financial Statements
         (unaudited).................................................    4
Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations...................................    6
Item 3.  Quantitative and Qualitative Disclosures about Market
         Risk........................................................   22

                        PART II. OTHER INFORMATION
Item 1.  Legal Proceedings...........................................   23
Item 2.  Changes in Securities and Use of Proceeds...................   23
Item 3.  Defaults Upon Senior Securities.............................   23
Item 4.  Submission of Matters to a Vote of Security Holders.........   23
Item 5.  Other Information...........................................   23
Item 6.  Exhibits and Reports on Form 8-K............................   24
Signatures...........................................................   25
</TABLE>

                                        i
<PAGE>   3

                         PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                             TRANSMETA CORPORATION

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                               MARCH 30,     DECEMBER 29,
                                                                 2001          2000(1)
                                                              -----------    ------------
                                                              (UNAUDITED)
<S>                                                           <C>            <C>
Current assets:
  Cash and cash equivalents.................................   $ 212,407      $ 259,744
  Short-term investments....................................      91,656         83,358
  Accounts receivable, net..................................      11,743          3,298
  Inventories...............................................      23,997         15,453
  Prepaid expenses and other current assets.................      10,446          7,821
                                                               ---------      ---------
          Total current assets..............................     350,249        369,674
  Property and equipment, net...............................      11,629         10,482
  Deferred charges under license agreements.................      23,766         26,097
  Loans to founders.........................................       5,530          5,446
  Intangible and other assets...............................      10,346            837
                                                               ---------      ---------
          Total assets......................................   $ 401,520      $ 412,536
                                                               =========      =========
                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................   $   9,661      $   7,237
  Accrued compensation and related compensation
     liabilities............................................       3,237          2,215
  Other accrued liabilities.................................       4,360          7,926
  Long-term debt and capital lease obligations, current
     portion................................................       4,815          5,292
  Long-term payables, current portion.......................       5,500          4,000
                                                               ---------      ---------
          Total current liabilities.........................      27,573         26,670
Long-term debt and capital lease obligations, net of current
  portion...................................................       2,131          3,046
Deposits received under subleasing agreements...............         138            138
Long-term payables, net of current portion..................      19,828         17,766
Commitments and contingencies
Stockholders' equity:
  Preferred stock, $0.00001 par value (none issued).........          --             --
  Common stock, $0.00001 par value, at amounts paid in......     591,844        589,220
  Notes receivable from stockholders........................     (17,902)       (17,752)
  Deferred stock compensation...............................     (26,376)       (32,988)
  Accumulated other comprehensive income....................         700            147
  Accumulated deficit.......................................    (196,416)      (173,711)
                                                               ---------      ---------
          Total stockholders' equity........................     351,850        364,916
                                                               ---------      ---------
          Total liabilities and stockholders' equity........   $ 401,520      $ 412,536
                                                               =========      =========
</TABLE>

---------------
(1) Derived from the Company's audited financial statements as of December 29,
    2000, included in the Company's Form 10-K filed with the Securities and
    Exchange Commission, but does not include all of the information and
    footnotes required by generally accepted accounting principles for complete
    financial statements.

                            (See accompanying notes)

                                        1
<PAGE>   4

                             TRANSMETA CORPORATION

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED
                                                              ----------------------
                                                              MARCH 30,    MARCH 31,
                                                                2001         2000
                                                              ---------    ---------
<S>                                                           <C>          <C>
Net revenues:...............................................  $ 18,570     $      4
Cost of product revenue.....................................    10,381            4
                                                              --------     --------
Gross profit................................................     8,189           --
                                                              --------     --------
Operating expenses:
  Research and development(1)...............................    17,126       11,477
  Selling, general and administrative(2)....................     8,990        5,666
  Amortization of deferred charges and other intangible
     assets.................................................     3,379        2,249
  Amortization of deferred stock compensation...............     6,127        1,126
                                                              --------     --------
          Total operating expenses..........................    35,622       20,518
                                                              --------     --------
Operating loss..............................................   (27,433)     (20,518)
  Interest income...........................................     5,072          938
  Interest expense..........................................      (331)        (450)
                                                              --------     --------
Loss before income taxes....................................   (22,692)     (20,030)
  Provision for income taxes................................        14           --
                                                              --------     --------
Net loss....................................................  $(22,706)    $(20,030)
                                                              ========     ========
Net loss per share -- basic and diluted.....................  $  (0.18)    $  (0.67)
                                                              ========     ========
Weighted average shares outstanding -- basic and diluted....   125,970       29,787
                                                              ========     ========
</TABLE>

---------------
(1) Excludes $3,660 and $75 in amortization of deferred stock compensation for
    the three months ended March 30, 2001 and March 31, 2000, respectively.

(2) Excludes $2,467 and $1,051 in amortization of deferred stock compensation
    for the three months ended March 30, 2001 and March 31, 2000, respectively.

                            (See accompanying notes)

                                        2
<PAGE>   5

                             TRANSMETA CORPORATION

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED
                                                              ----------------------
                                                              MARCH 30,    MARCH 31,
                                                                2001         2000
                                                              ---------    ---------
<S>                                                           <C>          <C>
NET CASH USED IN OPERATING ACTIVITIES.......................    (31,082)    (15,242)
                                                              ---------    --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
  Purchase of available-for-sale investments................   (401,257)    (34,000)
  Proceeds from sale or maturity of available-for-sale
     investments............................................    393,512      38,960
  Purchase of property and equipment........................     (2,908)       (707)
  Purchase of intellectual property and other assets........     (4,000)         --
                                                              ---------    --------
          Net cash (used in)/provided by investing
            activities......................................    (14,653)      4,253
                                                              ---------    --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from issue of preferred stock................         --      12,151
  Expenses related to initial public offering of common
     stock..................................................       (256)         --
  Common stock issued under stock option plans..............         45          66
  Issuance of debt and capital lease obligations............         --         386
  Repayment of debt and capital lease obligations...........     (1,391)     (1,032)
                                                              ---------    --------
          Net cash (used in)/provided by financing
            activities......................................     (1,602)     11,571
                                                              ---------    --------
Change in cash and cash equivalents.........................    (47,337)        582
Cash and cash equivalents at beginning of period............    259,744      46,645
                                                              ---------    --------
Cash and cash equivalents at end of period..................  $ 212,407    $ 47,227
                                                              =========    ========
</TABLE>

                            (See accompanying notes)

                                        3
<PAGE>   6

                             TRANSMETA CORPORATION

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

 1. BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission and generally accepted accounting principles. However,
certain information or footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed, or omitted, pursuant to such rules and regulations. In the
opinion of management, the statements include all adjustments (which are of a
normal and recurring nature) necessary for the fair presentation of the results
of the interim periods presented. These financial statements should be read in
conjunction with our audited consolidated financial statements and the notes
thereto for the year ended December 29, 2000. The results of operations for the
three months are not necessarily indicative of the operating results for the
full fiscal year or any future period.

     The Company's fiscal year ends on the last Friday in December, and each
fiscal quarter ends on the last Friday of each calendar quarter. Fiscal year
2000 ended on December 29 and consisted of 52 weeks. The first quarter of 2001
ended on March 30 and consisted of 13 weeks.

 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as
amended by SFAS 137, establishes methods for recording derivative financial
instruments and hedging activities related to those instruments, as well as
other hedging activities. As required, the Company adopted SFAS 133 effective
January 1, 2001. Because Transmeta does not currently hold any derivative
instruments and does not engage in hedging activities the adoption of SFAS 133,
as amended by SFAS 137, did not have a significant impact on its consolidated
financial position or results of operations.

 3. NET LOSS PER SHARE

     Basic and diluted net loss per share is presented in conformity with the
FASB's SFAS No. 128, "Earnings Per Share" ("SFAS 128"), 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:

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED
                                                         ----------------------
                                                         MARCH 30,    MARCH 31,
                                                           2001         2000
                                                         ---------    ---------
                                                         (IN THOUSANDS, EXCEPT
                                                           PER SHARE AMOUNTS)
<S>                                                      <C>          <C>
Basic and diluted:
  Net loss.............................................  $(22,706)    $(20,030)
                                                         --------     --------
Basic and diluted:
  Weighted average shares outstanding..................   131,083       36,676
  Less: Weighted average shares subject to
     repurchase........................................    (5,113)      (6,889)
                                                         --------     --------
  Weighted average shares used in computing basic and
     diluted net loss per share........................   125,970       29,787
                                                         --------     --------
Net loss per share -- basic and diluted................  $  (0.18)    $  (0.67)
                                                         ========     ========
</TABLE>

                                        4
<PAGE>   7
                             TRANSMETA CORPORATION

                   NOTES TO CONDENSED CONSOLIDATED FINANCIAL
                             STATEMENTS (CONTINUED)
                                  (UNAUDITED)

     The Company has excluded all outstanding stock options and shares subject
to repurchase from the calculation of basic and diluted net loss per share
because these securities are antidilutive for all periods presented. Options and
warrants to purchase 17,283,037 shares of common stock at March 30, 2001 and
11,893,704 shares of common stock at March 31, 2000, determined using the
treasury stock method, were not included in the computation of diluted net loss
per share because the effect would be antidilutive. These securities, had they
been dilutive, would have been included in the computation of diluted net loss
per share using the treasury stock method.

 4. ACCUMULATED OTHER COMPREHENSIVE INCOME

     Total accumulated other comprehensive income was $700,000 and $147,000 for
the three months ended March 30, 2001 and March 31, 2000, respectively.
Accumulated other comprehensive gains are comprised entirely of unrealized gains
on available for sale securities.

 5. SEGMENT INFORMATION

     Transmeta operates solely in one segment, the development, marketing and
sale of hardware and software technologies for the mobile computing market. The
Company also currently operates in one geographic region and is evaluated by
management on a single segment basis. Sales to Japan, Taiwan and the United
States in the first quarter of 2001 accounted for 56%, 27% and 17% of sales,
respectively. Sales to three customers accounted for at least 10% each and for
63% in the aggregate of product revenue in the first quarter of 2001.

 6. 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):

<TABLE>
<CAPTION>
                                                       MARCH 30,    DECEMBER 29,
                                                         2001           2000
                                                       ---------    ------------
<S>                                                    <C>          <C>
Work in progress.....................................   $10,173       $ 6,680
Finished goods.......................................    13,824         8,773
                                                        -------       -------
                                                        $23,997       $15,453
                                                        =======       =======
</TABLE>

                                        5
<PAGE>   8

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

     This Form 10-Q contains forward-looking statements based on our current
expectations, estimates and projections about our industry, management's beliefs
and certain assumptions made by us. Words such as "anticipates," "expects,"
"intends," "plans," believes" or similar expressions are intended to identify
forward-looking statements. These statements include, among other things,
statements concerning our anticipated growth strategies, anticipated trends in
our business and the markets in which we operate, our expectations for our
future performance and the market acceptance of our products, our need for
additional capital, and the status of evolving technologies and their growth
potential. In addition, the section entitled "Risks That May Affect Future
Results" in Part I, Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" consists primarily of forward-looking
statements. Forward looking-statements are only predictions, based upon our
current expectations about future events. We cannot guarantee future results,
performance or achievements or that predictions or current expectations will be
accurate.

     Forward-looking statements are subject to risks, uncertainties and
assumptions that are difficult to predict. Therefore, our actual results could
differ materially and adversely from those expressed in any forward-looking
statements as a result of various factors. The section entitled "Risks That May
Affect Future Results" in Part I, Item 2, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" discusses some of the
important risk factors that may affect our business, results of operations and
financial condition. You should carefully consider those risks. Investors are
cautioned not to place undue reliance on these forward-looking statements that
speak only as of the date of this report. We undertake no obligation to revise
or update any forward-looking statements for any reason.

OVERVIEW

     We develop and sell software-based microprocessors and develop additional
hardware and software technologies that enable computer manufacturers to build
computers that simultaneously offer long battery life, high performance and x86
compatibility. 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 significantly
reduces the amount of capital we need to invest in manufacturing products.

     From our inception in March 1995 until September 2000, we were in the
development stage and engaged primarily in research and development activities.
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 we began
recognizing product revenue from sales of these microprocessors in the first
half of 2000. Through June 30, 2000, product shipments consisted of development
systems and prototypes. We began volume shipments of production units in the
third quarter of 2000 and emerged from the development stage during that period.
We expect to be dependent on sales of Crusoe microprocessors and successive
generations of these products for the foreseeable future.

     We currently sell our products primarily to OEMs and, to a lesser extent,
through distributors. Sales to three customers located in Asia Pacific accounted
for 36%, 14% and 13%, respectively, of our product revenue during the first
quarter of 2001. The loss of a major customer, or the delay of significant
orders from these customers could reduce or delay our recognition of product
revenue. Although we derive a substantial portion of our product revenue from
customers in Asia, we expect that these customers ultimately will sell their
products to major PC manufacturers in the United States and Japan. All of our
sales to date have been denominated in U.S. dollars, and we expect that most of
our sales in the future will be denominated in U.S. dollars. Substantially all
of our product sales in the first quarter of fiscal 2001 were for the notebook
computer market. If our Crusoe products fail to achieve widespread acceptance in
the notebook computer market we may not achieve revenue sufficient to sustain
our business.

     In August 2000, we entered into a distribution agreement with Siltrontech
Electronics Corporation in Taiwan to support our sales and marketing activities
in the Far East market. We appointed Siltrontech

                                        6
<PAGE>   9

Electronics as the exclusive distributor of our products in Taiwan, Hong Kong
and China until December 31, 2002, other than the right to sell products to OEMs
and major notebook computer manufacturers. In September 2000, we appointed All
American Semiconductor as the exclusive distributor of our products in North
America until December 31, 2002, other than the right to sell products to OEMs
and major notebook computer manufacturers. These agreements specify inventory
levels and price protection and contain provisions regarding rights of return.

     We generally recognize revenue from product sales upon transfer of title,
typically upon shipment, and provide for expected returns and warranty costs at
that time. With respect to products shipped to distributors, we defer
recognition of product revenue if the product is subject to price protection or
stock rotation until the distributors sell our products to their customers.

     Cost of product 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.
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. They also will include commissions paid to internal and
external sales representatives, once volume shipments increase. We have incurred
no sales commission costs to date.

     In connection with the grant of stock options to our employees in 2000, we
recorded deferred stock compensation of approximately $45.6 million,
representing the difference between the deemed fair value of our common stock
for accounting purposes and the exercise price of these options at the date of
grant. Deferred stock compensation is presented as a reduction of stockholders'
equity and is amortized on the graded vesting method. We will incur substantial
expense in future periods as a result of the amortization of the deferred stock
compensation. In addition, we recorded $1.3 million of deferred compensation
expense in the first quarter of 2000 related to a severance agreement with a
former employee.

     Historically, we have incurred significant losses. As of March 30, 2001, we
had an accumulated deficit of $196.4 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. General softening in
the semiconductor industry and in the general economy has occurred in the first
calendar quarter of 2001 and is expected to continue through at least the second
quarter of 2001. Our operating results could fluctuate in response to the
general economic downturn.

RESULTS OF OPERATIONS

     Revenue. Product revenue was $18.6 million in the first quarter of 2001
compared to $4,000 during the first quarter of 2000. Initial shipments of
commercial products and shipments of prototypes and development systems occurred
in the second quarter of 2000 and volume commercial shipments began in the third
quarter of fiscal 2000. Sales to three customers accounted for at least 10% and
for 63% in the aggregate or our product revenue during the first quarter of
2001.

     Gross Profit. Product gross profit, which equals product revenue less cost
of product revenue, was $8.2 million in the first quarter of 2001 compared to
zero in the first quarter of 2000. Product gross profit in the first quarter of
2001 reflects a significant increase in the volume of product shipments
including prototypes and development systems. Product gross profit in the first
quarter of 2000 reflects minimal product and prototype sales. We expect our
gross margin, which is product gross profit as a percentage of product revenue,
to vary from period to period due to the mix of products sold, the stage in the
life cycle of each of our products and expenses in connection with the
manufacturing process. For example, newly introduced products generally have
higher average selling prices, which typically decline over product life cycles
due to competitive pressures and technological advances.

                                        7
<PAGE>   10

     Research and Development. Research and development expenses were $17.1
million in the first quarter of 2001 compared to $11.5 million in the first
quarter of 2000. This increase is primarily a result of hiring additional
development personnel, prototype wafer costs and services, costs of photomasks
used to print circuits on a wafer and depreciation and amortization expenses
arising from significant purchases of computer aided design and other software
tools. We believe that continued investment in research and development is
critical to attaining our strategic objectives and we expect research and
development expenses to increase in absolute dollars in the future.

     Selling, General and Administrative. Selling, general and administrative
were $9.0 million in the first quarter of 2001 compared to $5.7 million in the
first quarter of 2000. This increase was largely due to additional costs related
to recruiting and retaining personnel and the overall expansion in our level of
operations. We anticipate that selling, general and administrative expenses will
remain relatively consistent through the second quarter of 2001 but are expected
to increase in absolute dollars in the future as we continue to increase staff,
develop product marketing and branding campaigns, and develop our infrastructure
to support a larger, global organization.

     Amortization of Deferred Charges and Other Intangible Assets. In connection
with the renegotiations of technology license agreements which we previously
entered into with IBM and Toshiba and amortization of other intangible assets we
recorded amortization of $3.4 million in the first quarter of 2001 and $2.2
million in the first quarter of 2000. Future amortization will be $10.6 million
in the remainder of 2001, $14.0 million in 2002, $11.6 million in 2003 and the
balance in future years.

     Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation was $6.1 million in the first quarter of 2001 and $1.1 million in
the first quarter of 2000. We expect to record an additional $13.8 million
during the remainder of 2001, $8.2 million in 2002, $3.6 million in 2003 and the
balance in future years.

     Interest Income. Interest income was $5.1 million in the first quarter of
2001 compared to $938,000 in the first quarter of 2000. The increase is
primarily due to larger average invested cash balances resulting from the
closing of our initial public offering in November 2000.

     Interest Expense. Interest expense decreased to $331,000 in the first
quarter of 2001 from $450,000 in the first quarter of 2000. The decrease is due
to lower average debt balances due to several lease-financing arrangements
expiring during late 2000.

     Provision for Income Taxes. We recorded a provision for income taxes of
$14,000 in the first quarter of 2001 relating to foreign taxes in Taiwan
withheld for local taxes imposed on local non-revenue income. We did not record
a tax provision in 2000.

LIQUIDITY AND CAPITAL RESOURCES

     Prior to our initial public offering on November 6, 2000, we funded our
operations primarily through sales of equity securities and, to a lesser extent,
from license revenue and lease financing. Net proceeds from our initial public
offering were approximately $289.4 million. As of March 30, 2001 we had $304.1
million in cash and cash equivalents and short-term investments.

     Net cash used in operating activities during the first quarter of 2001 was
$31.1 million compared to $15.2 million used during the first quarter of 2000.
Net cash used in operating activities was attributable to our net losses and
significant inventory and accounts receivable increases, partially offset by
non-cash depreciation and amortization charges and increases in accounts payable
and accrued liabilities. Increases in accounts payable and accrued liabilities
were due to the general continued growth in business activity from the first
quarter of 2000 through the first quarter of 2001. The increase in accounts
payable in the first quarter of 2001 was also due to significant
inventory-related purchases.

     Net cash used for investing activities during the first quarter of 2001 was
$14.7 million compared to $4.3 million provided during the first quarter of
2000. Net cash used for investing activities in the first quarter of 2001
consisted primarily of the purchase of available for sale investments and a $4.0
million cash outflow in

                                        8
<PAGE>   11

consideration for intellectual property and related assets. Net cash provided
during the first quarter of fiscal 2000 was primarily the result of the proceeds
from the sales and maturities of short term-investments.

     Net cash used for financing activities during the first quarter of 2001 was
$1.6 million compared to $11.6 million provided during the first quarter of
2000. Net cash used during the first quarter of 2001 was primarily due to the
repayment of debt and capital lease obligations. Net cash provided during the
first quarter of 2000 is primarily attributable to advance proceeds from the
issuance of convertible preferred stock of $12.2 million, which closed in April
2000.

     At March 30, 2001, we had $212.4 million in cash and cash equivalents and
$91.7 million in short-term investments. We lease our facilities under
non-cancelable operating leases expiring in 2008, and we lease equipment and
software under non-cancelable leases with terms ranging from 36 to 48 months. At
March 30, 2001, we had total minimum lease payments of $33.4 million under our
operating leases and $5.2 million under our capital leases. We also are
obligated to pay IBM a total of $33.0 million -- $4.0 million in December 2001,
$6.0 million in 2002, $7.0 million in 2003 and $16.0 million in 2004 -- in
connection with amendments to our technology license agreement. Finally, our
foundry relationship with IBM allows us to cancel all outstanding purchase
orders, but requires us to pay the foundry for expenses it has incurred in
connection with the purchase orders through the date of cancellation. As of
March 30, 2001, IBM had incurred approximately $9.2 million of manufacturing
expenses on our outstanding purchase orders. We also had minimum aggregate
principal payments of $2.3 million under our long-term debt. As of March 30,
2001, we had a $449,000 commitment for a capital expenditure. We anticipate that
additional capital expenditures will be required as we grow our business.

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

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as
amended by SFAS 137, establishes methods for recording derivative financial
instruments and hedging activities related to those instruments, as well as
other hedging activities. As required, the Company adopted SFAS 133 effective
January 1, 2001. Because Transmeta does not currently hold any derivative
instruments and does not engage in hedging activities the adoption of SFAS 133,
as amended by SFAS 137, did not have a significant impact on its consolidated
financial position or results of operations.

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<PAGE>   12

RISKS THAT MAY AFFECT FUTURE RESULTS

     The factors discussed below are cautionary statements that identify
important factors that could cause actual results to differ materially from
those anticipated in the forward-looking statements in this Form 10-Q. If any of
the following risks actually occurs, our business, financial condition and
results of operations would suffer. In 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, expect to incur further
significant losses, and do not expect to achieve profitability in the near
future. We incurred net losses of $22.7 million in the first quarter of 2001,
$97.7 million in 2000, $41.1 million in 1999 and $10.1 million in 1998. As of
March 30, 2001, we had an accumulated deficit of approximately $196.4 million.
We intend to increase our research and development, sales and marketing, and
administrative expenses over time. We also expect to incur substantial non-cash
charges relating to the amortization of deferred charges, intellectual property
and deferred stock compensation, which will serve to increase our net losses
further. We cannot assure you that our revenue will increase, so we may never
achieve profitability. Even if we achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or an annual basis.

OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE RECOGNIZED OUR FIRST PRODUCT
REVENUE IN THE FIRST HALF OF 2000.

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

WE DEPEND ON INCREASING DEMAND FOR OUR CRUSOE MICROPROCESSORS.

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

OUR FUTURE REVENUE DEPENDS UPON OUR ABILITY TO PENETRATE THE NOTEBOOK COMPUTER
MARKET.

     Our success depends upon our ability to sell our Crusoe microprocessors in
volume to the small number of OEMs that manufacture notebook computers. Due to
our software-based approach to microprocessor design, we have been required, and
expect to continue to be required, to devote substantial resources to educate
prospective customers in the notebook computer market about the benefits of our
Crusoe products and to assist potential customers with their designs. In
addition, since computer products generally are designed to incorporate a
specific microprocessor, OEMs must design new products to utilize different

                                        10
<PAGE>   13

microprocessors such as our Crusoe products. Given the complexity of these
computer products and their many components, designing new products requires
significant investments. For instance, OEMs may need to design new computer
casings, basic input/output system software and motherboards. Our target
customers may not choose our products for technical, performance, packaging,
novelty, design cost or other reasons. For example, IBM showed a technology
demonstration at a trade show in June 2000 using the Crusoe microprocessor in an
existing ThinkPad model 240 notebook computer, but decided not to proceed with
the project. If our Crusoe products fail to achieve widespread acceptance in the
notebook computer market, we would likely never achieve revenue sufficient to
sustain our business and the value of an investment in our common stock would
decline significantly.

THE GROWTH OF OUR BUSINESS DEPENDS IN PART ON THE GROWTH OF THE HIGH-DENSITY
SERVER AND INTERNET APPLIANCE MARKETS AND OUR ABILITY TO MEET THE NEEDS OF THESE
MARKETS.

     The growth of our business depends in part on acceptance and use of our
products in new markets such as the high density server and Internet appliance
markets. We depend on the ability of our target customers to develop new
products and enhance existing products for these markets that incorporate our
products and to introduce and promote their products successfully. The market
for high-density servers depends in part upon the success of our target
customers and development partners to successfully incorporate recent
technologies into their servers. In addition, the infancy of these recent
technologies will require additional development and marketing before widespread
acceptance is achieved. The market for Internet appliances depends in part upon
the deployment of wireless technologies that enable the delivery of Internet
content at a speed comparable to that of a desktop computer. The wireless
technologies currently under development might not fully address the needs of
mobile Internet users. If the use of high-density servers and Internet
appliances 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. In addition, the high-density server and Internet
appliance markets are new and evolving slowly. Internet appliance manufacturers
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.

OUR OPERATING RESULTS ARE DIFFICULT TO PREDICT IN ADVANCE AND MAY FLUCTUATE
SIGNIFICANTLY, AND A FAILURE TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR
INVESTORS WOULD LIKELY RESULT IN A SUBSTANTIAL DECLINE IN OUR STOCK PRICE.

     There is little historical financial information that is useful in
evaluating our business, prospects or future operating results. You should not
rely on quarter-to-quarter comparisons of our results of operations as an
indication of our future performance. We expect our future operating results to
fluctuate significantly from quarter to quarter. If our operating results fail
to meet or exceed the expectations of securities analysts or investors, our
stock price would likely decline substantially.

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

     - the gain or loss of significant customers or significant changes in their
       purchasing volume;

     - the amount and timing of our operating expenses and capital expenditures;

     - pricing concessions that we 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;

     - 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.

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<PAGE>   14

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

     - fluctuations in manufacturing yields;

     - cancellations, changes or delays of deliveries to us by our
       manufacturers;

     - the cost and availability of manufacturing, assembly and test capacity;
       and

     - problems or delays due to shifting our products to smaller geometry
       process technologies and designing our products to achieve higher levels
       of design integration.

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

     - the timing, rescheduling or cancellation of customer orders;

     - the varying length of our sales cycles;

     - the availability and pricing of competing products and technologies and
       the resulting effect on sales and pricing of our products;

     - fluctuations in the cost and availability of components, such as dynamic
       random access memory, or DRAM, 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.

     Because a large portion of our expenses, including rent, salaries and
capital leases, is fixed and difficult to reduce, if our revenue does not meet
our expectations, the adverse effect of the revenue shortfall will be magnified
by the fixed nature of our expenses.

COMPETITION IN THE SEMICONDUCTOR MARKET IS INTENSE; MANY OF OUR COMPETITORS AND
POTENTIAL 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 intensely competitive, rapidly evolving
and subject to rapid technological change. We believe that competition will
become more intense in the future and 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. Significant competitors that offer
microprocessors for the notebook computer market include Advanced Micro Devices
and Intel. Intel recently announced lower power versions of its microprocessor
to target applications in the ultra-light notebook computer market. Significant
competitors that offer microprocessors for the Internet appliance market include
licensees of technology from ARM Holdings and MIPS Technologies. We also face
competition from providers of x86 compatible microprocessors for the
high-density server market from Intel and for the Internet appliance market from
National Semiconductor.

     Many of 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

                                        12
<PAGE>   15

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

OUR PRODUCTS MAY HAVE DEFECTS, WHICH COULD DAMAGE OUR REPUTATION, DECREASE
MARKET ACCEPTANCE OF OUR PRODUCTS, CAUSE US TO LOSE CUSTOMERS AND REVENUE, AND
RESULT IN LIABILITY TO US.

     Highly complex products such as our microprocessors may contain hardware or
software defects or bugs for many reasons, including design issues or defective
material. Often, these defects and bugs are not detected until after the
products have been shipped. For example, in November 2000, our customer NEC
Corporation recalled 284 computers manufactured using Crusoe products, which had
a defect in the silicon. If any of our products contains further 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.

     During the first quarter of 2001, sales to three customers accounted for at
least 10% each and for 63% in the aggregate of our product revenue. Further, we
presently derive a substantial portion of our product revenue from customers
located in Asia, and face intense competition in our efforts to sell our
products to customers located in the U.S. and Europe. We expect that a small
number of OEM customers and distributors will continue to account for a
significant portion of our revenue. Our future success will depend upon the
timing and size of future purchase orders, if any, from these customers and new
customers and, in particular:

     - the success of our customers in marketing products that incorporate our
       products;

     - the product requirements of our customers; and

     - the financial and operational success of our customers.

     We have entered into two distributor agreements, both of which are
exclusive in large territories, one in Taiwan, Hong Kong and China and the other
in North America. These agreements do not contain minimum purchase commitments.
Any distributor that fails to emphasize sales of our products, chooses to
emphasize alternative products or promotes 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

                                        13
<PAGE>   16

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 product revenue.

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. We
anticipate that our customers will 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 semiconductor industry has experienced shortages
of some materials and devices, including dynamic random access memory, or DRAM.
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 PRODUCT REVENUE.

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

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<PAGE>   17

OUR RECENT GROWTH COULD PLACE A SIGNIFICANT STRAIN ON OUR MANAGEMENT SYSTEMS,
INFRASTRUCTURE AND OTHER RESOURCES, AND OUR BUSINESS MAY NOT SUCCEED IF WE FAIL
TO MANAGE OUR GROWTH EFFECTIVELY.

     Our ability to implement our business plan in a rapidly evolving market
requires an effective planning and management process. Until 2000, we focused
primarily on the development of our products. We have recently increased our
number of employees substantially and plan to increase the scope of our
operations and the size of our direct sales force domestically and
internationally. The number of employees that we and our subsidiaries employ
increased from 193 at January 1, 2000 to 418 at March 30, 2001. We expect to
expand our facilities in proportion to any expansion in the number of our
employees. This growth could place a significant strain on our management
systems, infrastructure and other resources. In addition, we expect that we will
need to 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 our growth effectively, our
employee-related costs and employee turnover could increase, which would
jeopardize our ability to execute on our business plan.

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 companies designing our microprocessors into their products,
which we refer to as design wins. Many of our targeted customers consider the
choice of a microprocessor to be a strategic decision. Thus our targeted
customers may take a long time to evaluate our products, and many individuals
may be involved in the evaluation process. We anticipate that the length of time
between our initial contact with a customer and the time when we recognize
revenue from that customer will vary. We expect our sales cycles to range from
six to twelve months from the time we achieve a design win to the time the
customer begins volume production of products that incorporate our
microprocessors. We do not have historical experience selling our products that
is sufficient for us to determine how our sales cycles will affect the timing of
our revenue. Variations in the length of our sales cycles could cause our
revenue to fluctuate widely from period to period. While potential customers are
evaluating our products and before they place an order with us, we may incur
sales and marketing expenses and expend significant management and engineering
resources without any assurance of success. The value of any design win depends
upon the commercial success of our customers' products. Therefore, we take risks
related to project cancellations or changed product plans, which could result in
the loss of 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. 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
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;

                                        15
<PAGE>   18

     - bring products to market on a timely basis at competitive prices; and

     - respond effectively to technological changes or product announcements by
       others.

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

OUR DEPENDENCE ON THIRD PARTIES 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 IBM to fabricate our wafers. Our contract with IBM
does not obligate IBM to provide us with any specified number of wafers at any
specified price until IBM has accepted a purchase order. The absence of
dedicated capacity under our agreement means that, with little or no notice, IBM
could refuse to continue to fabricate all or some of the wafers that we require
or change the terms under which it fabricates wafers. If IBM 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 a smooth and timely transition would be
unlikely. As a result, we could lose potential sales and fail to meet existing
obligations to our customers. In addition, if IBM were to change the terms under
which it manufactures for us, our manufacturing costs could increase.

     We have qualified TSMC in Taiwan to fabricate wafers for Crusoe
microprocessors. We do not have a manufacturing agreement with TSMC or a
guaranteed level of production capacity or any particular price from TSMC. We
place orders on a purchase order basis and TSMC may allocate capacity to other
companies' products while reducing deliveries to us on short notice. Any future
inability of TSMC to fabricate our wafers could result in significant delays and
increase production costs of our microprocessors.

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

     - unpredictability of manufacturing yields and production costs;

     - interruptions in shipments;

     - potential lack of adequate capacity to fill all or part of the services
       we require;

     - inability to control quality of finished products;

     - inability to control product delivery schedules; and

     - potential lack of access to key fabrication process technologies.

OUR DEPENDENCE ON THIRD PARTIES TO PROVIDE ASSEMBLY AND TEST SERVICES LIMITS OUR
CONTROL OVER PRODUCTION COSTS AND PRODUCT SUPPLY.

     We rely on IBM for substantially all of our assembly and test services. As
a result, we do not directly control our product delivery schedules. This lack
of control could result in product shortages as IBM manufactures our current
products in volume and, in the future, as we introduce new products. Product
shortages could increase our costs or delay delivery of our products. We do not
have a contract with IBM for test and assembly services, and we typically
procure these services from IBM on a per order basis. 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 or a decline
in product quality.

THE THIRD PARTIES THAT FABRICATE OUR WAFERS MAY NOT ACHIEVE ACCEPTABLE
MANUFACTURING YIELDS, WHICH 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

                                        16
<PAGE>   19

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. If we do not achieve expected yields, our product costs would
increase. 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 of slower products and insufficient inventory of faster
products, depending upon customer demand. Further, we have experienced lower
yield problems as we initially migrated our manufacturing processes to smaller
geometries. 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 could hamper our ability to deliver our products to our customers
in a timely manner.

IF WE EXPERIENCE DIFFICULTIES IN TRANSITIONING TO SMALLER GEOMETRY PROCESS
TECHNOLOGIES, WE COULD EXPERIENCE REDUCED MANUFACTURING YIELDS, DELAYS IN
PRODUCT DELIVERIES AND INCREASED EXPENSES.

     We continuously evaluate the benefits, on a product-by-product basis, of
migrating to a smaller geometry process technology to reduce costs and increase
the performance of our microprocessors. We expect to begin producing later in
2001 some of our products using a .13 micron, rather than .18 micron, geometry
process. This transition involves redesigning the product and modifying the
manufacturing processes for the product. Difficulties in shifting to a smaller
geometry process technologies or other new manufacturing processes can lead to
reductions in manufacturing yields, delays in product deliveries and increased
expenses. In addition, 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. If our
third party manufacturers or we experience significant delays in this transition
or fail to efficiently implement this transition, our ability to achieve revenue
growth and margin improvement from existing manufacturing capacity would be
jeopardized, particularly if we experience price pressures on the affected
products.

IF WE FAIL TO FORECAST DEMAND FOR OUR PRODUCTS ACCURATELY, WE COULD LOSE SALES
AND INCUR INVENTORY LOSSES.

     Because we only introduced our products in January 2000 and did not start
volume shipments of commercial products until June 2000, we have little
historical information about demand for our products. We expect that the demand
for our products will depend upon many factors and be difficult to forecast. We
expect that it will become more difficult to forecast demand as we introduce a
larger number of products and as competition in the markets for our products
intensifies. Significant unanticipated fluctuations in demand could cause
problems in our operations.

     The lead time required to fabricate large volumes of wafers is often longer
than the lead time our customers provide to us for delivery of their product
requirements. Therefore, we often must place our orders in advance of expected
purchase orders from our customers. As a result, we have only a limited ability
to react to fluctuations in demand for our products, which could cause us to
have either too much or too little inventory of a particular product. If demand
does not develop as we expect, we could have excess production. Excess
production would result in excess inventories of finished products, which would
use cash and could result in inventory write-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 may decrease. Excess materials would
likely result in excess or obsolete inventory. If demand exceeds our
expectations, IBM may not be able to fabricate wafers as quickly as we need
them. In that event, we would need to increase production rapidly at IBM or
find, qualify and begin production at additional manufacturers, which may not be
possible within a time frame acceptable to our customers. The inability of IBM
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.

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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 portfolios with respect to
semiconductor technology. From time to time, third parties, including these
leading companies, may assert exclusive patent, copyright, trademark and other
intellectual property rights to technologies and related methods that are
important to us. We expect that we may become subject to infringement claims as
the number of products and competitors in our target markets grows and the
functionality of products overlaps. We have received, and may in the future
receive, communications from third parties asserting patent or other
intellectual property rights covering our products. Litigation may be necessary
in the future to defend against claims of infringement or invalidity, to
determine the validity and scope of the proprietary rights of others, to enforce
our intellectual property rights, or to protect our trade secrets. We may also
be subject to claims from customers for indemnification. Any resulting
litigation, regardless of its resolution, could result in substantial costs and
diversion of resources.

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

IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS ADEQUATELY, OUR COMPETITORS
MIGHT GAIN ACCESS TO OUR TECHNOLOGY AND WE MIGHT NOT COMPETE SUCCESSFULLY IN OUR
MARKET.

     We believe that our success will depend in part upon our proprietary
technology. We rely on a combination of patents, copyrights, trademarks, trade
secret laws and contractual obligations with employees and third parties to
protect our proprietary rights. These legal protections provide only limited
protection and may be time consuming and expensive to obtain and enforce. If we
fail to protect our 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. Even if
our pending patent applications are approved, the resulting patents may not
provide us with any competitive advantage or may be challenged by third parties.
If challenged, our patents might not be upheld or their claims could be
narrowed. Any litigation surrounding our rights could force us to divert
important financial and other resources from our business operations.

WE MIGHT NOT BE ABLE TO EXECUTE ON OUR BUSINESS PLAN IF WE LOSE KEY MANAGEMENT
AND TECHNICAL PERSONNEL, ON WHOSE KNOWLEDGE, LEADERSHIP AND TECHNICAL EXPERTISE
WE RELY.

     Our success depends heavily upon the continued contributions of our key
management and technical personnel, whose knowledge, leadership and technical
expertise would be difficult to replace. Several of these

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<PAGE>   21

individuals have been with us for a number of years. All of our executive
officers and key personnel are employees at-will. We have no employment
contracts and maintain no 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.

WE WILL NOT BE ABLE TO GROW OUR BUSINESS IF WE ARE UNABLE TO HIRE, TRAIN AND
RETAIN ADDITIONAL 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 additional highly-skilled
sales, marketing, engineering and finance personnel. In particular, we will need
to expand 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 additional
engineering staff of various experience levels in order to meet our product
roadmap. 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 to expand our business. 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 amortization expenses 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.

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. A
downturn of this type occurred in 1997 and 1998. General softening in the
semiconductor industry has occurred in the first quarter of 2001 and is expected
to continue through at least the second quarter of 2001. Our operating results
could deteriorate in response to industry-wide fluctuations.

GENERAL ECONOMIC CONDITIONS CAN LEAD TO REDUCED DEMAND FOR OUR PRODUCTS.

     A decline in economic conditions generally could lead to reduced demand for
notebook computers, which in turn would reduce demand for our products. A
significant decline in economic conditions in any geographic area that is
significant to us, such as Japan, Europe or the United States, could decrease
the overall demand for our products and harm our operating results.

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 expect to sell a significant portion of our
products to customers overseas. As part of our international expansion, we have
opened an office in Taiwan to provide sales and customer support, and expect to
do the same in Japan later in 2001. In addition, we have appointed a distributor
to sell products in Taiwan, Hong

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<PAGE>   22

Kong and China. In attempting to conduct and expand business internationally, we
are exposed to various risks that could adversely affect our international
operations and, consequently, our operating results, including:

     - difficulties and costs of staffing and managing international operations;

     - fluctuations in currency exchange rates;

     - unexpected changes in regulatory requirements, including imposition of
       currency exchange controls;

     - longer accounts receivable collection cycles;

     - import or export licensing requirements;

     - potentially adverse tax consequences;

     - political and economic instability; and

     - potentially reduced protection for intellectual property rights.

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

SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO
DECLINE.

     Approximately 113 million shares of our common stock subject to lock-up
agreements terminating on May 5, 2001 may be sold on that date in the public
market, subject to prior registration or qualification for an exemption from
registration, including, in the case of shares held by affiliates, compliance
with the volume restrictions of Rule 144 under the Securities Act of 1933. The
market price of our common stock could decline as a result of sales of a large
number of these shares of our common stock in the market or the perception that
these sales could occur.

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 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;

     - 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;

     - changes in the estimates of our operating performance or changes in
       recommendations by any securities analysts that follow our stock; and

     - market conditions in our industry, the industries of our customers and
       the economy as a whole.

     In addition, the stock market generally and the market for
technology-related stocks in particular has experienced a decline in recent
months 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. In the past, securities class
action litigation has often been brought against a company following a period of
volatility in the market price of its securities. We may in

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<PAGE>   23

the future be the target of similar litigation. Securities litigation could
result in substantial costs and divert management's attention and resources.

OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS
THAT COULD DISCOURAGE OR PREVENT A TAKEOVER, EVEN IF AN ACQUISITION WOULD BE
BENEFICIAL TO OUR STOCKHOLDERS.

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

     - establishing a classified board of directors so that not all members of
       our board may be elected at one time;

     - providing that directors may only be removed "for cause" and only with
       the approval of 66 2/3% of our stockholders;

     - 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, Section 203 of the Delaware General Corporation Law may
discourage, delay or prevent a change in control.

IF WE NEED ADDITIONAL FINANCING, WE MAY NOT BE ABLE TO RAISE FURTHER FINANCING
OR IT MAY ONLY BE AVAILABLE ON TERMS UNFAVORABLE TO US OR OUR STOCKHOLDERS.

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

     - fund more rapid expansion;

     - fund additional marketing expenditures;

     - develop new products or enhance existing products;

     - enhance our operating infrastructure;

     - hire additional personnel;

     - respond to competitive pressures; or

     - acquire complementary businesses or technologies.

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Interest Rate Risk. Our cash equivalents and short-term investments are
exposed to financial market risk due to fluctuations in interest rates, which
may affect our interest income. As of March 30, 2001, our cash equivalents and
short-term investments included money market funds and commercial paper and
earned interest at an average rate of 5.6%. Due to the short-term nature of our
investment portfolio, operating results or cash flows are vulnerable to sudden
changes in market interest rates. We do not use our investment portfolio for
trading or other speculative purposes.

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

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<PAGE>   25

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

     From time to time, we may be involved in litigation relating to claims
arising out of our operations. As of the date of filing this Form 10-Q, we are
not subject to any material legal proceedings.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

  Recent Sales of Unregistered Securities

     In January 2001, we issued 351,912 shares of common stock to Comdisco, Inc.
upon the exercise of a warrant that was granted in April 1997. The exercise
price of $0.63 per share was paid by a net exercise of the warrant through the
surrender of shares issuable under the warrant.

     In February 2001, we issued 31,719 shares of common stock, and agreed to
issue in each of January 2002 and January 2003 an additional $1.0 million in
common stock to an intellectual property owner, in consideration for certain
intellectual property and related assets.

     In February 2001, we issued 153,061 shares of common stock to Phoenix
Technologies upon exercise of a warrant that was granted in August 1997. The
exercise price of $1.25 per share was paid by a net exercise of the warrant
through the surrender of shares issuable under the warrant.

     In March 2001, we issued a warrant to Twinhead Corp. to purchase up to
25,000 shares of common stock at a price of $5.00 per share, exercisable upon
the performance of services as specified in the warrant. The warrant expires on
February 1, 2005.

     In March 2001, we issued a warrant to InSync, Inc. to purchase up to 2,500
shares of common stock at a price of $16.81 per share, exercisable upon the
performance of services as specified in the warrant. The warrant expires on
December 31, 2001.

  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
was registered with the Securities and Exchange Commission with an aggregate
offering price of approximately $314 million. Net offering proceeds to us (after
deducting underwriting discounts and offering expenses) were approximately
$289.4 million.

     As of March 30, 2001, we had paid $5.0 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, and $4.0 million to an intellectual property owner for the
purchase of certain intellectual property and related assets. The remaining net
proceeds have been invested in short-term interest bearing, investment-grade
securities.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

     Not Applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     Not Applicable

ITEM 5. OTHER INFORMATION.

     Not Applicable.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

     (a) Exhibits.

     Not applicable

     (b) Reports on Form 8-K

     We did not file any reports on Form 8-K during the quarter ended on March
30, 2001.

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                                   SIGNATURES

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

Date: April 27, 2001                      TRANSMETA CORPORATION

                                          By:    /s/ MERLE A. MCCLENDON
                                            ------------------------------------
                                                     Merle A. McClendon
                                                  Chief Financial Officer
                                              (Principle Financial Officer and
                                                  Duly Authorized Officer)

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