##### Table of Contents









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 June 29,
2001

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
	incorporation or organization) |  | (I.R.S. employer
	identification no.)

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 
o

There were 134,123,497 shares of the
Companys common stock, par value $0.00001 per share,
outstanding on June 29, 2001.



---






---

TABLE OF CONTENTS



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



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##### Table of Contents



TRANSMETA CORPORATION

FORM 10-Q

Quarterly Period Ended June 29,
2001


TABLE OF CONTENTS

|                              |  |                                                                                                                                              |    |      |    | 
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                              |  |                                                                                                                                              |    | Page
|                              |  |                                                                                                                                              |    |     
|PART I. FINANCIAL INFORMATION
|                             
|                             
|                             
|                             
|                             
|Item  1.                      |  | Condensed Consolidated Financial Statements                                                                                                  |    |      | 1  | 
|                             
|                             
|                             
|                             
|                              |  | Condensed Consolidated Balance Sheets as of
	June 29, 2001 (unaudited) and December 29, 2000                                                 |    |      | 1  | 
|                             
|                             
|                             
|                             
|                              |  | Condensed Consolidated Statements of Operations
	for the Three and Six Months Ended June 29, 2001
	(unaudited) and June 30, 2000 (unaudited) |    |      | 2  | 
|                             
|                             
|                             
|                             
|                              |  | Condensed Consolidated Statements of Cash Flows
	for the Six Months Ended June 29, 2001 (unaudited) and
	June 30, 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                                                       |    |      | 7  | 
|                             
|                             
|                             
|                             
|Item  3.                      |  | Quantitative and Qualitative Disclosures about
	Market Risk                                                                                  |    |      | 24 | 
|                             
|                             
|                             
|                             
|PART II. OTHER INFORMATION   
|                             
|                             
|                             
|                             
|                             
|Item  1.                      |  | Legal Proceedings                                                                                                                            |    |      | 25 | 
|                             
|                             
|                             
|                             
|Item  2.                      |  | Changes in Securities and Use of Proceeds                                                                                                    |    |      | 26 | 
|                             
|                             
|                             
|                             
|Item  3.                      |  | Defaults Upon Senior Securities                                                                                                              |    |      | 26 | 
|                             
|                             
|                             
|                             
|Item  4.                      |  | Submission of Matters to a Vote of Security
	Holders                                                                                         |    |      | 26 | 
|                             
|                             
|                             
|                             
|Item  5.                      |  | Other Information                                                                                                                            |    |      | 26 | 
|                             
|                             
|                             
|                             
|Item  6.                      |  | Exhibits and Reports on Form 8-K                                                                                                             |    |      | 27 | 
|                             
|                             
|                             
|                             
|Signatures                    |  |                                                                                                                                              | 28 |     

i



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Condensed Consolidated
Financial Statements

TRANSMETA CORPORATION






CONDENSED CONSOLIDATED BALANCE
SHEETS


(In thousands, except per share
amounts)


ASSETS

|                                                                      |                                                                |                                            |        |              |         |  |        |          |         | 
|--------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------ | ------ | ------------ | ------- |  | ------ | -------- | ------- | 
|                                                                      |                                                                | June 29,                                   |        | December 29,
|                                                                      |                                                                | 2001                                       |        | 2000(1)     
|                                                                      |                                                                |                                            |        |             
|                                                                      |                                                                | (unaudited)                                |        |             
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Current assets:                                                       |                                                                |                                            |        |              |         |  |        |         
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Cash and cash equivalents                                      |                                            | $      | 27,655       |         |  | $      | 259,744  |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Short-term investments                                         |                                            |        | 254,763      |         |  |        | 83,358   |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accounts receivable, net                                       |                                            |        | 7,807        |         |  |        | 3,298    |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Inventories                                                    |                                            |        | 3,015        |         |  |        | 15,453   |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Prepaid expenses and other current assets                      |                                            |        | 10,453       |         |  |        | 7,821    |        
|                                                                      |                                                                |                                            |        |              |         |  |        |         
|                                                                      |                                                                | Total current assets                       |        |              | 303,693 |  |        |          | 369,674 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Property and equipment, net                                    |                                            |        | 12,049       |         |  |        | 10,482   |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Deferred charges under license agreements                      |                                            |        | 21,196       |         |  |        | 26,097   |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Loans to founders                                              |                                            |        |             |         |  |        | 5,446    |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Intangible and other assets                                    |                                            |        | 47,573       |         |  |        | 837      |        
|                                                                      |                                                                |                                            |        |              |         |  |        |         
|                                                                      |                                                                | Total assets                               |        | $            | 384,511 |  |        | $        | 412,536 | 
|                                                                      |                                                                |                                            |        |              |         |  |        |         
|LIABILITIES AND STOCKHOLDERS EQUITY                                 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Current liabilities:                                                  |                                                                |                                            |        |              |         |  |        |         
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accounts payable                                               |                                            | $      | 8,962        |         |  | $      | 7,237    |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accrued compensation and related compensation
	liabilities     |                                            |        | 4,285        |         |  |        | 2,215    |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Other accrued liabilities                                      |                                            |        | 8,804        |         |  |        | 7,926    |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Long-term debt and capital lease obligations,
	current portion |                                            |        | 4,622        |         |  |        | 5,292    |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Long-term payables, current portion                            |                                            |        | 9,000        |         |  |        | 4,000    |        
|                                                                      |                                                                |                                            |        |              |         |  |        |         
|                                                                      |                                                                | Total current liabilities                  |        |              | 35,673  |  |        |          | 26,670  | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Long-term debt and capital lease obligations, net
	of current portion |                                                                |                                            | 1,156  |              |         |  | 3,046  |         
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Deposits received under subleasing agreements                         |                                                                |                                            | 138    |              |         |  | 138    |         
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Long-term payables, net of current portion                            |                                                                |                                            | 32,871 |              |         |  | 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          |                                            |        | 617,270      |         |  |        | 589,220  |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Notes receivable from stockholders                             |                                            |        | (17,172      | )       |  |        | (17,752  | )      
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Deferred stock compensation                                    |                                            |        | (20,505      | )       |  |        | (32,988  | )      
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accumulated other comprehensive income                         |                                            |        | 750          |         |  |        | 147      |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accumulated deficit                                            |                                            |        | (265,670     | )       |  |        | (173,711 | )      
|                                                                      |                                                                |                                            |        |              |         |  |        |         
|                                                                      |                                                                | Total stockholders equity                 |        |              | 314,673 |  |        |          | 364,916 | 
|                                                                      |                                                                |                                            |        |              |         |  |        |         
|                                                                      |                                                                | Total liabilities and stockholders equity |        | $            | 384,511 |  |        | $        | 412,536 | 
|                                                                      |                                                                |                                            |        |              |         |  |        |         




|    |                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

(See accompanying notes)

1



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##### Table of Contents



TRANSMETA CORPORATION






CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


(In thousands, except per share
amounts)


(Unaudited)


|                                                         |                                                               |                          |         |                  |        |          |         |          |        |   |          |        |        |   |         |        |        | 
|-------------------------------------------------------- | ------------------------------------------------------------- | ------------------------ | ------- | ---------------- | ------ | -------- | ------- | -------- | ------ | - | -------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                         |                                                               |                          |         |                 
|                                                         |                                                               | Three Months Ended       |         | Six Months Ended
|                                                         |                                                               |                          |         |                 
|                                                         |                                                               | June 29,                 |         | June 30,         |        | June 29, |         | June 30,
|                                                         |                                                               | 2001                     |         | 2000             |        | 2001     |         | 2000    
|                                                         |                                                               |                          |         |                  |        |          |         |         
|Net revenue                                              |                                                               | $                        | 10,531  |                  |        | $        | 354     |          |        | $ | 29,101   |        |        | $ | 358     |       
|                                                        
|                                                        
|                                                        
|                                                        
|Cost of product revenue                                  |                                                               |                          | 34,026  |                  |        |          | 219     |          |        |   | 44,407   |        |        |   | 223     |       
|                                                         |                                                               |                          |         |                  |        |          |         |          |        |   |          |        |        |   |         |       
|Gross profit (loss)                                      |                                                               |                          | (23,495 | )                |        |          | 135     |          |        |   | (15,306  | )      |        |   | 135     |       
|                                                        
|                                                        
|                                                        
|                                                        
|Operating expenses:                                      |                                                               |                          |         |                  |        |          |         |          |        |   |          |        |        |   |         |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Research and development(1)                                   |                          |         | 17,233           |        |          |         | 15,072   |        |   |          | 34,359 |        |   |         | 26,549 |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | In-process research and development                           |                          |         | 13,600           |        |          |         |         |        |   |          | 13,600 |        |   |         |       |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Selling, general and administrative(2)                        |                          |         | 8,861            |        |          |         | 5,781    |        |   |          | 17,851 |        |   |         | 11,447 |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Amortization of deferred charges and other
	intangible assets |                          |         | 4,109            |        |          |         | 2,614    |        |   |          | 7,488  |        |   |         | 4,863  |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Amortization of deferred stock compensation                   |                          |         | 5,650            |        |          |         | 2,014    |        |   |          | 11,777 |        |   |         | 3,140  |       
|                                                         |                                                               |                          |         |                  |        |          |         |          |        |   |          |        |        |   |         |       
|                                                         |                                                               | Total operating expenses |         |                  | 49,453 |          |         |          | 25,481 |   |          |        | 85,075 |   |         |        | 45,999 | 
|                                                         |                                                               |                          |         |                  |        |          |         |          |        |   |          |        |        |   |         |       
|Operating loss                                           |                                                               |                          | (72,948 | )                |        |          | (25,346 | )        |        |   | (100,381 | )      |        |   | (45,864 | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Interest income                                               |                          |         | 3,959            |        |          |         | 2,007    |        |   |          | 9,031  |        |   |         | 2,945  |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Interest expense                                              |                          |         | (262             | )      |          |         | (426     | )      |   |          | (593   | )      |   |         | (876   | )     
|                                                         |                                                               |                          |         |                  |        |          |         |          |        |   |          |        |        |   |         |       
|Loss before income taxes                                 |                                                               |                          | (69,251 | )                |        |          | (23,765 | )        |        |   | (91,943  | )      |        |   | (43,795 | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Provision for income taxes                                    |                          |         | 3                |        |          |         |         |        |   |          | 16     |        |   |         |       |       
|                                                         |                                                               |                          |         |                  |        |          |         |          |        |   |          |        |        |   |         |       
|Net loss                                                 |                                                               | $                        | (69,254 | )                |        | $        | (23,765 | )        |        | $ | (91,959  | )      |        | $ | (43,795 | )     
|                                                         |                                                               |                          |         |                  |        |          |         |          |        |   |          |        |        |   |         |       
|Net loss per share  basic and diluted                   |                                                               | $                        | (0.54   | )                |        | $        | (0.73   | )        |        | $ | (0.72    | )      |        | $ | (1.42   | )     
|                                                         |                                                               |                          |         |                  |        |          |         |          |        |   |          |        |        |   |         |       
|Weighted average shares outstanding 
	basic and diluted |                                                               |                          | 128,478 |                  |        |          | 32,452  |          |        |   | 127,863  |        |        |   | 30,838  |       
|                                                         |                                                               |                          |         |                  |        |          |         |          |        |   |          |        |        |   |         |       




|    |                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes $3,392 and $432 in amortization of
	deferred stock compensation for the three months ended
	June 29, 2001 and June 30, 2000, respectively, and
	$7,052 and $507 for the six months ended June 29, 2001 and
	June 30, 2000, respectively.    
|   
|(2) | Excludes $2,258 and $1,582 in amortization of
	deferred stock compensation for the three months ended
	June 29, 2001 and June 30, 2000, respectively, and
	$4,725 and $2,633 for the six months ended June 29, 2001
	and June 30, 2000, respectively.

(See accompanying notes)

2



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##### Table of Contents



TRANSMETA CORPORATION






CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(In thousands)


(Unaudited)


|                                                        |                                                                   |                                                      |          |          |          |   |         |          |        | 
|------------------------------------------------------- | ----------------------------------------------------------------- | ---------------------------------------------------- | -------- | -------- | -------- | - | ------- | -------- | ------ | 
|                                                        |                                                                   |                                                     
|                                                        |                                                                   | Six Months Ended                                    
|                                                        |                                                                   |                                                     
|                                                        |                                                                   | June 29,                                             |          | June 30,
|                                                        |                                                                   | 2001                                                 |          | 2000    
|                                                        |                                                                   |                                                      |          |         
|Net cash used in operating
	activities                  |                                                                   | $                                                    | (45,632  | )        |          | $ | (30,711 | )       
|                                                        |                                                                   |                                                      |          |          |          |   |         |         
|Cash flows (used in)/provided by investing
	activities: |                                                                   |                                                      |          |          |          |   |         |         
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Purchase of available-for-sale investments                        |                                                      |          | (668,623 | )        |   |         | (111,551 | )     
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Proceeds from sale or maturity of
	available-for-sale investments |                                                      |          | 497,821  |          |   |         | 128,338  |       
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Purchase of property and equipment                                |                                                      |          | (4,985   | )        |   |         | (1,402   | )     
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Loans to founders                                                 |                                                      |          | 5,446    |          |   |         | (5,250   | )     
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Payment to development partner                                    |                                                      |          | (3,500   | )        |   |         |         |       
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Purchase of intellectual property and other assets                |                                                      |          | (11,809  | )        |   |         | (284     | )     
|                                                        |                                                                   |                                                      |          |          |          |   |         |         
|                                                        |                                                                   | Net cash (used in)/provided by investing
	activities |          |          | (185,650 | ) |         |          | 9,851  | 
|                                                        |                                                                   |                                                      |          |          |          |   |         |         
|Cash flows (used in)/provided by financing
	activities: |                                                                   |                                                      |          |          |          |   |         |         
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Net proceeds from issue of preferred stock                        |                                                      |          |         |          |   |         | 87,942   |       
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Expenses related to initial public offering of
	common stock      |                                                      |          | (256     | )        |   |         |         |       
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Common stock issued under stock option plans                      |                                                      |          | 2,009    |          |   |         | 136      |       
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Issuance of debt and capital lease obligations                    |                                                      |          |         |          |   |         | 658      |       
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Repayment of debt and capital lease obligations                   |                                                      |          | (2,560   | )        |   |         | (2,168   | )     
|                                                        |                                                                   |                                                      |          |          |          |   |         |         
|                                                        |                                                                   | Net cash (used in)/provided by financing
	activities |          |          | (807     | ) |         |          | 86,568 | 
|                                                        |                                                                   |                                                      |          |          |          |   |         |         
|Change in cash and cash equivalents                     |                                                                   |                                                      | (232,089 | )        |          |   | 65,708  |         
|                                                       
|                                                       
|                                                       
|                                                       
|Cash and cash equivalents at beginning of period        |                                                                   |                                                      | 259,744  |          |          |   | 46,645  |         
|                                                        |                                                                   |                                                      |          |          |          |   |         |         
|Cash and cash equivalents at end of period              |                                                                   | $                                                    | 27,655   |          |          | $ | 112,353 |         
|                                                        |                                                                   |                                                      |          |          |          |   |         |         

(See accompanying notes)

3



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##### Table of Contents



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 and six months ended
June 29, 2001 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. The first two quarters of
fiscal 2001 and fiscal 2000 consisted of 26 weeks.

2. Net Loss per Share

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

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

|                                       |                                                                                 |                                          |       |                  |   |          |       |          |   |   |       |         |   |   |       |         |  
|-------------------------------------- | ------------------------------------------------------------------------------- | ---------------------------------------- | ----- | ---------------- | - | -------- | ----- | -------- | - | - | ----- | ------- | - | - | ----- | ------- | -
|                                       |                                                                                 |                                          |       |                 
|                                       |                                                                                 | Three Months Ended                       |       | Six Months Ended
|                                       |                                                                                 |                                          |       |                 
|                                       |                                                                                 | June 29,                                 |       | June 30,         |   | June 29, |       | June 30,
|                                       |                                                                                 | 2001                                     |       | 2000             |   | 2001     |       | 2000    
|                                       |                                                                                 |                                          |       |                  |   |          |       |         
|                                       |                                                                                 |                                         
|                                       |                                                                                 | (In thousands, except per share amounts)
|                                      
|                                      
|                                      
|                                      
|Basic and diluted:                     |                                                                                 |                                          |       |                  |   |          |       |          |   |   |       |         |   |   |       |        
|                                      
|                                      
|                                      
|                                      
|                                       | Net loss                                                                        |                                          | $     | (69,254          | ) |          | $     | (23,765  | ) |   | $     | (91,959 | ) |   | $     | (43,795 | )
|                                       |                                                                                 |                                          |       |                  |   |          |       |          |   |   |       |         |   |   |       |        
|Basic and diluted:                     |                                                                                 |                                          |       |                  |   |          |       |          |   |   |       |         |   |   |       |        
|                                      
|                                      
|                                      
|                                      
|                                       | Weighted average shares outstanding                                             |                                          |       | 132,629          |   |          |       | 38,486   |   |   |       | 132,495 |   |   |       | 37,300  |  
|                                      
|                                      
|                                      
|                                      
|                                       | Less: Weighted average shares subject to
	repurchase                            |                                          |       | (4,151           | ) |          |       | (6,034   | ) |   |       | (4,632  | ) |   |       | (6,462  | )
|                                       |                                                                                 |                                          |       |                  |   |          |       |          |   |   |       |         |   |   |       |        
|                                       | Weighted average shares used in computing basic
	and diluted net loss per share |                                          |       | 128,478          |   |          |       | 32,452   |   |   |       | 127,863 |   |   |       | 30,838  |  
|                                       |                                                                                 |                                          |       |                  |   |          |       |          |   |   |       |         |   |   |       |        
|Net loss per share  basic and diluted |                                                                                 | $                                        | (0.54 | )                |   | $        | (0.73 | )        |   | $ | (0.72 | )       |   | $ | (1.42 | )      
|                                       |                                                                                 |                                          |       |                  |   |          |       |          |   |   |       |         |   |   |       |        

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 16,368,934 and 14,554,080 shares of common stock at
June 29, 2001 and June 30, 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.

3. Accumulated Other Comprehensive
Income

Total accumulated other net comprehensive income
was $50,000 during the second quarter of fiscal 2001 and
$750,000 during the first six months of fiscal 2001. This
compared to zero other comprehensive income for the same periods
of fiscal 2000. Increases are due to larger average cash
balances as a result of the Companys

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TRANSMETA CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

(Unaudited)


initial public offering, which closed in November
2000. Accumulated other comprehensive income is comprised
entirely of unrealized gains on available-for-sale securities.

4. Segment Information

Transmeta operates solely in one segment, the
development and marketing and selling 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 six months of fiscal 2001
accounted for 66%, 23% and 11% of net revenue, respectively.
Sales to three customers accounted for 31%, 13% and 12% of net
revenue in the first six months of fiscal 2001.

5. Inventories

During the second quarter of fiscal 2001,
Transmeta recorded a charge to cost of product revenue totaling
$28.1 million. This amount includes $24.4 million
related to excess inventory and related non-cancelable purchase
commitments due to a sudden and significant decrease in actual
and forecasted demand for specific products. In addition, the
$28.1 million charge includes $3.7 million primarily
related to the write-off of obsolete inventory and related
estimated non-cancelable purchase commitments incurred during
the second quarter of fiscal 2001.

Inventories are stated at the lower of cost
(first-in, first-out) or market. The components of inventories
consist of the following (in thousands):

|                 |  |          |       |              |  |   |        | 
|---------------- |  | -------- | ----- | ------------ |  | - | ------ | 
|                 |  | June 29, |       | December 29,
|                 |  | 2001     |       | 2000        
|                 |  |          |       |             
|Work in progress |  | $        |      |              |  | $ | 6,680  | 
|                
|                
|                
|                
|Finished goods   |  |          | 3,015 |              |  |   | 8,773  | 
|                 |  |          |       |              |  |   |        | 
|                 |  | $        | 3,015 |              |  | $ | 15,453 | 
|                 |  |          |       |              |  |   |        | 

6. Intangible Asset Acquisition

In May 2001, Transmeta acquired from Seiko Epson
Corporation (Epson) certain patents and patent
rights relating to microprocessor technology. In exchange for
those patents and patent rights Transmeta agreed to pay Epson a
combination of cash and shares of the Companys common
stock aggregating $40.8 million. These patents and patent
rights are recorded on the balance sheet as an element of
intangible and other assets equal to the net present value of
the aggregate payments. In accordance with the Companys
policies, this asset is being amortized on a straight-line basis
over the expected life of seven years. Total cash payments to
Epson aggregate $30 million, of which $22.5 million
remains outstanding and is payable in equal annual installments
through 2004.

7. License Agreements

In April 2001, Transmeta licensed certain
computing technologies and intellectual property from Advanced
Micro Devices, Inc. (AMD), including AMDs
HyperTransport interconnect technology for use in the
Companys future products and technology initiatives. As
initial consideration for the intellectual property and
technology support provided for in the agreement, Transmeta
issued unregistered shares of Transmeta stock valued at
$13.6 million. This amount has been expensed as in-process
research and development during the second quarter of fiscal
2001 because the HyperTransport interconnect technology is
designed for use in products that are currently in development
and not anticipated to be commercially available until late
fiscal 2002.

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TRANSMETA CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

(Unaudited)


8. Legal Proceedings

Between June 25, 2001 and August 3,
2001, the Company, its directors, and certain of its officers
were named as defendants in the following lawsuits filed in the
United States District Court for the Northern District of
California: Nancy Hertzfeld and Jay Schwerd v. Transmeta
Corp., et al. (Case No. C-01-2450-JL, N.D. Cal.); Pond
Equities v. Transmeta Corp., et al.
(Case No. C-01-2463-JL, N.D. Cal.); James
Puente v. Transmeta Corp., et al.
(Case No. C-01-2464-EDL, N.D. Cal.); Thomas
McCarvill v. Transmeta Corp., et al. (Case
No. C-01-2534-BZ, N.D. Cal.); Michael Koroluk v.
Transmeta Corp., et al. (Case No. C-01-2587-EDL, N.D.
Cal.); Patricia A. Gammino v. Transmeta Corp., et al.
(Case No. C-01-2614-EDL, N.D. Cal.); B. Keith
Dunnavant v. Transmeta Corp., et al.
(Case No. C-01-20647-EDL, N.D. Cal.); and Julie
LaFleur v. Transmeta Corp., et al. (Case
No. C-01-20690 PVT, N.D. Cal.). In addition, the Company is
aware of but has not been served with the following complaint
filed in the United States District Court for the Southern
District of New York: Jason John Schwarz v. Transmeta
Corp., et al. (Case No. 01-CV-6492, S.D.N.Y.).

These complaints purport to be class actions
filed on behalf of all persons, other than the individual
defendants and the other officers of Transmeta, who purchased or
otherwise acquired the Companys common stock during the
period from November 7, 2000 to June 20, 2001. These
complaints allege various violations of federal securities law,
including violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder, and Sections 11, 12(a)(2), and 15 of the
Securities Act of 1933. All of the complaints allege that the
defendants made materially misleading statements or material
omissions in various contexts, including the prospectus and
registration statement for the initial public offering of the
Companys common stock on November 7, 2000. The
complaints also allege that certain individual defendants
intentionally engaged in this conduct in order to inflate the
value of the Companys common stock and thereby obtain
alleged illegal insider trading proceeds. The complaints seek
unspecified damages, unspecified injunctive relief, interest,
attorney and expert fees, and other litigation costs.

These complaints were filed only recently.
Plaintiffs have not yet filed motions to consolidate or for the
appointment of lead plaintiff pursuant to the Private Securities
Litigation Reform Act of 1995. Transmeta currently expects that
all of these actions will be consolidated into one action and
that a consolidated amended complaint will be filed after the
appointment of lead plaintiff. The Company has not yet made any
responsive filings, and discovery has not commenced. Transmeta
believes that the allegations in these complaints are without
merit, and intends to challenge the complaints and defend the
actions vigorously. Based upon information presently known to
management, the Company does not believe that the ultimate
resolution of these lawsuits will have a material adverse effect
on its business.

Between June 28, 2001 and August 3,
2001, the directors and certain officers of the Company were
sued in two purported shareholder derivative actions, both filed
in Superior Court for Santa Clara County, California, with the
following captions: Thomas Pereira v. David Ditzel, et al.
(Transmeta Corp.) (Case No. CV 799491) and Karen
Sweeney v. Mark Allen, et al. (Transmeta Corp.) (Case
No. CV 799667). The Company is also named as a nominal
defendant in both actions. Both of these complaints are based
upon the same general allegations set out in the purported
shareholder class actions described above. The complaints allege
that certain of the individual defendants sold shares of
Transmeta common stock while in possession of material inside
information, purportedly in breach of their fiduciary duties to
the Company, and that those so-called selling
defendants were aided and abetted by the other individual
defendants. The complaints also include counts for gross
mismanagement, waste of corporate assets and
abuse of control, all based upon the same general
allegations. The Company has not yet responded to these
complaints, and discovery has not commenced. The Company
believes that the allegations in these purported derivative
actions are also without merit and intends to challenge the
complaints and defend the actions vigorously. Based upon
information presently known to management, the Company does not
believe that the ultimate resolution of these lawsuits will have
a material adverse effect on its business.

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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 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
future gross margins, operating expenses and our need for
additional capital. In addition, the section entitled
Risks That May Affect Future Results 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.

Investors are cautioned that these
forward-looking statements are only predictions which may differ
materially from actual results or future events. Actual results
could vary significantly based on a variety of factors. The
section entitled Risks That May Affect Future
Results 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, which 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, test
and warehouse functions.

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 accounted for 31%, 13% and 12% of net revenue in the
first six months of fiscal 2001. The loss of a major customer or
delay or cancellation of significant orders from these customers
for economic or other reasons could continue to reduce or delay
our recognition of revenue. All of our sales to date have been
denominated in U.S. dollars, and we expect that most of our
sales in the future will be denominated in U.S. dollars.
Substantially all of our product sales in the first six months
of fiscal 2001 were for the notebook computer market. If our
Crusoe products fail to achieve widespread acceptance, 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 Electronics as the exclusive
distributor of our products in Taiwan, Hong Kong and China until
December 31, 2002. In September 2000, we appointed All
American Semiconductor as the exclusive distributor of our
products in North America until December 31, 2002. Both
distributor agreements exclude the right to sell products to
OEMs and major notebook computer and high-density server
manufacturers. These agreements also specify inventory levels
and price protection and contain provisions regarding rights of
return.

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We generally recognize revenue from product sales
upon transfer of title, typically upon shipment, and provide for
expected returns 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. During the
second quarter of fiscal 2001, cost of product revenue included
a $28.1 million charge primarily related to the write-off
of excess inventory and related purchase commitments. 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 include
commissions paid to internal sales representatives and will
include future commissions paid to external representatives once
volume shipments increase.

In connection with the grant of stock options to
our employees in 2000, we recorded deferred stock compensation
of approximately $45.1 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 using the graded
vesting method. We will incur substantial expense in future
periods as a result of the amortization of the deferred stock
compensation.

Historically, we have incurred significant
losses. As of June 29, 2001, we had an accumulated deficit
of $265.7 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. A downturn in the
semiconductor industry and in the general economy has occurred
in the first six months of fiscal 2001 and is expected to
continue at least through the remainder of calendar 2001. Our
net revenue decreased by 43.3% in the second quarter of fiscal
2001 compared to the first quarter of fiscal 2001, and operating
results also declined primarily as a result of the general
economic downturn. If our unit volumes do not increase and the
economic conditions in Japan and worldwide do not improve, or
worsen, we would continue to experience material adverse effects
upon our operating results.

Results of Operations

Net Loss.Net loss
for the second quarter of fiscal 2001 was $69.3 million
compared to a net loss of $23.8 million for the second
quarter of fiscal 2000. Net loss for the first six months of
fiscal 2001 was $92.0 million compared to a net loss of
$43.8 million for the first six months of fiscal 2000. As
opposed to actual results, pro forma results of operations
exclude the effects of the $28.1 million charge to cost of
product revenue related primarily to the write-off of excess
inventory and related purchase commitments, the
$13.6 million in-process research and development charge as
discussed below and the effects of amortization of intangible
assets and deferred stock compensation of $9.8 million and
$19.3 million for the three and six months ended
June 29, 2001, respectively, and $4.6 million and
$8.0 million for the three and six months ended
June 30, 2000, respectively. If excluded, pro forma net
loss was $17.8 million, or $0.14 per share, for the second
quarter of fiscal 2001, compared to pro forma net loss of
$19.1 million, or $0.59 per share, for the second quarter
of fiscal 2000. Pro forma net loss was $31.0 million, or
$0.24 per share, for the first six months of fiscal 2001,
compared with pro forma net loss of $35.8 million or $1.16
per share, for the first six months of fiscal 2000.

Net Revenue.Net
revenue in the second quarter of fiscal 2001 was
$10.5 million, compared with $354,000 in the second quarter
of fiscal 2000. Net revenue in the first six months of fiscal
2001 was $29.1 million, compared with $358,000 in the first
six months of fiscal 2000. These increases reflect the
commencement of volume shipments of our products in the third
quarter of fiscal 2000. Net revenue in the second quarter of
fiscal 2001 decreased 43.3% from net revenue of
$18.6 million in the first quarter of fiscal

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2001. We believe that this decrease in net
revenue quarter over quarter was primarily a result of decreased
unit sales of our microprocessors primarily due to a slowdown in
the Japanese and, to a lesser extent, the U.S. economy. In
addition, demand for our products depends in large part upon
sales by our OEM customers of notebook computers that
incorporate our products. Sales to three customers accounted for
31%, 13% and 12% of net revenue in the first six months of
fiscal 2001.


Gross Margin.Gross
margin is the percentage derived from dividing gross profit by
net revenue. Actual gross margin in the second quarter of fiscal
2001 was (223.1)%, compared with 38.1% in the second quarter of
fiscal 2000. Actual gross margin in the first six months of
fiscal 2001 was (52.6)%, compared with 37.7% in the first six
months of fiscal 2000. The decrease in gross margin is primarily
a result of the additional charge of $28.1 million to cost
of product revenue sold as a result of the inventory and related
charges recorded in the second quarter of fiscal 2001 as
discussed below. Excluding that $28.1 million charge, pro
forma gross margin in the second quarter of fiscal 2001 was
44.0%, compared with 38.1% in the second quarter of fiscal 2000.
Pro forma gross margin in the first six months of fiscal 2001
was 44.1%, compared with 37.7% in the first six months of fiscal
2000. Pro forma gross margin in the second quarter of fiscal
2001 remained relatively flat compared to the actual gross
margin of 44.1% in the first quarter of fiscal 2001. The
decrease in actual gross margin in quarter over quarter was due
primarily to the inventory charge discussed below.

Inventory Charge.In
the second quarter of fiscal 2001, we recorded a charge to cost
of product revenue totaling $28.1 million. This amount
includes $24.4 million related to excess inventory and
related purchase commitments due to a sudden and significant
decrease in actual and forecasted demand for specific products.
Inventory purchases and commitments are based upon future sales
forecasts. In order to mitigate potential supply constraints, we
built inventory levels for certain components with long lead
times and entered into certain longer-term commitments for
certain components. This inventory charge was calculated based
upon the inventory levels in excess of forecasted demand for
each specific product. We anticipate that a significant part of
this inventory subject to this charge will not be used at a
later date, based upon our current demand forecast.

Research and Development.Research and development (R&D)
expenses in the second quarter of fiscal 2001 were
$17.2 million, compared to $15.1 million in the second
quarter of fiscal 2000, an increase of 14.3%. R&D expenses
in the first six months of fiscal 2001 were $34.4 million,
compared to $26.5 million in the first six months of fiscal
2000, an increase of 29.4%. These increases were primarily a
result of hiring additional development personnel. In addition,
R&D expenses have increased due to the increased volume of
prototype wafers and services, as well as additional
depreciation and amortization expenses arising from significant
purchases of computer aided design and other software tools.
R&D expenses for the second quarter of fiscal 2001 were
relatively flat compared to the first quarter of fiscal 2001
R&D expenses of $17.1 million. We expect research and
development expenses will remain flat through the third quarter
of fiscal 2001.

In-Process Research and Development.In April 2001, we licensed certain
computing technologies and intellectual property from Advanced
Micro Devices, Inc. (AMD), including AMDs
HyperTransport interconnect technology for our future products
and technology initiatives. As initial consideration for the
patents and patent rights licensed under the agreement, we
issued unregistered shares of our common stock valued at
$13.6 million. This amount has been expensed as in-process
research and development during the second quarter of fiscal
2001 because the HyperTransport technology is designed for use
in products that are currently in research and development that
are not anticipated to be available until late fiscal 2002.

Selling, General and Administrative.Selling, general and administrative
(SG&A) expenses in the second quarter of fiscal 2001 were
$8.9 million, compared to $5.8 million in the second
quarter of fiscal 2000, an increase of 53.3%. SG&A expenses
in the first six months of fiscal 2001 were $17.9 million,
compared to $11.4 million in the six months of fiscal 2000,
an increase of 55.9%. These increases were largely due to
additional costs related to recruiting personnel, additional
marketing expenses for tradeshows and branding efforts and the
overall expansion in our level of operations. SG&A expenses
for the second quarter of fiscal 2001 remained relatively flat
compared to the first quarter of fiscal 2001 SG&A expenses
of $9.0 million. We anticipate that selling, general and
administrative expenses will remain relatively consistent
through the third quarter of fiscal 2001.

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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
$4.1 million in the second quarter of fiscal 2001, compared
to $2.6 million in the second quarter of fiscal 2000.
Amortization expense in the first six months of fiscal 2001 was
$7.5 million, compared to $4.9 million in the first
six months of fiscal 2000. Amortization increased in the second
quarter and first half of fiscal 2001 compared to the same
periods of fiscal 2000 due to the recent acquisitions of patents
and patent rights, resulting in approximately $2.0 million
of additional amortization expense per quarter. Future
amortization will be $10.0 million in the remainder of
2001, $20.7 million in 2002, $17.9 million in 2003 and
the balance in future years.

Amortization of Deferred Stock Compensation.Amortization of deferred stock
compensation in the second quarter of fiscal 2001 was
$5.7 million, compared to $2.0 million in the second
quarter of fiscal 2000. Amortization expense in the first six
months of fiscal 2001 was $11.8 million, compared to
$3.1 million in the first six months of fiscal 2000. The
increases are a result of the additional options granted to
employees during the second half of fiscal 2000. We expect to
record an additional amortization expense of $8.0 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 in the second quarter
of fiscal 2001 was $4.0 million, compared to
$2.0 million in the second quarter of fiscal 2000. Interest
income in the first six months of fiscal 2001 was
$9.0 million, compared to $2.9 million in the first
six months of fiscal 2000. These increases are primarily due to
larger average invested cash balances resulting from the closing
of our initial public offering in November 2000. Interest income
in the second quarter of fiscal 2001 decreased 21.9% from
$5.1 million in the first quarter of fiscal 2001. The
decrease is primarily due to lower cash balances as a result of
funding operations and lower interest rates. We invest in highly
liquid securities, which have been affected by the recent
interest rate cuts. We expect that returns on future investments
will also yield a lower return due primarily to the lower cash
balances in addition to declining interest rates.

Interest Expense.Interest expense for the second
quarter of fiscal 2001 was $262,000, compared to $426,000 for
the second quarter of fiscal 2000, a decrease of 38.5%. Interest
expense for the first six months of fiscal 2001 was $593,000,
compared to $876,000 for the first six months of fiscal 2000, a
decrease of 32.3%. The decrease is due to lower average debt
balances due to the expiration of several lease-financing
arrangements during late 2000 and throughout fiscal 2001.

Provision for Income Taxes.We recorded a provision for income
taxes of $3,000 in the second quarter of fiscal 2001 and a
$16,000 provision in the first six months of fiscal 2001, in
each case 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 June 29, 2001 we had $282.4 million in cash and
cash equivalents and short-term investments, a decrease of
$60.7 million from December 29, 2000.

Net cash used in operating activities during the
first six months of fiscal 2001 was $45.6 million, compared
to $30.7 million used during the first six months of fiscal
2000, an increase of 48.6%. Net cash used in operating
activities was attributable to our net losses net of our
non-cash charges, the increases in accounts receivable and
prepaid expenses, partially offset by increases in accounts
payable and other accrued liabilities. Increases in accounts
payable, prepaid expenses and accrued liabilities were due to
the general continued growth in business activity from the first
six months of fiscal 2000 through the first six months of fiscal
2001. Net loss of $92.0 million for the first six months of
fiscal 2001 includes non-cash charges of $28.1 related to the
inventory charge, $13.6 million related to the in-process
research and development charge and $19.3 million related
to amortization of intangibles and deferred stock compensation.

10



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Net cash used for investing activities during the
first six months of fiscal 2001 was $185.7 million,
compared to $9.9 million provided during the first six
months of fiscal 2000. Net cash used for investing activities in
the first six months of fiscal 2001 consisted primarily of the
purchase of available-for-sale investments and the purchase of
intellectual property and related assets. Net cash provided
during the first six months of fiscal 2000 was primarily the
result of the proceeds from the sales and maturities of our
investments.

Net cash used for financing activities during the
first six months of fiscal 2001 was $807,000, compared to
$86.6 million provided during the first six months of
fiscal 2000. Net cash used during the first six months of fiscal
2001 was primarily due to the repayment of debt and capital
lease obligations partially offset by proceeds from option
exercises. Net cash provided during the first six months of
fiscal 2000 is primarily attributable to proceeds from the
issuance of convertible preferred stock of $87.9 million,
which closed in April 2000.

At June 29, 2001, we had $27.7 million
in cash and cash equivalents and $254.8 million in
available-for-sale 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 June 29, 2001, we had
total minimum lease payments of $31.0 million under our
operating leases and $4.3 million under our capital leases.
We are obligated to pay $9.0 million in 2002,
$9.0 million in 2003 and $7.5 million in 2004 in
connection with patent and patent right acquisitions. We also
are obligated to pay IBM a total of
$29.0 million  $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 Taiwan
Semiconductor Manufacturing Co., (TSMC) 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
June 29, 2001, TSMC had incurred approximately
$3.1 million of manufacturing expenses on our outstanding
purchase orders. We also had minimum aggregate principal
payments of $1.9 million under our long-term debt. 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. After this period, capital requirements will depend on
many factors, including general economic conditions, the rate of
sales growth, market acceptance of our products, costs of
securing access to adequate manufacturing capacity, the timing
and extent of research and development projects and increases in
our operating expenses. To the extent that existing cash and
cash equivalents and short-term investments balances and any
cash from operations are insufficient to fund our future
activities, we may need to raise additional funds through public
or private equity or debt financing. Although we are currently
not a party to any agreement or letter of intent with respect to
a potential acquisition or business combination, we may enter
into acquisitions or business combination in the future, which
also could require us to seek additional equity or debt
financing. Additional funds may not be available on terms
favorable to us or at all.

Risks That May Affect Future Results

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

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

We have a history of substantial losses, expect
to incur further significant losses, and do not expect to
achieve profitability in the near future. We incurred net losses
of $92.0 million in the first six months of fiscal 2001,
$97.7 million in 2000, $41.1 million in 1999 and
$10.1 million in 1998. As of June 29, 2001, we had an
accumulated deficit of approximately $265.7 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

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charges relating to the amortization of deferred
charges, intellectual property and deferred stock compensation,
which will serve to increase our net losses further. Our net
revenue must increase if we are to achieve profitability under
our current business model. Our revenue of $10.5 million in
the second quarter of fiscal 2001 decreased by 43.3% from our
revenue of $18.6 million in the first quarter of fiscal 2001. We
cannot assure you that our revenue will increase, so we may
never achieve profitability. Even if we achieve profitability,
we may not be able to sustain or increase profitability on a
quarterly or an annual basis.


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

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

We Depend Upon Increasing Demand for Our
Crusoe Microprocessors.

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

We Are Subject to General Economic and Market
Conditions.

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

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 microprocessors such as our Crusoe products.
Given the complexity of these computer products and their

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many components, designing new products requires
significant investments. For instance, OEMs may need to design
new computer casings, basic input/output system software and
motherboards. Our target customers may not choose our products
for technical, performance, packaging, novelty, design cost or
other reasons. If our Crusoe products fail to achieve widespread
acceptance in the notebook computer market, we would likely
never achieve revenue sufficient to sustain our business and the
value of an investment in our common stock would likely decline
significantly.


The Growth of Our Business Depends in Part
upon the Development of 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 does not grow as we
anticipate, our target customers do not incorporate our products
into theirs, or our products are not widely accepted by end
users, our growth would be impeded and we will not be able to
factor the related revenues into our growth in the future. In
addition, 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.

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. A general downturn in
the semiconductor industry has occurred in the first half of
2001 and is expected to continue through at least the remainder
of 2001. Our net revenue has decreased in response to
industry-wide fluctuations, and could decrease further. In
addition, we may determine to lower our prices of our products
to increase or maintain market share, which would likely
decrease our operating results.

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

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. Our operating results fluctuate
significantly from quarter to quarter and we expect our results
to fluctuate in the future. Our stock price declined
substantially after our preliminary announcement of our results
for the second quarter of fiscal 2001. If our future operating
results fail to meet or exceed the expectations of securities
analysts or investors, our stock price would likely decline
further in the future.

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



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

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



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

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



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

Our results could also fluctuate due to the
introduction of new technologies that affect the notebook
computer market. For example, if Microsoft delays the
introduction of its new Windows XP operating system, or if
notebook computer makers perceive such delay, then notebook
computer makers may delay the

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introduction of their products incorporating
Windows XP and consequently delay their purchases of computer
components such as our semiconductor devices.


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

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

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



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

In addition, the stock market generally and the
market for semiconductor and other 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. Accordingly, you may not be
able to resell your shares of common stock at or above the price
you paid. 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, and as noted
in the discussion of Legal Proceedings we have
recently been sued in several purported securities class action
lawsuits, which we anticipate will be consolidated. Further,
certain of our management and directors have also been sued in
purported shareholder derivative actions. Although we believe
that the lawsuits lack merit, an adverse determination could
have a significant effect upon our business and materially
affect the price of our stock. Moreover, regardless of the
ultimate result, it is likely that the lawsuits will divert
managements attention and resources from other matters,
which could also adversely affect the price of our stock.

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

The market for microprocessors is dominated by
established firms and subject to rapid technological change. We
have not yet succeeded in selling our products to companies
based in the U.S. or Europe, where we face particularly strong
competitive pressure. We believe that such pressure is
increasing worldwide. Competition may cause price reductions,
reduced gross margins and loss of market share, any one of which
could significantly reduce our future revenue and increase our
losses. For example, we may determine to lower our prices of our
products in order to increase or maintain market share, which
would likely decrease our

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operating results. Significant competitors that
offer microprocessors for the notebook computer market include
Advanced Micro Devices and Intel. 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 from Intel for the high-density server market
and from National Semiconductor for the Internet appliance
market.


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

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

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

Highly complex products such as our
microprocessors may contain hardware or software defects or bugs
for many reasons, including design issues or defective materials
or manufacturing processes. Often, these defects and bugs are
not detected until after the products have been shipped. 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.

Sales to three customers accounted for 31%, 13%
and 12% of net revenue in the first six months of fiscal 2001.
These customers are located in Japan, which subjects us to
economic cycles in Japan. We expect that a small number of OEM
customers and distributors will continue to account for a
significant portion of our

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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 devices to promote
products of our competitors might not sell a significant amount
or any of our products. We expect that our sales to
OEM customers will continue to be made on the basis of
purchase orders rather than long-term commitments. In addition,
customers can delay, modify or cancel orders without penalty.
Many of our customers and potential customers are significantly
larger than we are and have sufficient bargaining power to
demand reduced prices and favorable nonstandard terms. The loss
of any major customer, or the delay of significant orders from
these customers, could reduce or delay our recognition of
product revenue.

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

We have begun to produce a significant portion of
our products using a new .13 micron manufacturing process,
rather than the established .18 micron process. This
transition involved redesigning the product and modifying the
manufacturing processes for the product. Difficulties in
shifting to 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. Many shipments of our products
are made near the end of the fiscal quarter, which also makes it
difficult to estimate demand for our products. 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. For example,
due to the sudden and significant decrease in actual and
forecasted demand for our products during the second quarter of
fiscal 2001, we recorded a charge of $24.4 million to cost
of product revenue related to excess inventory and related
purchase commitments. Further, as we introduce product
enhancements and new products, and improve our manufacturing
processes, demand for our existing products

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may decrease. If demand exceeds our expectations,
TSMC, may not be able to fabricate wafers as quickly as we need
them. Also, Advance Semiconductor Engineering (ASE),
may not be able to increase assembly functions in a timely
manner. In that event, we would need to increase production and
assembly rapidly at TSMC and ASE or find, qualify and begin
production and assembly at additional manufacturers, which may
not be possible within a time frame acceptable to our customers.
The inability of TSMC and ASE to increase production rapidly
enough could cause us to fail to meet customer demand. In
addition, rapid increases in production levels to meet
unanticipated demand could result in higher costs for
manufacturing and other expenses. These higher costs could lower
our gross margins.


Our Dependence on a Third Party to Fabricate
Wafers Limits Our Control Over the Production, Supply and
Delivery of Our Products.

The cost, quality and availability of third-party
manufacturing operations are essential elements to the
successful production of our products. We currently rely
exclusively on TSMC to fabricate our wafers. We do not have a
manufacturing agreement with TSMC 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. The absence of dedicated capacity means
that, with little or no notice, TSMC could refuse to continue to
fabricate all or some of the wafers that we require or change
the terms under which it fabricates wafers. If TSMC were to stop
manufacturing for us, we would likely be unable to replace the
lost capacity in a timely manner. Transferring to another
manufacturer would require a significant amount of time and
money, and a smooth and timely transition would be unlikely. As
a result, we could lose potential sales and fail to meet
existing obligations to our customers. In addition, if TSMC were
to change the terms under which it manufactures for us, our
manufacturing costs could increase.

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



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

TSMC 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 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 TSMC, which currently
fabricates all of our wafers, does 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.

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

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

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

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

Disruptions in Energy Supplies Could
Negatively Affect our Results of Operations.

California is currently experiencing prolonged
energy alerts and blackouts caused by the shortage and
substantially increased costs of electricity and natural gas. We
are unsure how long these alerts and blackouts will continue or
how severe they may become. We are headquartered and have our
primary place of business in Santa Clara County, California. If
we experience a sustained disruption in energy supplies, our
results of operations could be materially and adversely affected.

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

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

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

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

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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 TFT screens. 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.

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

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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;       
|
| |  | bring products to market on a timely basis at
	competitive prices; and                     
|
| |  | respond effectively to technological changes or
	product announcements by others.          

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

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

Our industry is characterized by the existence of
a large number of patents and frequent claims and related
litigation regarding patent and other intellectual property
rights. We cannot be certain that our products do not and will
not infringe issued patents, patents that may be issued in the
future, or other intellectual property rights of others. In
addition, leading companies in the semiconductor industry have
extensive 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.

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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 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 do not maintain key person insurance on any of our
personnel. We might not be able to execute on our business plan
if we were to lose the services of any of our key personnel.

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 and technology to expand
our business and for other strategic reasons. Integrating newly
acquired organizations and technologies into our company could
put a strain on our resources and be expensive and time
consuming. We may not be successful in integrating acquired
businesses or technologies and may not achieve anticipated
revenue and cost benefits. In addition, future acquisitions
could result in potentially dilutive issuances of equity
securities or the incurrence of debt, contingent liabilities

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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.


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
personnel in Taiwan and in Japan, who provide sales and customer
support. In addition, we have appointed a distributor to sell
products in Taiwan, Hong 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.

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 be removed only
	for cause and only with the vote of 66 2/3% of
	our outstanding shares;                                                      
|
| |  | requiring super-majority voting to amend some
	provisions in our certificate of incorporation and bylaws;                                                                    
|
| |  | authorizing the issuance of blank
	check preferred stock that our board could issue to
	increase the number of outstanding shares and to discourage a
	takeover attempt;   
|
| |  | limiting the ability of our stockholders to call
	special meetings of stockholders;                                                                                          
|
| |  | prohibiting stockholder action by written
	consent, which requires all stockholder actions to be taken at a
	meeting of our stockholders;                                    
|
| |  | eliminating cumulative voting in the election of
	directors; and                                                                                                             
|
| |  | establishing advance notice requirements for
	nominations for election to our board or for proposing matters
	that can be acted upon by stockholders at stockholder meetings.

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

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

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



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

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




Item 3. Quantitative and
Qualitative Disclosures about Market Risk

Interest Rate Risk.Our cash equivalents and
available-for-sale investments are exposed to financial market
risk due to fluctuations in interest rates, which may affect our
interest income. As of June 29, 2001, our cash equivalents
and available-for-sale investments included money market funds
and short and medium term corporate bonds and earned interest at
an average rate of 4.7%. Due to the relative short-term nature
of our investment portfolio, our operating results or cash flows
are extremely vulnerable to sudden changes in market interest
rates. Assuming a decline of 10% in the market interest rates at
June 29, 2001, with consistent cash balances, interest
income for each of the remaining quarters of fiscal 2001 would
be adversely affected by approximately $150,000 per quarter. 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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PART II. OTHER INFORMATION




Item 1. Legal
Proceedings

Between June 25, 2001 and August 3,
2001, Transmeta, our directors, and certain of our officers were
named as defendants in the following lawsuits filed in the
United States District Court for the Northern District of
California: Nancy Hertzfeld and Jay Schwerd v. Transmeta Corp.,
et al. (Case No. C-01-2450-JL, N.D. Cal.); Pond
Equities v. Transmeta Corp., et al. (Case
No. C-01-2463-JL, N.D. Cal.); James Puente v. Transmeta
Corp., et al. (Case No. C-01-2464-EDL, N.D. Cal.);
Thomas McCarvill v. Transmeta Corp., et al. (Case
No. C-01-2534-BZ, N.D. Cal.); Michael Koroluk v. Transmeta
Corp., et al. (Case No. C-01-2587-EDL, N.D. Cal.);
Patricia A. Gammino v. Transmeta Corp., et al. (Case
No. C-01-2614-EDL, N.D. Cal.); B. Keith Dunnavant v.
Transmeta Corp., et al. (Case No. C-01-20647-EDL, N.D.
Cal.); and Julie LaFleur v. Transmeta Corp., et al. (Case
No. C-01-20690 PVT, N.D. Cal.). In addition, we are aware
of but have not been served with the following complaint filed
in the United States District Court for the Southern District of
New York: Jason John Schwarz v. Transmeta Corp.,
et al. (Case No. 01-CV-6492, S.D.N.Y.).

These complaints purport to be class actions
filed on behalf of all persons, other than the individual
defendants and the other officers of Transmeta, who purchased or
otherwise acquired our common stock during the period from
November 7, 2000 to June 20, 2001. These complaints
allege various violations of federal securities law, including
violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder,
and Sections 11, 12(a)(2), and 15 of the Securities Act of
1933. All of the complaints allege that the defendants made
materially misleading statements or material omissions in
various contexts, including the prospectus and registration
statement for the initial public offering of our common stock on
November 7, 2000. The complaints also allege that certain
individual defendants intentionally engaged in this conduct in
order to inflate the value of our common stock and thereby
obtain alleged illegal insider trading proceeds. The complaints
seek unspecified damages, unspecified injunctive relief,
interest, attorney and expert fees, and other litigation costs.

These complaints were filed only recently.
Plaintiffs have not yet filed motions to consolidate or for the
appointment of lead plaintiff pursuant to the Private Securities
Litigation Reform Act of 1995. We currently expect that all of
these actions will be consolidated into one action and that a
consolidated amended complaint will be filed after the
appointment of lead plaintiff. We have not yet made any
responsive filings, and discovery has not commenced. We believe
that the allegations in these complaints are without merit, and
we intend to challenge the complaints and defend the actions
vigorously. Based upon information presently known to
management, we do not believe that the ultimate resolution of
these lawsuits will have a material adverse effect on our
business.

Between June 28, 2001 and August 3,
2001, the directors and certain officers of Transmeta were sued
in two purported shareholder derivative actions, both filed in
Superior Court for Santa Clara County, California, with the
following captions: Thomas Pereira v. David Ditzel, et al.
(Transmeta Corp.) (Case No. CV 799491) and Karen Sweeney v.
Mark Allen, et al. (Transmeta Corp.) (Case No. CV
799667). The Company is also named as a nominal defendant in
both actions. Both of these complaints are based upon the same
general allegations set out in the purported shareholder class
actions described above. The complaints allege that certain of
the individual defendants sold shares of Transmeta common stock
while in possession of material inside information, purportedly
in breach of their fiduciary duties to the Company, and that
those so-called selling defendants were aided and
abetted by the other individual defendants. The complaints also
include counts for gross mismanagement, waste
of corporate assets and abuse of control, all
based upon the same general allegations. We have not yet
responded to these complaints, and discovery has not commenced.
We believe that the allegations in these purported derivative
actions are also without merit and intend to challenge the
complaints and defend the actions vigorously. Based upon
information presently known to management, we do not believe
that the ultimate resolution of these lawsuits will have a
material adverse effect on our business.

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Item 2. Changes in Securities and
Use of Proceeds

Recent Sales of Unregistered
Securities

In May 2001, we issued 766,930 shares of common
stock, valued at $10.8 million, to Seiko Epson Corporation
in partial consideration for the acquisition of certain patents
and patent rights.

In June 2001, we issued 1,000,000 shares of
common stock, valued at $13.6 million, to AMD as partial
consideration for the license to certain computing technologies
and intellectual property.

Use of Proceeds From Sales of
Registered Securities

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

As of June 29, 2001, we had paid
$5.0 million of the net proceeds to IBM under the terms of
our amended license agreement, $3.5 million to IBM under
the terms of our original license agreement, $1.1 million
to Quickturn Design Systems to repay indebtedness incurred in
conjunction with equipment purchases in 1998, and
$11.5 million for the purchase of intellectual property and
related assets from Seiko Epson and other intellectual property
owners. We have also paid approximately $45.6 million in
ordinary operating expenses. The remaining net proceeds have
been invested in short-term interest bearing, investment-grade
securities.




Item 3. Defaults upon Senior
Securities

Not Applicable.




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

(a)  The Annual Meeting of Stockholders of
Transmeta was held on May 17, 2001.



| |     |                                                                                                                                                                                                                                                                                                                          
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) | At the Annual Meeting, our stockholders elected
        each of the following nominees as Class I directors, each
        for a term of three years and until his successor has been
        elected and qualified or until his earlier resignation, death or
        removal. The vote for each director was as follows:

|                  |  |             |            | 
|----------------- |  | ----------- | ---------- | 
|Nominees          |  | Total Votes
|                  |  |            
|R. Hugh Barnes    |  |             | 81,086,406 | 
|                 
|                 
|                 
|                 
|Murray A. Goldman |  |             | 79,086,265 | 

(c)  At the Annual Meeting, our stockholders
adopted the following resolution by the vote indicated:

a. To ratify the selection of Ernst & Young
LLP as our independent auditors for 2001.

|        |  |             |            | 
|------- |  | ----------- | ---------- | 
|        |  | Total Votes
|        |  |            
|For     |  |             | 80,729,976 | 
|       
|       
|       
|       
|Against |  |             | 15,109     | 
|       
|       
|       
|       
|Abstain |  |             | 485,685    | 




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 June 29, 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: August 6, 2001

| |                      
| | ---------------------
| | TRANSMETA CORPORATION



| |     |                       
| | --- | ----------------------
| | By: | /s/ MERLE A. MCCLENDON

| |                                 
| | --------------------------------
| |                                 
| | Merle A. McClendon              
| | Chief Financial Officer         
| | (Principal Financial Officer and
| | Duly Authorized Officer)        

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