##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period from     to
 Commission File Number 000-31803
 TRANSMETA CORPORATION
 (Exact name of Registrant as specified in its charter)
 Delaware
    
    77-0402448(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification no.)
 2540 Mission College Boulevard, Santa Clara, CA 95054
(Address of principal executive offices, including zip code)
(408) 919-3000
(Registrants telephone number, including area code)
 
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



TRANSMETA CORPORATION
FORM 10-Q
Quarterly Period Ended September 30, 2008
 TABLE OF CONTENTS
 PageCaution Regarding Forward-Looking Statements
    
    
    3PART I. FINANCIAL INFORMATION
    
    
    4Item 1. Financial Statements
    
    
    4Unaudited Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007
    
    
    4Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months ended
September 30, 2008 and 2007
    
    
    5Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 2008 and 2007
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28PART II. OTHER INFORMATION
    
    
 29Item 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 4. Submissions of Matters to a Vote of Security Holders
    
    
    37Item 6. Exhibits
    
    
    37Signatures
    
    
    38INDEX TO EXHIBITS
    
    
    39EXHIBIT 10.40EXHIBIT 10.41EXHIBIT 10.42EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01EXHIBIT 32.02




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##### Table of Contents



Caution Regarding Forward-Looking Statements
     Accounting Principles Board opinion
    
    APB OpinionBlack-Scholes-Merton valuation model
    
    BSM modelFASB Emerging Issues Task Force issue
    
    EITF IssueFASB Interpretation
    
    FINFASB Staff Accounting Position
    
    FSPFinancial Accounting Standards Board
    
    FASBSEC Staff Accounting Bulletin
    
    SABSecurities and Exchange Commission
    
    SECStatement of Financial Accounting Standards
    
    SFAS
  Advanced Micro Devices, Inc.
    
    AMDIntel Corporation
    
    IntelMicrosoft Corporation
    
    MicrosoftNEC Electronics
    
    NECNovafora,
Inc.
    
    NovaforaNVIDIA Corporation
    
    NVIDIASeiko Epson Corporation
    
    EpsonSony Corporation
    
    SonyToshiba Corporation
    
    Toshiba
 3




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 TRANSMETA CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2008
    
    
    2007(1)(unaudited)(In thousands, except for share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    205,271
    
    
    $
    15,607Short-term investments
    
    
    49,969
    
    
    
    2,968Accounts receivable
    
    
    2
    
    
    
    163Other receivables, current
    
    
    
    
    
    
    149,400Prepaid expenses and other current assets
    
    
    1,963
    
    
    
    2,476Total current assets
    
    
    257,205
    
    
    
    170,614Other receivables, long-term
    
    
    
    
    
    
    85,200Property and equipment, net
    
    
    194
    
    
    
    284Patents and patent rights, net
    
    
    
    
    
    
    2,388Other assets
    
    
    200
    
    
    
    800Total assets
    
    $
    257,599
    
    
    $
    259,286LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,029
    
    
    $
    341Accrued compensation
    
    
    774
    
    
    
    15,351Income tax payable
    
    
    15
    
    
    
    3,306Accrued restructuring costs
    
    
    352
    
    
    
    1,592Other accrued liabilities
    
    
    473
    
    
    
    1,028Current portion of deferred income from settlement and licensing
    
    
    23,460
    
    
    
    23,460Current portion of long-term payable
    
    
    800
    
    
    
    667Total current liabilities
    
    
    26,903
    
    
    
    45,745Long-term deferred income from settlement and licensing, net of
current portion
    
    
    193,545
    
    
    
    211,140Long-term payables, net of current portion
    
    
    200
    
    
    
    800Total liabilities
    
    
    220,648
    
    
    
    257,685Commitments and contingencies (notes 13 and 15)Stockholders equity:Convertible preferred stock, $0.00001 par value, at amounts
paid in; authorized shares  5,000,000. Issued and outstanding
shares - 1,000,000 and liquidation preference of $7.5 million,
at September 30, 2008 and December 31, 2007
    
    
    6,966
    
    
    
    6,966Common stock, $0.00001 par value, at amounts paid in;
authorized shares  50,000,000. Issued and outstanding 
12,204,088 shares at September 30, 2008 and 12,021,388 at
December 31, 2007
    
    
    743,641
    
    
    
    739,268Treasury stock  39,843 shares at September 30, 2008 and December
31, 2007
    
    
    (2,439
    )
    
    
    (2,439
    )Accumulated other comprehensive income
    
    
    190
    
    
    
    29Accumulated deficit
    
    
    (711,407
    )
    
    
    (742,223
    )Total stockholders equity
    
    
    36,951
    
    
    
    1,601Total liabilities and stockholders equity
    
    $
    257,599
    
    
    $
    259,286
 
 (1)
    
    Derived from the audited financial statements of Transmeta Corporation
as of December 31, 2007 but does not include all disclosures required
by accounting principles generally accepted in the United States.  4




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##### Table of Contents



TRANSMETA CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands, except for per share data)Revenue:Product
    
    $
    
    
    
    $
    
    
    
    $
    253
    
    
    $
    167License
    
    
    25,299
    
    
    
    1
    
    
    
    25,905
    
    
    
    1Service
    
    
    
    
    
    
    43
    
    
    
    168
    
    
    
    2,186Total revenue
    
    
    25,299
    
    
    
    44
    
    
    
    26,326
    
    
    
    2,354Cost of revenue:Product
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    80Service(*)
    
    
    
    
    
    
    18
    
    
    
    163
    
    
    
    1,236Impairment charge on inventories
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    364Total cost of revenue
    
    
    
    
    
    
    18
    
    
    
    166
    
    
    
    1,680Gross profit
    
    
    25,299
    
    
    
    26
    
    
    
    26,160
    
    
    
    674Operating expenses:Income from settlement and licensing
    
    
    (5,865
    )
    
    
    
    
    
    
    (17,595
    )
    
    
    Income from license and receivable
    
    
    (2,855
    )
    
    
    
    
    
    
    (2,855
    )
    
    
    Research and development(*)
    
    
    1,586
    
    
    
    1,336
    
    
    
    6,751
    
    
    
    8,809Selling, general and administrative(*)
    
    
    3,700
    
    
    
    6,107
    
    
    
    12,150
    
    
    
    17,857Restructuring charges, net
    
    
    (97
    )
    
    
    177
    
    
    
    700
    
    
    
    8,878Amortization of patents and patent rights
    
    
    
    
    
    
    1,711
    
    
    
    2,388
    
    
    
    5,134Impairment charge on long-lived and
other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    302Total operating expenses
    
    
    (3,531
    )
    
    
    9,331
    
    
    
    1,539
    
    
    
    40,980Operating income (loss)
    
    
    28,830
    
    
    
    (9,305
    )
    
    
    24,621
    
    
    
    (40,306
    )Interest income and other, net
    
    
    1,813
    
    
    
    250
    
    
    
    6,197
    
    
    
    1,109Interest expense
    
    
    
    
    
    
    (15
    )
    
    
    (2
    )
    
    
    (53
    )Net income (loss) before income tax
    
    
    30,643
    
    
    
    (9,070
    )
    
    
    30,816
    
    
    
    (39,250
    )Provision for income taxes
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    7Net income (loss)
    
    
    30,643
    
    
    
    (9,073
    )
    
    
    30,816
    
    
    
    (39,257
    )Deemed dividend for beneficial
conversion feature of preferred stock
    
    
    
    
    
    
    (3,630
    )
    
    
    
    
    
    
    (3,630
    )Net income (loss) attributable to common
shareholders
    
    $
    30,643
    
    
    $
    (12,703
    )
    
    $
    30,816
    
    
    $
    (42,887
    )Net income (loss) per share attributable to
common shareholders  basic
    
    $
    2.52
    
    
    $
    (1.24
    )
    
    $
    2.54
    
    
    $
    (4.26
    )Net income (loss) per share attributable to
common shareholders  diluted
    
    $
    2.31
    
    
    $
    (1.24
    )
    
    $
    2.33
    
    
    $
    (4.26
    )Weighted average shares outstanding  basic
    
    
    12,170
    
    
    
    10,236
    
    
    
    12,145
    
    
    
    10,066Weighted average shares outstanding  diluted
    
    
    13,265
    
    
    
    10,236
    
    
    
    13,220
    
    
    
    10,066(*) Includes stock-based compensation:Cost of service revenue
    
    $
    
    
    
    $
    1
    
    
    $
    82
    
    
    $
    18Research and development
    
    
    156
    
    
    
    (271
    )
    
    
    1,599
    
    
    
    11Selling, general and administrative
    
    $
    731
    
    
    $
    244
    
    
    $
    2,047
    
    
    $
    941
  5




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##### Table of Contents



TRANSMETA
CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Nine Months Ended September 30,2008
    
    
    2007(In thousands)Cash flows from operating activities:Net income (loss)
    
    $
    30,816
    
    
    $
    (39,257
    )Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:Stock-based compensation expense
    
    
    3,728
    
    
    
    970Depreciation
    
    
    194
    
    
    
    465Gain on disposal of fixed assets, net
    
    
    (37
    )
    
    
    (171
    )Realized gain on marketable securities
    
    
    (14
    )
    
    
    Amortization of patents and patent rights
    
    
    2,388
    
    
    
    5,134Impairment charge on inventories
    
    
    
    
    
    
    364Impairment charge on long-lived and other assets
    
    
    
    
    
    
    302Non cash restructuring charges
    
    
    700
    
    
    
    8,878Changes in operating assets and liabilities:Accounts receivable, current
    
    
    161
    
    
    
    265Inventories
    
    
    
    
    
    
    (360
    )Prepaid expenses and other current assets
    
    
    513
    
    
    
    47Other receivables
    
    
    234,600
    
    
    
    Other assets
    
    
    600
    
    
    
    1,131Accounts payable and accrued liabilities
    
    
    (14,855
    )
    
    
    (643
    )Income tax payable
    
    
    (3,291
    )
    
    
    (45
    )Deferred income from settlement and licensing
    
    
    (17,595
    )
    
    
    Deferred revenue
    
    
    
    
    
    
    (15
    )Advances from customers
    
    
    
    
    
    
    (1,320
    )Accrued restructuring charges
    
    
    (1,940
    )
    
    
    (9,270
    )Net cash provided by (used in) operating activities
    
    
    235,968
    
    
    
    (33,525
    )Cash flows from investing activities:Purchase of available-for-sale investments
    
    
    (139,616
    )
    
    
    (2,978
    )Proceeds from sale or maturity of
available-for-sale investments
    
    
    92,734
    
    
    
    24,000Proceeds from fixed asset disposals
    
    
    37
    
    
    
    186Purchase of property and equipment
    
    
    (104
    )
    
    
    (47
    )Net cash provided by (used in) investing activities
    
    
    (46,949
    )
    
    
    21,161Cash flows from financing activities:Net proceeds from direct placement offering
of common stock and warrants
    
    
    
    
    
    
    11,600Net proceeds from issuance of preferred stock
    
    
    
    
    
    
    6,966Proceeds from sales of common stock under
employee stock purchase and incentive option
plans
    
    
    441
    
    
    
    1,832Proceeds from exercise of warrants
    
    
    204
    
    
    
    Net cash provided by financing activities
    
    
    645
    
    
    
    20,398Increase in cash and cash equivalents
    
    
    189,664
    
    
    
    8,034Cash and cash equivalents at beginning of period
    
    
    15,607
    
    
    
    11,595Cash and cash equivalents at end of period
    
    $
    205,271
    
    
    $
    19,629Supplemental disclosure of non-cash financing
activities during the period:Deemed dividend for beneficial conversion feature of
preferred stock
    
    $
    
    
    
    $
    (3,630
    )
  6




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##### Table of Contents



TRANSMETA CORPORATION
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Overview
 Formation and Business of the Company
  tm
 Recent
Developments
   Basis of Presentation
  Reclassifications
  2. Recent Accounting Pronouncements
 The Fair Value Option for Financial
Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115
 Business Combinations
 7




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##### Table of Contents



Non-controlling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 Effective FAS Date of FASB Statement
No. 157 Fair Value Measurements
 Determination of the Useful Life of
Intangible Asset Goodwill and Other Intangible Assets (SFAS 142) Business Combinations,
 The Hierarchy of Generally Accepted
Accounting Principles The Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles
 Determining the Fair Value of a Financial
Asset When the Market for That Asset is Not Active
  3. Net Comprehensive Income (Loss)
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    30,643
    
    
    $
    (9,073
    )
    
    $
    30,816
    
    
    $
    (39,257
    )Net change in unrealized gain on investments
    
    
    137
    
    
    
    15
    
    
    
    151
    
    
    
    44Net change in foreign currency translation
adjustments
    
    
    (4
    )
    
    
    7
    
    
    
    10
    
    
    
    51Net comprehensive income (loss)
    
    $
    30,776
    
    
    $
    (9,051
    )
    
    $
    30,977
    
    
    $
    (39,162
    )
  8




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##### Table of Contents



September 30,
    
    
    December 31,(In thousands)
    
    2008
    
    
    2007Net unrealized gain (loss) on investments
    
    $
    147
    
    
    $
    (4
    )Cumulative foreign currency translation adjustments
    
    
    43
    
    
    
    33Accumulated other comprehensive income
    
    $
    190
    
    
    $
    29
 4. Income from Settlement and Licensing
    Interest
on Receivables and Payables
  (In thousands)
    
    September 30, 2008
    
    
    December 31, 2007Non-interest bearing note, consisting of
Payments of 5 x $20 million (due Jan 2009-Jan 2013), plus the
initial $150 million
payment (due Jan 2008) as of December 31, 2007
    
    $
    100,000
    
    
    $
    250,000Unamortized discount on $150
million initial payment,
based on 4.70% imputed
interest rate
    
    
    
    
    
    
    (600
    )Unamortized discount on $100
million of 2009-2013
payments, based on 5.41%
imputed interest rate
    
    
    (11,355
    )
    
    
    (14,800
    )Less unamortized discount based on imputed interest rates
    
    
    (11,355
    )
    
    
    (15,400
    )Less payment acceleration per September 2008 agreement
    
    
    (88,645
    )
    
    
    Present value of other receivables from Intel
    
    $
    
    
    
    $
    234,600Other receivables, current
    
    
    
    
    
    
    149,400Other receivables, long-term
    
    
    
    
    
    
    85,200Present value of other receivables from Intel
    
    $
    
    
    
    $
    234,600
  5. Financial Statement Components
 9




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##### Table of Contents



Property and Equipment
  September 30,
    
    
    December 31,(In thousands)
    
    2008
    
    
    2007Property and equipment, netLeasehold improvements
    
    $
    2,325
    
    
    $
    2,325Computer equipment
    
    
    3,599
    
    
    
    3,519Furniture and fixtures
    
    
    395
    
    
    
    395Computer software
    
    
    719
    
    
    
    7757,038
    
    
    
    7,014Less accumulated depreciation and amortization
    
    
    (6,844
    )
    
    
    (6,730
    )Total
    
    $
    194
    
    
    $
    284
 6. Cash and Cash Equivalents, Marketable Securities and Fair Value of Financial Instruments
   Gross
    
    
    Gross(In thousands)
    
    Fair Value
    
    
    Book Value
    
    
    Unrealized Gain
    
    
    Unrealized (Loss)As of September 30, 2008Money market funds
    
    $
    887
    
    
    $
    887
    
    
    $
    
    
    
    $
    Federal agency paper
    
    
    252,920
    
    
    
    252,773
    
    
    
    164
    
    
    
    (17
    )Commercial paper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total marketable securities: available for sale
    
    
    253,807
    
    
    
    253,660
    
    
    
    164
    
    
    
    (17
    )Cash
    
    
    1,433
    
    
    
    1,433
    
    
    
    
    
    
    
    Total cash, cash equivalents and short term investments
    
    $
    255,240
    
    
    $
    255,093
    
    
    $
    164
    
    
    $
    (17
    )As of December 31, 2007Money market funds
    
    $
    14,627
    
    
    $
    14,627
    
    
    $
    
    
    
    $
    Federal agency paper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial paper
    
    
    2,968
    
    
    
    2,972
    
    
    
    
    
    
    
    (4
    )Total marketable securities: available for sale
    
    
    17,595
    
    
    
    17,599
    
    
    
    
    
    
    
    (4
    )Cash
    
    
    980
    
    
    
    980
    
    
    
    
    
    
    
    Total cash, cash equivalents and short term investments
    
    $
    18,575
    
    
    $
    18,579
    
    
    $
    
    
    
    $
    (4
    )
  (In thousands)
    
    September 30, 2008
    
    
    December 31, 2007Cash
    
    $
    1,433
    
    
    $
    980Cash equivalents
    
    
    203,838
    
    
    
    14,627Short term investments
    
    
    49,969
    
    
    
    2,968Total cash, cash equivalents and short term investments
    
    $
    255,240
    
    
    $
    18,575
  10




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##### Table of Contents



Gross
    
    
    Gross(In thousands)
    
    Fair Value
    
    
    Book Value
    
    
    Unrealized Gain
    
    
    Unrealized (Loss)As of September 30, 2008:Amounts maturing within one year
    
    $
    253,807
    
    
    $
    253,660
    
    
    $
    164
    
    
    $
    (17
    )Amounts maturing after one year, within five years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total marketable securities: available for sale
    
    $
    253,807
    
    
    $
    253,660
    
    
    $
    164
    
    
    $
    (17
    )As of December 31, 2007:Amounts maturing within one year
    
    $
    17,595
    
    
    $
    17,599
    
    
    $
    
    
    
    $
    (4
    )Amounts maturing after one year, within five years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total marketable securities: available for sale
    
    $
    17,595
    
    
    $
    17,599
    
    
    $
    
    
    
    $
    (4
    )
      Fair Value of Financial Instruments
 Fair Value Measurements
   Level 1
    -
    Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.Level 2
    -
    Inputs are quoted prices for similar assets or liabilities in an active market, quoted
prices for identical or similar assets or liabilities in markets that are not active,
inputs other than quoted prices that are observable and market-corroborated inputs which
are derived principally from or corroborated by observable market data.Level 3
    -
    Inputs are derived from valuation techniques in which one or more significant inputs or
value drivers are unobservable (i.e., supported by little or no market activity).
  11




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##### Table of Contents



(Level 1)Quoted Prices in Active
    
    
    (Level 2)Balance as of
    
    
    Markets of Identical
    
    
    Significant Other(In thousands)
    
    September 30, 2008
    
    
    Assets
    
    
    Observable InputsAvailable-for-sale securities
    
    $
    253,807
    
    
    $
    887
    
    
    $
    252,920
  The Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment of FASB Statement No. 115 Accounting for Certain Investments
in Debt and Equity Securities.
 7. Stock Based Compensation
 Share-Based
Payment
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(In thousands, except for per share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Stock-based compensation expense by type of award:Employee stock options
    
    $
    809
    
    
    $
    373
    
    
    $
    3,576
    
    
    $
    1,716Restricted stock awards
    
    
    12
    
    
    
    
    
    
    
    12
    
    
    
    Employee stock purchase plan
    
    
    66
    
    
    $
    (399
    )
    
    
    140
    
    
    
    (746
    )Total stock-based compensation
    
    
    887
    
    
    
    (26
    )
    
    
    3,728
    
    
    
    970Tax effect on stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net effect of stock-based compensation on results
of operations
    
    $
    887
    
    
    $
    (26
    )
    
    $
    3,728
    
    
    $
    970
 Stock Options and Employee Stock Purchase Plan (ESPP):
   Valuation Assumptions
  12




---



##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,Employee Stock Option Plans
    
    2008
    
    2007
    
    2008
    
    2007Risk-free interest rate
    
    
    2.8
    %
    
    
    4.5
    %
    
    
    2.9
    %
    
    
    4.6
    %Expected life in years
    
    
    4.3
    
    
    
    4.0
    
    
    
    4.3
    
    
    
    4.0Expected stock price volatility
    
    
    102
    %
    
    
    91
    %
    
    
    104
    %
    
    87% to 90%Weighted-average fair value of
stock options granted
    
    $
    10.36
    
    
    $
    7.09
    
    
    $
    10.50
    
    
    $
    7.62
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,Employee Stock Purchase Plan (ESPP)
    
    2008
    
    2007
    
    2008
    
    2007Risk-free interest rate
    
    
    2.3
    %
    
    
    5.1
    %
    
    
    2.1
    %
    
    
    5.1
    %Expected life in years
    
    
    1.3
    
    
    
    1.3
    
    
    
    1.3
    
    
    
    1.3Expected stock price volatility
    
    
    102
    %
    
    
    86
    %
    
    102% to 151%
    
    71% to 86%Weighted-average fair value of
purchase rights granted under the
purchase plan
    
    $
    7.66
    
    
    $
    5.07
    
    
    $
    9.19
    
    
    $
    5.88
   Restricted Stock Awards
   Tax effects of stock-based compensation
  8. Employee Stock Option Plans
 Equity Incentive Plans
  13




---



##### Table of Contents



Stock Options OutstandingWeighted 
AverageRemainingShares Available for
    
    
    
    
    
    
    Weighted 
Average
    
    
    Contractual 
Term
    
    
    Aggregate
 Intrinsic ValueGrant
    
    
    Number of Shares
    
    
    Exercise Price
    
    
    (In Years)
    
    
    (in thousands)Balance at December 31, 2007
    
    
    1,429,195
    
    
    
    1,897,368
    
    
    $
    19.42Additional shares reserved
    
    
    601,069
    
    
    
    
    
    
    
    Restricted stock granted
    
    
    (25,900
    )
    
    
    
    
    
    
    Options granted
    
    
    (252,695
    )
    
    
    252,695
    
    
    
    14.29Options exercised
    
    
    
    
    
    
    (134,163
    )
    
    
    1.24Options forfeited / canceled / expired
    
    
    385,073
    
    
    
    (385,073
    )
    
    
    23.41Balance at September 30, 2008
    
    
    2,136,742
    
    
    
    1,630,827
    
    
    $
    19.18
    
    
    
    8.27
    
    
    $
    3,798Vested and expected to be vested1,200,179
    
    
    $
    21.11
    
    
    
    7.93
    
    
    $
    2,611Shares exercisable:September 30, 2008
    
    
    
    
    
    
    628,853
    
    
    $
    27.87
    
    
    
    6.71
    
    
    $
    1,045
   Outstanding
    
    ExercisableWeighted
 Average
    
    Weighted 
Average
    
    
    
    
    
    Weighted
 AverageRange of Exercise Prices
    
    Shares 
Outstanding
    

Contractual
 Life (In Years)
    
    Exercise 
Price
    
    Shares 
Exercisable
    

Exercise Price$10.04 - $13.11
    
    
    166,612
    
    
    
    8.94
    
    
    $
    11.27
    
    
    
    68,278
    
    
    $
    11.26$13.32 - $13.32
    
    
    3,000
    
    
    
    9.46
    
    
    
    13.32
    
    
    
    
    
    
    
    $13.36 - $13.36
    
    
    778,249
    
    
    
    9.21
    
    
    
    13.36
    
    
    
    171,216
    
    
    
    13.36$13.40 - $14.40
    
    
    107,250
    
    
    
    8.70
    
    
    
    13.73
    
    
    
    37,081
    
    
    
    13.68$14.41 - $14.41
    
    
    175,000
    
    
    
    9.61
    
    
    
    14.41
    
    
    
    
    
    
    
    $14.63 - $24.20
    
    
    184,350
    
    
    
    6.44
    
    
    
    16.80
    
    
    
    156,405
    
    
    
    17.17$24.60 - $49.20
    
    
    175,806
    
    
    
    5.15
    
    
    
    37.63
    
    
    
    155,313
    
    
    
    38.73$49.60- $223.40
    
    
    36,526
    
    
    
    2.27
    
    
    
    115.52
    
    
    
    36,526
    
    
    
    115.52$244.80 - $244.80
    
    
    600
    
    
    
    2.66
    
    
    
    244.80
    
    
    
    600
    
    
    
    244.80$260.20 - $260.20
    
    
    3,434
    
    
    
    2.10
    
    
    
    260.20
    
    
    
    3,434
    
    
    
    260.20$10.04 - $260.20
    
    
    1,630,827
    
    
    
    8.27
    
    
    $
    19.18
    
    
    
    628,853
    
    
    $
    27.87
 14




---



##### Table of Contents



Par Value Stock Options
  Employee Stock Purchase Plan
  9. Stockholders Equity
  Nine Months Ended September 30,(In thousands)
    
    2008
    
    
    2007Beginning balance:
    
    $
    1,601
    
    
    $
    42,683Net income (loss)
    
    
    30,816
    
    
    
    (39,257
    )Proceeds from stock option exercises and ESPP
    
    
    441
    
    
    
    1,826Proceeds from exercise of warrants
    
    
    204
    
    
    
    Stock-based compensation expense
    
    
    3,728
    
    
    
    970Net proceeds from direct placement offering of common stock and warrants
    
    
    
    
    
    
    11,600Net proceeds from issuance of preferred stock
    
    
    
    
    
    
    6,966Beneficial conversion feature of preferred stock
    
    
    
    
    
    
    3,630Deemed dividend for preferred stocks beneficial conversion feature
    
    
    
    
    
    
    (3,630
    )Other comprehensive income
    
    
    161
    
    
    
    95Ending balance:
    
    $
    36,951
    
    
    $
    24,883
  Nine Months Ended September 30,2008
    
    2007Beginning balance:
    
    
    12,021,388
    
    
    
    9,893,820Shares issued from stock option exercises and ESPP
    
    
    40,545
    
    
    
    127,691Shares issued from warrant exercises
    
    
    22,655
    
    
    
    Shares issued from stock option exercises of par value stock options
    
    
    122,000
    
    
    
    Shares issued of restricted stock
    
    
    25,900
    
    
    
    Stock repurchased and retired
    
    
    (28,400
    )
    
    
    Shares from direct placement offering of common stock and warrants
    
    
    
    
    
    
    2,000,000Refund of fractional shares due to reverse stock split
    
    
    
    
    
    
    (123
    )Ending balance:
    
    
    12,204,088
    
    
    
    12,021,388
 15




---



##### Table of Contents



Outstanding Warrants
  Issuance
    
    Number of
    
    Price perDate
    
    Shares
    
    Share
    
    Expiration DateSeptember 2007
    
    
    977,345
    
    
    $
    9.00
    
    
    September 2012
 Series B Preferred Stock
   Recent Developments
  Warrants issued in September 2007
     10. Earnings (Loss) per Share
 Earnings Per Share
 16




---



##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(In thousands, except per share amounts)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Basic and diluted:Net income (loss) attributable to common shareholders
    
    $
    30,643
    
    
    $
    (12,703
    )
    
    $
    30,816
    
    
    $
    (42,887
    )Shares used to compute basic net income (loss) per share
    
    
    12,170
    
    
    
    10,236
    
    
    
    12,145
    
    
    
    10,066Effect of potentially dilutive securities:Series B Preferred Stock
    
    
    713
    
    
    
    0
    
    
    
    713
    
    
    
    0Warrants issued in direct placement offering
    
    
    368
    
    
    
    0
    
    
    
    348
    
    
    
    0Employee stock options and ESPP
    
    
    14
    
    
    
    
    
    
    
    14
    
    
    
    Shares used to compute diluted net income (loss) per share
    
    
    13,265
    
    
    
    10,236
    
    
    
    13,220
    
    
    
    10,066Net income (loss) per share attributable to common shareholders  basic
    
    $
    2.52
    
    
    $
    (1.24
    )
    
    $
    2.54
    
    
    $
    (4.26
    )Net income (loss) per share attributable to common shareholders  basic
    
    $
    2.31
    
    
    $
    (1.24
    )
    
    $
    2.33
    
    
    $
    (4.26
    )
  11. Restructuring Charges
    17




---



##### Table of Contents



Excess
    
    
    Workforce(In thousands)
    
    Facilities
    
    
    Reduction
    
    
    TotalBalance as of December 31, 2007
    
    $
    1,537
    
    
    $
    55
    
    
    $
    1,592Restructuring charges
    
    
    131
    
    
    
    
    
    
    
    131Change in estimates
    
    
    212
    
    
    
    (1
    )
    
    
    211Cash drawdowns
    
    
    (951
    )
    
    
    (3
    )
    
    
    (954
    )Balance as of March 31, 2008
    
    $
    929
    
    
    $
    51
    
    
    $
    980Restructuring charges
    
    
    455
    
    
    
    
    
    
    
    455Change in estimates
    
    
    0
    
    
    
    
    
    
    
    Cash drawdowns
    
    
    (924
    )
    
    
    
    
    
    
    (924
    )Balance as of June 30, 2008
    
    $
    460
    
    
    $
    51
    
    
    $
    511Restructuring charges
    
    
    
    
    
    
    
    
    
    
    Change in estimates
    
    
    (97
    )
    
    
    
    
    
    
    (97
    )Cash drawdowns
    
    
    (11
    )
    
    
    (51
    )
    
    
    (62
    )Balance as of September 30, 2008
    
    $
    352
    
    
    $
    
    
    
    $
    352
 12. Business Segments and Major Customers
 Disclosure About
Segments of an Enterprise and Related Information,
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Japan
    
    
    *
    %
    
    
    97
    %
    
    
    *
    %
    
    
    93
    %North America
    
    
    99
    %
    
    
    *
    %
    
    
    95
    %
    
    
    *
    %Other
    
    
    *
    %
    
    
    *
    %
    
    
    *
    %
    
    
    *
    %
 
 *
    
    % represents less than 10% of total revenue   13. Commitments and Contingencies
    18




---



##### Table of Contents



Future Minimum Payments Due by PeriodRemainder of(In thousands)
    
    Total
    
    
    2008
    
    2009Operating leases(1)
    
    $
    270
    
    
    $
    68
    
    
    $
    202Unconditional contractual obligations(2)
    
    
    1,000
    
    
    
    200
    
    
    
    800Total
    
    $
    1,270
    
    
    $
    268
    
    
    $
    1,002
 
 (1)
    
    Operating leases includes the lease extension agreement for
approximately 22,500 square feet of office space in Santa Clara,
California that was signed in July 2008.(2)
    
    Contractual obligations include agreements to purchase goods or
services that are enforceable and legally binding on the Company and
that specify all significant terms, including, fixed or minimum
quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction. Purchase
obligations also include agreements for design tools and software for
use in product development. Indemnifications and warranties
   14. Income Taxes
 Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109 Accounting for Income Taxes
     15. Litigation and Asserted Claims
 Litigation
  19




---



##### Table of Contents



In re Transmeta Corporation Initial Public Offering
Securities Litigation, In re Initial Public Offering Securities Litigation,
 Simmonds v. Morgan Stanley, et al.
 Riley Investment Partners Investment Fund, L.P., et al. v. Horsley,
et al. (Transmeta Corp.),
 16.
Subsequent Events
 Patent
License Agreement with AMD
  Merger
Agreement with Novafora
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis of the financial condition and results of our
operations should be read in conjunction with the unaudited condensed consolidated financial
statements and related notes included elsewhere in this Quarterly Report on Form 10-Q . This
discussion contains forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those discussed below. Factors that could cause or contribute
to such differences include, but are not limited to, those identified below, and those discussed in
the section titled Risk Factors included in Item 1A of this Quarterly Report on Form 10-Q .
 Overview
  20




---



##### Table of Contents



tm
 Patent
License
Agreement with AMD
  Merger
Agreement with Novafora
  21




---



##### Table of Contents



Results of Operations
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2008
    
    2007
    
    2008
    
    2007RevenueProduct
    
    
    0
    %
    
    
    0
    %
    
    
    1
    %
    
    
    7
    %License
    
    
    100
    %
    
    
    2
    %
    
    
    98
    %
    
    
    0
    %Service
    
    
    0
    %
    
    
    98
    %
    
    
    1
    %
    
    
    93
    %Total Revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Costs of product
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    3
    %Costs of license
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Costs of service(*)
    
    
    0
    %
    
    
    41
    %
    
    
    1
    %
    
    
    53
    %Impairment charges on long-lived assets
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    15
    %Total cost of revenue
    
    
    0
    %
    
    
    41
    %
    
    
    1
    %
    
    
    71
    %Gross profit
    
    
    100
    %
    
    
    59
    %
    
    
    99
    %
    
    
    29
    %Operating expenses:Income from settlement and licensing
    
    
    -23
    %
    
    
    0
    %
    
    
    -67
    %
    
    
    0
    %Gain from receivable and license
    
    
    -11
    %
    
    
    0
    %
    
    
    -11
    %
    
    
    0
    %Research and development(*)
    
    
    6
    %
    
    
    3036
    %
    
    
    26
    %
    
    
    374
    %Selling, general and administrative(*)
    
    
    15
    %
    
    
    13880
    %
    
    
    46
    %
    
    
    759
    %Restructuring charges
    
    
    0
    %
    
    
    402
    %
    
    
    3
    %
    
    
    377
    %Amortization of patents and patent rights
    
    
    -1
    %
    
    
    3889
    %
    
    
    9
    %
    
    
    218
    %Impairment charge on long-lived and other assets
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    13
    %Total operating expenses
    
    
    -14
    %
    
    
    21207
    %
    
    
    6
    %
    
    
    1741
    %Operating income (loss)
    
    
    114
    %
    
    
    -21148
    %
    
    
    93
    %
    
    
    -1712
    %Interest income and other, net
    
    
    7
    %
    
    
    568
    %
    
    
    24
    %
    
    
    47
    %Interest expense
    
    
    0
    %
    
    
    -34
    %
    
    
    0
    %
    
    
    -2
    %Income (loss) before income taxes
    
    
    121
    %
    
    
    -20614
    %
    
    
    117
    %
    
    
    -1667
    %Provision for income taxes
    
    
    0
    %
    
    
    7
    %
    
    
    0
    %
    
    
    0
    %Net income (loss)
    
    
    121
    %
    
    
    -20621
    %
    
    
    117
    %
    
    
    -1667
    %Deemed dividend for beneficial conversion feature
of preferred stock
    
    
    0
    %
    
    
    -8250
    %
    
    
    0
    %
    
    
    -154
    %Net income (loss) attributable to common shareholders
    
    
    121
    %
    
    
    -28871
    %
    
    
    117
    %
    
    
    -1821
    %(*) Includes stock-based compensation:Cost of service revenue
    
    
    0
    %
    
    
    2
    %
    
    
    0
    %
    
    
    1
    %Research and development
    
    
    1
    %
    
    
    -616
    %
    
    
    6
    %
    
    
    0
    %Selling, general and administrative
    
    
    3
    %
    
    
    555
    %
    
    
    8
    %
    
    
    40
    %
 Total Revenue
  22




---



##### Table of Contents



Three Months Ended September 30,
    
    
    
    
    
    
    
    
    
    Nine Months Ended September 30,Change in
    
    
    Change in
    
    
    
    
    
    
    
    
    
    
    Change in
    
    
    Change in(In thousands)
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    Percent
    
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    PercentProduct
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    n/a
    
    
    $
    253
    
    
    $
    167
    
    
    $
    86
    
    
    
    51
    %License
    
    
    25,299
    
    
    
    1
    
    
    
    25,298
    
    
    
    2529800
    %
    
    
    25,905
    
    
    
    1
    
    
    
    25,904
    
    
    
    2590400
    %Service
    
    
    
    
    
    
    43
    
    
    
    (43
    )
    
    
    (100
    %)
    
    
    168
    
    
    
    2,186
    
    
    
    (2,018
    )
    
    
    (92
    %)Total revenue
    
    $
    25,299
    
    
    $
    44
    
    
    $
    25,255
    
    
    
    57398
    %
    
    $
    26,326
    
    
    $
    2,354
    
    
    $
    23,972
    
    
    
    1018
    %
  Product Revenue.
 License Revenue.
  Service Revenue.
  Customer Concentration Information
  Costs of Revenues
  Three Months Ended September 30,
    
    
    
    
    
    
    
    
    
    
    Nine Months Ended September 30,Change in
    
    
    Change in
    
    
    
    
    
    
    
    
    
    
    Change in
    
    
    Change in(In thousands)
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    Percent
    
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    PercentProduct(*)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    n/a
    
    
    $
    3
    
    
    $
    80
    
    
    $
    (77
    )
    
    
    (96
    %)License
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    n/aRoyalties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    n/aService(*)
    
    
    
    
    
    
    18
    
    
    
    (18
    )
    
    
    (100
    %)
    
    
    163
    
    
    
    1,236
    
    
    
    (1,073
    )
    
    
    (87
    %)Impairment
charge on inventories
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    364
    
    
    
    (364
    )
    
    
    (100
    %)Total cost of revenue
    
    $
    
    
    
    $
    18
    
    
    $
    (18
    )
    
    
    (100
    %)
    
    $
    166
    
    
    $
    1,680
    
    
    $
    (1,514
    )
    
    
    (90
    %)(*) Includes stock-based
compensation:Cost of product revenue
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    n/a
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    n/aCost of service revenue
    
    $
    
    
    
    $
    1
    
    
    $
    (1
    )
    
    
    (100
    %)
    
    $
    82
    
    
    $
    18
    
    
    $
    64
    
    
    
    356
    %
 23




---



##### Table of Contents



Cost of Product Revenue
  Cost of License Revenue
  Cost of Service Revenue
   Impairment Charges on Inventories
  Income from Settlement and Licensing
 Three Months Ended September 30,
    
    

    Change in
    

    Change in





    
    Nine Months Ended September 30,
    
    
    Change in
    
    
    Change in(In thousands)
    
    2008
    
    
    2007
    
    
    Dollars

    
    Percent

    
    2008
    
    
    2007
    
    
    Dollars
    
    
    PercentIncome from settlement and licensing
    
    $
    5,865
    
    
    $
    
    
    
    $
    5,865
    
    
    
    n/a
    
    
    $
    17,595
    
    
    $
    
    
    
    $
    17,595
    
    
    
    n/a
  Income from license and receivable
 Three Months Ended September 30,
    
    

    Change in
    

    Change in





    
    Nine Months Ended September 30,
    
    
    Change in
    
    
    Change in(In thousands)
    
    2008
    
    
    2007
    
    
    Dollars

    
    Percent

    
    2008
    
    
    2007
    
    
    Dollars
    
    
    PercentIncome from license and receivable
    
    $
    2,855
    
    
    $
    
    
    
    $
    2,855
    
    
    
    n/a
    
    
    $
    2,855
    
    
    $
    
    
    
    $
    2,855
    
    
    
    n/a
  24




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##### Table of Contents



Research and Development




Three Months Ended September 30,
    
    
    Change in
    
    
    Change in
    
    
    Nine Months Ended September 30,
    
    
    Change in
    
    
    Change in(In thousands)
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    Percent
    
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    PercentResearch and development expenses
    
    $
    1,430
    
    
    $
    1,607
    
    
    $
    (177
    )
    
    
    (11
    %)
    
    $
    5,152
    
    
    $
    8,798
    
    
    $
    (3,646
    )
    
    
    (41
    %)Stock-based compensation
    
    
    156
    
    
    
    (271
    )
    
    
    427
    
    
    
    158
    %
    
    
    1,599
    
    
    
    11
    
    
    
    1,588
    
    
    
    14436
    %Total research and development
expenses
    
    $
    1,586
    
    
    $
    1,336
    
    
    $
    250
    
    
    
    19
    %
    
    $
    6,751
    
    
    $
    8,809
    
    
    $
    (2,058
    )
    
    
    (23
    %)
  Selling, General and Administrative
 Three Months Ended September 30,
    
    
    Change in
    
    
    Change in
    
    
    Nine Months Ended September 30,

    
    
    Change in
    
    
    Change in(In thousands)
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    Percent
    
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    PercentSelling, general and administrative expenses
    
    $
    2,969
    
    
    $
    5,863
    
    
    $
    (2,894
    )
    
    
    (49
    %)
    
    $
    10,103
    
    
    $
    16,916
    
    
    $
    (6,813
    )
    
    
    (40
    %)Stock-based compensation
    
    
    731
    
    
    
    244
    
    
    
    487
    
    
    
    200
    %
    
    
    2,047
    
    
    
    941
    
    
    
    1,106
    
    
    
    118
    %Total selling, general and administrative expenses
    
    $
    3,700
    
    
    $
    6,107
    
    
    $
    (2,407
    )
    
    
    (39
    %)
    
    $
    12,150
    
    
    $
    17,857
    
    
    $
    (5,707
    )
    
    
    (32
    %)
   Restructuring Charges, Net
 Three Months Ended September 30,

    
    
    Change in
    
    
    Change in
    
    
    Nine Months Ended September 30,
    
    
    Change in
    
    
    Change in(In thousands)
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    Percent
    
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    PercentRestructuring charges
    
    $
    (97
    )
    
    $
    177
    
    
    $
    (274
    )
    
    
    (155
    %)
    
    $
    700
    
    
    $
    8,878
    
    
    $
    (8,178
    )
    
    
    (92
    %)
  25




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##### Table of Contents



Amortization of Patents and Patent Rights
 Three Months Ended September 30,
    
    
    Change in
    
    
    Change in
    
    

    Nine Months Ended September 30,

    
    
    Change in
    
    
    Change in(In thousands)
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    Percent
    
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    PercentAmortization of patent and patent rights
    
    $
    
    
    
    $
    1,711
    
    
    $
    (1,711
    )
    
    
    (100
    %)
    
    $
    2,388
    
    
    $
    5,134
    
    
    $
    (2,746
    )
    
    
    (53
    %)
  Impairment Charge on Long-Lived and Other Assets
 Three Months Ended September 30,

    
    
    Change in
    
    
    Change in
    
    

    Nine Months Ended September 30,

    
    
    Change in
    
    
    Change in(In thousands)
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    Percent
    
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    PercentImpairment charges
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    n/a
    
    
    $
    
    
    
    $
    302
    
    
    $
    (302
    )
    
    
    (100
    %)
  Interest Income and Other, Net
 Three Months Ended September 30,

    
    
    Change in
    
    
    Change in
    
    
    Nine Months Ended September 30,

    
    
    Change in
    
    
    Change in(In thousands)
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    Percent
    
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    PercentInterest income and other, net
    
    $
    1,813
    
    
    $
    250
    
    
    $
    1,563
    
    
    
    625
    %
    
    $
    6,197
    
    
    $
    1,109
    
    
    $
    5,088
    
    
    
    459
    %
  Provision for Income Taxes
 Three Months Ended September 30,
    
    
    Change in
    
    
    Change in
    
    
    Nine Months Ended September 30,

    
    
    Change in
    
    
    Change in(In thousands)
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    Percent
    
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    PercentProvision for income taxes
    
    $
    
    
    
    $
    3
    
    
    $
    (3
    )
    
    
    (100
    %)
    
    $
    
    
    
    $
    7
    
    
    $
    (7
    )
    
    
    (100
    %)
  Liquidity and Capital Resources
  26




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##### Table of Contents



Nine Months Ended September 30,

    
    
    Change in
    
    
    Change in(In thousands)
    
    2008
    
    
    2007
    
    
    Dollars
    
    
    PercentNet cash provided by (used in) operating activities
    
    $
    235,968
    
    
    $
    (33,525
    )
    
    $
    269,493
    
    
    
    804
    %Net cash provided by (used in) investing activities
    
    
    (46,949
    )
    
    
    21,161
    
    
    
    (68,110
    )
    
    
    (322
    %)Net cash provided by financing activities
    
    
    645
    
    
    
    20,398
    
    
    
    (19,753
    )
    
    
    (97
    %)Increase in cash and cash equivalents
    
    $
    189,664
    
    
    $
    8,034
    
    
    $
    181,630
    
    
    
    2261
    %
 Operating activities
   Investing activities
    Financing activities
    Contractual Obligations
  Future Minimum Payments Due by PeriodRemainder of(In thousands)
    
    Total
    
    
    2008
    
    
    2009Operating leases(1)
    
    $
    270
    
    
    $
    68
    
    
    $
    202Unconditional contractual obligations(2)
    
    
    1,000
    
    
    
    200
    
    
    
    800Total
    
    $
    1,270
    
    
    $
    268
    
    
    $
    1,002
 
 (1)
    
    Operating leases includes the lease extension agreement for
approximately 22,500 square feet of office space in Santa Clara,
California that was signed in July 2008.(2)
    
    Contractual obligations include agreements to purchase goods or
services that are enforceable and legally binding on us and that
specify all significant terms, including, fixed or minimum quantities
to be purchased; fixed, minimum or variable price provisions; and the
approximate timing of the transaction. Purchase obligations also
include agreements for design tools and software for use in product
development. 27




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##### Table of Contents



Off-Balance Sheet Arrangements
  Critical Accounting Policies
   Recent Accounting Pronouncements
  
 Item 3 . Quantitative and Qualitative Disclosures about Market Risk
 Interest Rate Risk.
 Foreign Currency Exchange Risk.
 
 Item 4 . Controls and Procedures
 Disclosure Controls and Procedures
  Inherent Limitations on Effectiveness of Controls
  28




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  In re Transmeta Corporation Initial Public Offering
Securities Litigation In re Initial Public
Offering Securities Litigation
 Simmonds v. Morgan Stanley, et al.
 29




---



##### Table of Contents



Riley Investment Partners Investment Fund, L.P., et al. v. Horsley,
et al. (Transmeta Corp.),
 
 Item 1A. Risk Factors
 The factors discussed below are cautionary statements that identify important risk
factors that could cause actual results to differ materially from those anticipated in the
forward-looking statements in this Quarterly Report on Form 10-Q If any of the following risks
actually occurs, our business, financial condition and results of operations would suffer. In this
case, the trading price of our common stock could decline and investors might lose all or part of
their investment in our common stock.
 Risks
Related to Our Merger with Novafora
  We
cannot assure you that all conditions to the merger will be met and
the merger consummated.
   
    
    the diversion of our managements attention from our day-to-day business and the unavoidable disruption to our employees and our relationships with customers;
    
    the market price of our common stock could decline to the extent that the market price of our common stock
 reflects a market belief that the merger would be completed and its potential benefits would be realized;
    
    we could be required to pay Novafora a termination fee under certain circumstances; and
    
    the amount of the costs, fees and expenses and charges related to the merger.
  Whether
or not the merger is completed, the business of Transmeta could
suffer due to the announcement of the merger and the restrictions on
the conduct of our business prior to the completion of the
merger.
  Costs
associated with the merger are difficult to estimate, may be higher
than expected and may result in the consideration to be received by
our stockholders in the merger to be less than expected.
  Our executive officers and
 directors have interests with respect to the merger that are different from, or in addition to, interests of our
 stockholders generally, which may influence them to support the
merger.
  
    
    existing agreements that provide, among other things, for severance and other benefits as a result of the merger;
    
    continued director and executive officer indemnification and insurance; and
    
    acceleration of certain options held by our executive officers and directors.
  30




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##### Table of Contents



We substantially restructured our operations and changed our business plan in 2007, and we might
fail to operate successfully under our current business plan, which is unproven.
  We might lose key technical or management personnel, on whose knowledge, leadership and technical
expertise we rely. Such losses could prevent us from operating successfully under our current
business plan.
  Our recent restructuring and the evolution of our business could place significant strain on our
management systems, infrastructure and other resources, and our business may not succeed if we fail
to manage such changes effectively.
  31




---



##### Table of Contents



Our current business plan depends on increasing our LongRun2 licensing revenue, and we might be
unsuccessful in our efforts to license our LongRun2 technology to other parties
  We have limited visibility regarding when and to what extent our licensees will use our LongRun2 or
other licensed technologies and we might be unsuccessful in our efforts to generate royalty revenue
  
    
    the competition that our licensees face and the market acceptance of their products;
    
    the pricing policies of our licensees for their products incorporating our technology;
    
    the engineering, marketing and management capabilities of our licensees and technical
challenges unrelated to our technology that they face in developing their products;
and
    
    the financial and other resources of our licensees.
  Our results of operations could be adversely affected by global economic conditions and the
effects of these conditions on our customers businesses and levels of business activity.
  We face intense competition in the development of advanced technologies. Our customers and
competitors are much larger than we are and have significantly greater resources. We may not be
able to compete effectively
  We might be unable to keep pace with technological change in our industry, and our technology
offerings might not be competitive.
  We might experience payment disputes for amounts owed to us under our LongRun2 licensing
agreements, and such a dispute may harm our business results
  32




---



##### Table of Contents



We currently derive a substantial portion of our revenue from a small number of customers and
licensees, and our operating results would be adversely affected if any customer were to cancel,
reduce or delay a transaction.
   We may be unable to protect our proprietary technologies and defend our intellectual property
rights. Our competitors might gain access to our technologies, and we might not compete
successfully in our markets.
   Any dispute regarding our intellectual property may require us to indemnify certain licensees or
third parties, the cost of which could severely hamper our business operations and financial
condition
  33




---



##### Table of Contents



We have significant international business relationships, which expose us to risk and
uncertainties.
  
    
    difficulties and costs of servicing international customers;
    
    fluctuations in currency exchange rates;
    
    unexpected changes in regulatory requirements, including imposition of currency exchange controls;
    
    longer accounts receivable collection cycles;
    
    import or export licensing requirements;
    
    potentially adverse tax consequences;
    
    political and economic instability; and
    
    potentially reduced protection for intellectual property rights.
 Our operating results are difficult to predict and fluctuate significantly. A failure to meet the
expectations of investors could result in a substantial decline in our stock price.
  A sale of a substantial number of shares of our common stock may cause the price of our common
stock to decline
  The price of our common stock has been volatile and is subject to wide fluctuations
  
    
    variations in our quarterly results;
    
    market conditions in our industry, the industries of our customers and the economy as a whole;
    
    announcements of technological innovations by us or by our competitors;
    
    introductions of new products or new pricing policies by us or by our competitors;
    
    acquisitions or strategic alliances by us or by our competitors;
    
    recruitment or departure of key personnel;
    
    the gain or loss of significant customers; and
    
    changes in the estimates of our operating performance or changes in recommendations by securities analysts.
 34




---



##### Table of Contents



We might need to raise additional financing, which might not be available or might be available
only on terms unfavorable to us or our stockholders
  
    
    fund expansion;
    
    develop or enhance our products or technologies;
    
    enhance our operating infrastructure;
    
    respond to competitive pressures; or
    
    acquire complementary businesses or technologies.
  Our certificate of incorporation and bylaws, stockholder rights plan and Delaware law contain
provisions that could discourage or prevent a takeover, even if an acquisition would be beneficial
to our stockholders
  
    
    establishing a classified board of directors so that not all members of our board may be elected at one time;
    
    providing that directors may be removed only for cause and only with the vote of 66 2/3% of our outstanding shares;
    
    requiring super-majority voting to amend some provisions in our certificate of incorporation and bylaws;
    
    authorizing the issuance of blank check preferred
stock that our board could issue to increase the number of shares outstanding and to discourage a takeover attempt;
    
    limiting the ability of our stockholders to call special meetings of stockholders;
    
    prohibiting stockholder action by written consent, which requires all stockholder actions to be taken at a meeting
of our stockholders; and
    
    establishing advance notice requirements for nominations for election to our board or for proposals that can be
acted upon by stockholders at stockholder meetings.
  35




---



##### Table of Contents



Our business is subject to potential tax liabilities, which could change our effective tax rate.
   
    
    the jurisdictions in which profits are determined to be earned and taxed;
    
    the resolution of issues arising from tax audits with various tax authorities;
    
    adjustments to deferred tax assets utilized in 2007 to reduce the tax effect of various tax returns;
    
    adjustments to estimated taxes upon finalization of various tax returns;
    
    increases in expenses not deductible for tax purposes;
    
    changes in available tax credits and available net operating loss carryovers;
    
    changes in the valuation of any deferred tax assets and liabilities;
    
    changes in share-based compensation; or
    
    changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles.
 Our results of operations could vary as a result of the methods, estimates, and judgments we use in
applying our accounting policies.
  We may develop or identify material weaknesses in our internal control over financial reporting.
  36




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Total Numberof Shares
    
    
    Maximum Number ofTotal Number
    
    
    
    
    
    
    Average
    
    
    Purchased as Part
    
    
    Shares that May Yetof Shares
    
    
    Total
    
    
    Price Paid
    
    
    of Publicly Announced
    
    
    Be Purchased UnderPeriod
    
    Purchased
    
    
    Paid
    
    
    per Share
    
    
    Plans or Programs
    
    
    the Plans or Programs07/01/08 - 07/31/08
    
    
    800
    
    
    $
    
    
    
    $
    0.00001
    
    
    
    
    
    
    
    08/01/08 - 08/31/08
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    09/01/08 - 09/30/08
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    800
    
    
    $
    
    
    
    $
    0.00001
    
    
    
    
    
    
    
    
 
 Item 4. Submission of Matters to a Vote of Security Holders
   For
    
    WithheldRobert V. Dickinson
    
    
    8,031,128
    
    
    
    1,196,304Bryant R. Riley
    
    
    8,674,834
    
    
    
    552,598T. Peter Thomas
    
    
    7,469,821
    
    
    
    1,757,611
   For
    
    Against
    
    Abstain8,396,920
    
    70,956
    
    759,554
 
 Item 6. Exhibits
 ExhibitNumber
    
    Exhibit Title10.40
    
    License agreement between Transmeta
Corporation and NVIDIA Corporation.10.41
    
    Amendment number 1 to the settlement, release and license
agreement between
Transmeta Corporation and Intel Corporation.10.42
    
    Technology license agreement between Transmeta
Corporation and Intel Corporation.31.01
    
    Certification by Lester M. Crudele pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.31.02
    
    Certification by Sujan Jain pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.32.01*
    
    Certification by Lester M. Crudele pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.02*
    
    Certification by Sujan Jain pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *
    
    As contemplated by SEC Release No. 33-8212, these exhibits are
furnished with this quarterly report on Form 10-Q and are not deemed
filed with the Securities and Exchange Commission and are not
incorporated by reference in any filing of Transmeta Corporation under
the Securities Act of 1933 or the Securities Exchange Act of 1934,
including this quarterly report, whether made before or after the date
hereof and irrespective of any general incorporation language in any
filings. 37




---



##### Table of Contents



SIGNATURES
  TRANSMETA CORPORATIONBy
    
    /s/ Sujan JainSujan JainExecutive Vice President and Chief Financial OfficerDate:
November 17, 2008
    
    
    
    (Principal Financial Officer and Duly Authorized Officer)
 38




---



##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    Exhibit Title10.40
    
    License agreement between Transmeta
Corporation and NVIDIA Corporation.10.41
    
    Amendment number 1 to the settlement, release and license
agreement between
Transmeta Corporation and Intel Corporation.10.42
    
    Technology license agreement between Transmeta
Corporation and Intel Corporation.31.01
    
    Certification by Lester M. Crudele pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.31.02
    
    Certification by Sujan Jain pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.32.01*
    
    Certification by Lester M. Crudele pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.02*
    
    Certification by Sujan Jain pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *
    
    As contemplated by SEC Release No. 33-8212, these exhibits are
furnished with this quarterly report on Form 10-Q and are not deemed
filed with the Securities and Exchange Commission and are not
incorporated by reference in any filing of Transmeta Corporation under
the Securities Act of 1933 or the Securities Exchange Act of 1934,
including this quarterly report, whether made before or after the date
hereof and irrespective of any general incorporation language in any
filings. 39