##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) 
OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) 
OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period from                               to
 Commission File Number 000-31803
 TRANSMETA CORPORATION
 (Exact name of Registrant as specified in its charter)
 Delaware
    
    77-0402448(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification no.)
 3990 Freedom Circle, Santa Clara, CA 95054
(Address of principal executive offices, including zip code)
 (408) 919-3000
(Registrants telephone number, including area code)
 
 þ o
  o þ o
 o þ




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##### 



TRANSMETA CORPORATION
 FORM 10-Q
Quarterly Period Ended September 30, 2006
TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005
    
    
    3Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2006 and 2005
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the  Nine Months
Ended September 30, 2006 and 2005
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    28Item 5.
Other Information
    
    
    39Item 6. Exhibits
    
    
    40Signatures
    
    
    41EXHIBIT 10.29EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01EXHIBIT 32.02
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 TRANSMETA CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share amounts)
 September 30,
    
    
    December 31,2006
    
    
    2005 (1)(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    18,759
    
    
    $
    27,659Short-term investments
    
    
    31,942
    
    
    
    28,811Accounts receivable
    
    
    285
    
    
    
    1,686Inventories
    
    
    933
    
    
    
    265Prepaid expenses and other current assets
    
    
    1,859
    
    
    
    2,279Total current assets
    
    
    53,778
    
    
    
    60,700Property and equipment, net
    
    
    1,201
    
    
    
    1,623Patents and patent rights, net
    
    
    10,946
    
    
    
    16,080Other assets
    
    
    919
    
    
    
    911Total assets
    
    $
    66,844
    
    
    $
    79,314LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,297
    
    
    $
    1,521Accrued compensation and related compensation liabilities
    
    
    2,765
    
    
    
    3,279Deferred income, net
    
    
    47
    
    
    
    5,937Other accrued liabilities
    
    
    1,872
    
    
    
    2,109Advances from customers
    
    
    1,320
    
    
    
    7,260Current portion of accrued restructuring costs
    
    
    1,821
    
    
    
    1,803Total current liabilities
    
    
    9,122
    
    
    
    21,909Long-term accrued restructuring costs, net of current portion
    
    
    1,223
    
    
    
    2,453Total liabilities
    
    
    10,345
    
    
    
    24,362Commitments and contingenciesStockholders equity:Preferred stock, $0.00001 par value, at amounts paid in; Authorized shares 
5,000,000. None issued and outstanding
    
    
    
    
    
    
    Common stock, $0.00001 par value, at amounts paid in; Authorized shares
 1,000,000,000. Issued and outstanding shares 197,095,249 and
191,710,620, respectively
    
    
    722,156
    
    
    
    713,129Treasury stock shares 796,875 and 796,875, respectively
    
    
    (2,439
    )
    
    
    (2,439
    )Accumulated other comprehensive loss
    
    
    (78
    )
    
    
    (195
    )Accumulated deficit
    
    
    (663,140
    )
    
    
    (655,543
    )Total stockholders equity
    
    
    56,499
    
    
    
    54,952Total liabilities and stockholders equity
    
    $
    66,844
    
    
    $
    79,314
 
 (1)
    
    Derived from the Companys audited financial statements as of December 31, 2005, but does not
include all disclosures required by accounting principles generally accepted in the United
States of America.  3




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##### Table of Contents



TRANSMETA CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 (Unaudited)
 Three Months Ended
    
    

Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue:Product
    
    $
    507
    
    
    $
    7,927
    
    
    $
    1,457
    
    
    $
    21,401License
    
    
    10,000
    
    
    
    9,628
    
    
    
    10,000
    
    
    
    19,628Service
    
    
    6,810
    
    
    
    10,308
    
    
    
    34,700
    
    
    
    18,390Total revenue
    
    
    17,317
    
    
    
    27,863
    
    
    
    46,157
    
    
    
    59,419Cost of revenue:Product (2)
    
    
    9
    
    
    
    2,167
    
    
    
    109
    
    
    
    10,869License
    
    
    39
    
    
    
    46
    
    
    
    39
    
    
    
    71Service (2)
    
    
    3,913
    
    
    
    6,017
    
    
    
    20,589
    
    
    
    10,330Total cost of revenue
    
    
    3,961
    
    
    
    8,230
    
    
    
    20,737
    
    
    
    21,270Gross profit
    
    
    13,356
    
    
    
    19,633
    
    
    
    25,420
    
    
    
    38,149Operating expenses:Research and development (1) (2)
    
    
    4,838
    
    
    
    1,905
    
    
    
    12,859
    
    
    
    17,118Selling, general and administrative (2)
    
    
    4,847
    
    
    
    4,523
    
    
    
    16,434
    
    
    
    17,475Restructuring charges, net
    
    
    107
    
    
    
    1,529
    
    
    
    277
    
    
    
    2,884Amortization of patents and patent rights
    
    
    1,711
    
    
    
    1,711
    
    
    
    5,134
    
    
    
    5,133Stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48
    )Total operating expenses
    
    
    11,503
    
    
    
    9,668
    
    
    
    34,704
    
    
    
    42,562Operating income (loss)
    
    
    1,853
    
    
    
    9,965
    
    
    
    (9,284
    )
    
    
    (4,413
    )Interest income and other, net
    
    
    708
    
    
    
    305
    
    
    
    1,801
    
    
    
    644Interest expense
    
    
    (42
    )
    
    
    (132
    )
    
    
    (114
    )
    
    
    (346
    )Net income (loss)
    
    $
    2,519
    
    
    $
    10,138
    
    
    $
    (7,597
    )
    
    $
    (4,115
    )Net income (loss) per share  basic and diluted
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    (0.04
    )
    
    $
    (0.02
    )Weighted average shares outstanding  basic
    
    
    196,636
    
    
    
    190,933
    
    
    
    195,255
    
    
    
    189,984Weighted average shares outstanding  diluted
    
    
    199,809
    
    
    
    197,767
    
    
    
    195,255
    
    
    
    189,984
 
 (1)
    
    Excludes $0, $0, $0 and $(48) in variable stock compensation for the three and nine months
ended September 30, 2006 and 2005, respectively.(2)
    
    Includes stock based compensation charges as follows: Three Months Ended
    
    

Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Cost of product revenue
    
    $
    (4
    )
    
    $
    
    
    
    $
    5
    
    
    $
    Cost of service revenue
    
    
    239
    
    
    
    
    
    
    
    1,603
    
    
    
    Research and development
    
    
    339
    
    
    
    
    
    
    
    1,000
    
    
    
    Selling, general and administrative
    
    
    527
    
    
    
    
    
    
    
    1,720
    
    
    
    Total stock-based compensation
    
    $
    1,101
    
    
    $
    
    
    
    $
    4,328
    
    
    $
    
  4




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TRANSMETA CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (7,597
    )
    
    $
    (4,115
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Stock compensation expense
    
    
    4,328
    
    
    
    (48
    )Allowance for bad debts
    
    
    
    
    
    
    60Depreciation
    
    
    801
    
    
    
    967Amortization of patents and patent rights
    
    
    5,134
    
    
    
    5,135Non cash restructuring charges
    
    
    277
    
    
    
    1,508Changes in operating assets and liabilities:Accounts receivable
    
    
    1,401
    
    
    
    (2,242
    )Inventories
    
    
    (660
    )
    
    
    3,762Prepaid expenses and other current assets
    
    
    420
    
    
    
    (128
    )Other assets
    
    
    (8
    )
    
    
    Accounts payable and accrued liabilities
    
    
    (969
    )
    
    
    (2,681
    )Deferred income, net
    
    
    (5,890
    )
    
    
    Advances from customers
    
    
    (5,940
    )
    
    
    Accrued restructuring charges
    
    
    (1,489
    )
    
    
    (1,100
    )Net cash provided by (used in) operating activities
    
    
    (10,192
    )
    
    
    1,118Cash flows from investing activities:Purchase of available-for-sale investments
    
    
    (22,000
    )
    
    
    (22,000
    )Proceeds from sale or maturity of available-for-sale investments
    
    
    19,000
    
    
    
    28,548Purchase of property and equipment
    
    
    (379
    )
    
    
    (668
    )Net cash provided by (used in) investing activities
    
    
    (3,379
    )
    
    
    5,880Cash flows from financing activities:Proceeds from sales of common stock under employee stock purchase and incentive option plans
    
    
    4,671
    
    
    
    3,174Repayment of notes from stockholders
    
    
    
    
    
    
    18Repayment of debt and capital lease obligations
    
    
    
    
    
    
    (356
    )Net cash provided by financing activities
    
    
    4,671
    
    
    
    2,836Change in cash and cash equivalents
    
    
    (8,900
    )
    
    
    9,834Cash and cash equivalents at beginning of period
    
    
    27,659
    
    
    
    17,273Cash and cash equivalents at end of period
    
    $
    18,759
    
    
    $
    27,107
  5




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TRANSMETA CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. Description of Business
  2. Basis of Presentation
  3. Balance Sheet Details
 September 30,
    
    
    December 31,2006
    
    
    2005InventoriesRaw materials
    
    $
    401
    
    
    $
    Work in progress
    
    
    525
    
    
    
    Finished goods
    
    
    7
    
    
    
    265Total
    
    $
    933
    
    
    $
    265Property and equipment, netLeasehold improvements
    
    $
    2,484
    
    
    $
    2,410Computer equipment
    
    
    6,176
    
    
    
    5,911Furniture and fixtures
    
    
    1,622
    
    
    
    1,635Computer software
    
    
    1,858
    
    
    
    1,82512,140
    
    
    
    11,781Less accumulated depreciation and amortization
    
    
    (10,939
    )
    
    
    (10,158
    )Total
    
    $
    1,201
    
    
    $
    1,623Other accrued liabilitiesAccrued audit
    
    $
    811
    
    
    $
    885Deferred rent
    
    
    303
    
    
    
    408Other
    
    
    758
    
    
    
    816Total
    
    $
    1,872
    
    
    $
    2,109
 6




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##### Table of Contents



4. Short-Term Investments
   Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Aggregatecost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAs of September 30, 2006Federal agency discount notes
    
    $
    14,000
    
    
    $
    
    
    
    $
    58
    
    
    $
    13,942Commercial paper
    
    
    18,000
    
    
    
    
    
    
    
    
    
    
    
    18,000Total
    
    $
    32,000
    
    
    $
    
    
    
    $
    58
    
    
    $
    31,942As of December 31, 2005Federal agency discount notes
    
    $
    25,000
    
    
    $
    
    
    
    $
    189
    
    
    $
    24,811Commercial paper
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    4,000Total
    
    $
    29,000
    
    
    $
    
    
    
    $
    189
    
    
    $
    28,811
  Amortized
    
    
    AggregateCost
    
    
    Fair Value(In thousands)As of September 30, 2006:Amounts maturing within one year
    
    $
    24,000
    
    
    $
    23,960Amounts maturing after one year, within five years
    
    
    8,000
    
    
    
    7,982Total
    
    $
    32,000
    
    
    $
    31,942
     7




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##### Table of Contents



In Loss Position
    
    
    In Loss Position< 12 Months
    
    
    > 12 Months
    
    
    Total in Loss PositionGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    (Loss)
    
    
    Value
    
    
    (Loss)
    
    
    Value
    
    
    (Loss)Short-term investments:Federal agency discount notes
    
    $
    5,960
    
    
    $
    (40
    )
    
    $
    7,982
    
    
    $
    (18
    )
    
    $
    13,942
    
    
    $
    (58
    )Commercial paper
    
    
    18,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,000
    
    
    
    Total in loss position
    
    $
    23,960
    
    
    $
    (40
    )
    
    $
    7,982
    
    
    $
    (18
    )
    
    $
    31,942
    
    
    $
    (58
    )
 5. Commitments and Contingencies
 Purchase Obligations
  Operating Leases
   Operating Leases(In thousands)Years ending December 31,2006 (remaining three months)
    
    $
    1,2122007
    
    
    4,8582008
    
    
    2,5102009
    
    
    162010
    
    
    4Income from subleases
    
    
    (455
    )Total minimum operating lease payments
    
    $
    8,145
 Litigation
 In
re Transmeta Corporation Initial Public Offering Securities Litigation, In re
Initial Public Offering Securities Litigation,
 8




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##### Table of Contents



6. Net Comprehensive Income (Loss)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    2,519
    
    
    $
    10,138
    
    
    $
    (7,597
    )
    
    $
    (4,115
    )Net change in unrealized gain (loss) on investments
    
    
    76
    
    
    
    (17
    )
    
    
    131
    
    
    
    (58
    )Net change in foreign currency translation adjustments
    
    
    (8
    )
    
    
    
    
    
    
    (14
    )
    
    
    (20
    )Net comprehensive income (loss)
    
    $
    2,587
    
    
    $
    10,121
    
    
    $
    (7,480
    )
    
    $
    (4,193
    )
  September 30,
    
    
    December 31,2006
    
    
    2005Net unrealized loss on investments
    
    $
    (58
    )
    
    $
    (189
    )Cumulative foreign currency translation adjustments
    
    
    (20
    )
    
    
    (6
    )Accumulated other comprehensive loss
    
    $
    (78
    )
    
    $
    (195
    )
 7. Stock Based Compensation
     9




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Prior to the Adoption of SFAS No. 123(R)
   Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30, 2005
    
    
    September 30, 2005Net income (loss) as reported
    
    $
    10,138
    
    
    $
    (4,115
    )Add: Stock-based employee compensation expense included
in reported net income (loss), net of related tax effects
    
    
    
    
    
    
    (48
    )Less: Pro forma stock compensation expense computed under
the fair value method for all awards, net of related tax
effects
    
    
    (5,275
    )
    
    
    (10,136
    )Pro forma net income (loss)
    
    $
    4,863
    
    
    $
    (14,299
    )Basic and diluted net income (loss) per share, as reported
    
    $
    0.05
    
    
    $
    (0.02
    )Pro forma basic and diluted net income (loss) per share
    
    $
    0.03
    
    
    $
    (0.08
    )
 10




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##### Table of Contents



Impact of the Adoption of SFAS No. 123(R)
  Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30, 2006
    
    
    September 30, 2006Stock-based compensation expense by type of award:Employee stock options
    
    $
    1,231
    
    
    $
    3,545Employee stock purchase plan
    
    
    (136
    )
    
    
    791Net change in amounts capitalized as inventory
    
    
    4
    
    
    
    (8
    )Net change in amounts capitalized as deferred costs
    
    
    2
    
    
    
    0Total stock-based compensation
    
    
    1,101
    
    
    
    4,328Tax effect on stock-based compensation
    
    
    
    
    
    
    Net effect on net loss
    
    $
    1,101
    
    
    $
    4,328
   Valuation Assumptions
  Three Months Ended September 30,
    
    Nine Months Ended September 30,Equity Incentive Plans
    
    2006
    
    2005
    
    2006
    
    2005Risk-free interest rate
    
    
    4.9
    %
    
    
    4.0
    %
    
    
    4.8
    %
    
    
    4.0
    %Expected life of option in years
    
    
    3 to 4
    
    
    
    2.7
    
    
    
    3 to 4
    
    
    
    2.7Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility
    
    89% to 92
    %
    
    
    98
    %
    
    89% to 100
    %
    
    
    98
    %
 Three Months Ended September 30,
    
    Nine Months Ended September 30,Employee Stock Purchase Plan
    
    2006
    
    2005
    
    2006
    
    2005Risk-free interest rate
    
    
    5.08
    %
    
    
    3.7
    %
    
    
    5.08
    %
    
    
    3.7
    %Expected life of option in years
    
    
    1.25
    
    
    
    0.5
    
    
    
    1.25
    
    
    
    0.5Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    89
    %
    
    
    98
    %
    
    
    89
    %
    
    
    98
    %
  11




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##### Table of Contents



Equity Incentive Plans
    WeightedShares
    
    
    
    
    
    Average
    
    Weighted Average
    
    Weighted Average
    
    AggregateAvailable for
    
    Number of
    
    Exercise
    
    Grant Date
    
    Remaining
    
    IntrinsicGrant
    
    Shares
    
    Price
    
    Fair Value
    
    Contractual Term
    
    Value(In years)
    
    (In thousands)Balance at December 31, 2005
    
    
    16,847,775
    
    
    
    39,124,784
    
    
    $
    1.90Additional shares reserved
    
    
    9,585,531Options granted
    
    
    (7,826,163
    )
    
    
    7,826,163
    
    
    $
    1.48
    
    
    $
    0.98Options exercised
    
    
    
    
    
    
    (2,896,737
    )
    
    $
    0.98Options forfeited / canceled / expired
    
    
    3,495,982
    
    
    
    (3,495,982
    )
    
    $
    1.69Balance at September 30, 2006
    
    
    22,103,125
    
    
    
    40,558,228
    
    
    $
    1.90
    
    
    
    
    
    
    
    7.5
    
    
    $
    4,850Vested and expected to be vested
    
    
    
    
    
    
    38,201,067
    
    
    $
    1.95
    
    
    
    
    
    
    
    7.4
    
    
    $
    5,977Shares Exercisable at:September 30, 2006
    
    
    
    
    
    
    24,556,572
    
    
    $
    2.39
    
    
    
    
    
    
    
    6.5
    
    
    $
    2,241
  12




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Outstanding
    

ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageShares
    
    Contractual
    
    Exercise
    
    Shares
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    Life Years
    
    Price
    
    Exercisable
    
    PriceAs of September 30, 2006:$0.19-$0.72
    
    
    942,960
    
    
    
    6.03
    
    
    $
    0.67
    
    
    
    530,813
    
    
    $
    0.64$0.75-$0.75
    
    
    9,127,268
    
    
    
    8.60
    
    
    $
    0.75
    
    
    
    3,801,428
    
    
    $
    0.75$0.77-$1.15
    
    
    4,265,399
    
    
    
    7.08
    
    
    $
    0.97
    
    
    
    2,976,602
    
    
    $
    1.00$1.19-$1.31
    
    
    4,131,922
    
    
    
    8.12
    
    
    $
    1.22
    
    
    
    2,439,680
    
    
    $
    1.22$1.32-$1.43
    
    
    1,000,917
    
    
    
    9.33
    
    
    $
    1.37
    
    
    
    115,936
    
    
    $
    1.36$1.48-$1.48
    
    
    6,023,660
    
    
    
    9.67
    
    
    $
    1.48
    
    
    
    366,112
    
    
    $
    1.48$1.49-$2.15
    
    
    5,135,397
    
    
    
    7.42
    
    
    $
    1.85
    
    
    
    4,439,103
    
    
    $
    1.86$2.16-$2.46
    
    
    4,268,155
    
    
    
    5.44
    
    
    $
    2.41
    
    
    
    4,248,828
    
    
    $
    2.41$2.48-$6.00
    
    
    4,482,879
    
    
    
    4.63
    
    
    $
    4.32
    
    
    
    4,458,399
    
    
    $
    4.33$8.25-$14.49
    
    
    1,179,671
    
    
    
    4.07
    
    
    $
    9.40
    
    
    
    1,179,671
    
    
    $
    9.40Total
    
    
    40,558,228
    
    
    
    7.46
    
    
    $
    1.90
    
    
    
    24,556,572
    
    
    $
    2.39
 13




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##### Table of Contents



2000 Employee Stock Purchase Plan
  8. Geographic and Customer Concentration Information
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Toshiba
    
    
    59
    %
    
    
    *
    %
    
    
    22
    %
    
    
    *
    %Sony Corporation
    
    
    38
    %
    
    
    72
    %
    
    
    54
    %
    
    
    46
    %Hewlett-Packard Corporation
    
    
    *
    %
    
    
    20
    %
    
    
    *
    %
    
    
    14
    %Microsoft Corporation
    
    
    *
    %
    
    
    *
    %
    
    
    21
    %
    
    
    *
    %Fujitsu
    
    
    *
    %
    
    
    *
    %
    
    
    *
    %
    
    
    20
    %
 
 *
    
    represents less than 10% of total revenue  September 30,
    
    December 31,2006
    
    2005Sony Corporation
    
    
    98
    %
    
    
    11
    %3COM Corporation
    
    
    *
    %
    
    
    27
    %OQO, Inc.
    
    
    *
    %
    
    
    14
    %All American
    
    
    *
    %
    
    
    12
    %Microsoft Corporation
    
    
    *
    %
    
    
    12
    %ASEM S.p.A.
    
    
    *
    %
    
    
    11
    %
 
 *
    
    represents less than 10% of net accounts receivable 14




---



##### Table of Contents



9. Net Income (Loss) per Share
  Three Months Ended
    
    

Nine Months Ended(in thousands, except for per share amounts)
    
    September 30, 2006
    
    
    September 30, 2005
    
    
    September 30, 2006
    
    
    September 30, 2005Basic and diluted:Net income (loss), as reported
    
    $
    2,519
    
    
    $
    10,138
    
    
    $
    (7,597
    )
    
    $
    (4,115
    )Shares used to compute basic net loss per share
    
    
    196,636
    
    
    
    190,933
    
    
    
    195,255
    
    
    
    189,984Effect of dilutive securities:Common stock equivalents
    
    
    
    
    
    
    6,834
    
    
    
    
    
    
    
    Shares used to compute diluted net loss per share
    
    
    199,809
    
    
    
    197,767
    
    
    
    195,255
    
    
    
    189,984Basic and diluted net income (loss) per share
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    (0.04
    )
    
    $
    (0.02
    )
 10. Advances from Customers
  11. Deferred Income, net
  September 30,
    
    
    December 31,2006
    
    
    2005Deferred revenue:Product
    
    $
    143
    
    
    $
    619License
    
    
    
    
    
    
    Service
    
    
    
    
    
    
    8,934Total
    
    
    143
    
    
    
    9,553Deferred costs:Product
    
    
    96
    
    
    
    54License
    
    
    
    
    
    
    Service
    
    
    
    
    
    
    3,562Total
    
    
    96
    
    
    
    3,616Deferred income
    
    $
    47
    
    
    $
    5,937
 12. Restructuring Charges
   Excess
    
    
    WorkforceFacilities
    
    
    Reduction
    
    
    TotalBalance as of December 31, 2004
    
    $
    5,245
    
    
    $
    
    
    
    $
    5,245Restructuring charges
    
    
    1,841
    
    
    
    1,502
    
    
    
    3,343Adjustments and reversals
    
    
    (1,278
    )
    
    
    (56
    )
    
    
    (1,334
    )Cash drawdowns
    
    
    (1,552
    )
    
    
    (1,446
    )
    
    
    (2,998
    )Balance as of December 31, 2005
    
    
    4,256
    
    
    
    
    
    
    
    4,256Restructuring charges
    
    
    74
    
    
    
    
    
    
    
    74Cash drawdowns
    
    
    (484
    )
    
    
    
    
    
    
    (484
    )Balance as of March 31, 2006
    
    
    3,846
    
    
    
    
    
    
    
    3,846Restructuring charges
    
    
    96
    
    
    
    
    
    
    
    96Cash drawdowns
    
    
    (498
    )
    
    
    
    
    
    
    (498
    )Balance as of June 30, 2006
    
    
    3,444
    
    
    
    
    
    
    
    3,444Restructuring charges
    
    
    107
    
    
    
    
    
    
    
    107Cash drawdowns
    
    
    (507
    )
    
    
    
    
    
    
    (507
    )Balance as of September 30, 2006
    
    $
    3,044
    
    
    $
    
    
    
    $
    3,044
  15




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##### Table of Contents



13. Related Party Transactions
 Sales
to Investee
  Indemnification Agreements
  14. Recent Accounting Pronouncements
 Accounting for
Uncertainty in Income Taxes
   Fair Value Measurements
 Considering the Effects
of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements
  16




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Caution Regarding Forward-Looking Statements
    Overview
   
    
    On March 31, 2005, we entered into a design and engineering services agreement with Sony
Computer Entertainment Inc. and Sony Corporation (collectively, the Sony Group). The term
of this design services agreement extends to March 31, 2007; however, the services we
provide are agreed upon pursuant to specific project agreements with terms of one year or
less. Our prior project agreements expired by their terms on March 31, 2006, corresponding
to Sony Groups fiscal year end. In April 2006, we entered into a series of new project
agreements for us to continue to provide design and engineering services to the Sony Group
during the second year of the two-year design and engineering services agreement. Those
April 2006 project agreements provide for us to perform a variety of design and engineering
services for the Sony Group over project periods ranging from three months to one year,
ending March 31, 2007. Under those April 2006 project agreements, we initially provided the
services of more than 100 engineers in the second quarter of fiscal 2006 to work on advanced
projects for the Sony Group. Since April 2006, we have also negotiated some additional new
project agreements with the Sony Group. Notwithstanding those most recent new project
agreements, we experienced a reduction in Sonys demand for our engineering services in the
third quarter of fiscal 2006 and we expect a further reduction in Sonys demand for our
engineering services in the fourth quarter of 2006. We and the Sony Group are currently
discussing additional potential engineering projects for us to
perform for the Sony Group, but we cannot assure you that the parties
will enter into any additional project agreements.
 17




---



##### Table of Contents




    
    On May  12, 2005, we entered into a series of related
definitive engineering and development
services agreements with Microsoft Corporation. Those agreements
provide for us to develop certain
 security technologies designed to enable end users to use or access certain products, services
or functionality for limited periods of time or specific tasks on a variety of business models,
including customer services offered on a pre-paid or subscription
basis. Microsoft publicly
announced and introduced that technology under the trade name FlexGo in May 2006. We have
completed the services to be performed under these engineering and development services agreements,
 and we have obtained customer acceptance for such completed
deliverables. Accordingly, in the
nine months ended September 30, 2006, we recognized $9.8 million of fixed fee revenue and related
 fixed fee development costs of services, respectively. We currently are in negotiations with
Microsoft regarding the provision of additional engineering and
development services, but we do
not necessarily expect that we will continue to supply engineering and development services in
2007 at the same level as we provided in 2006.
      18




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##### Table of Contents



Critical Accounting Policies
  Accounting for Stock-Based Compensation
  Results of Operations
  Three Months Ended
    

Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Product
    
    
    3
    %
    
    
    28
    %
    
    
    3
    %
    
    
    36
    %License
    
    
    58
    %
    
    
    35
    %
    
    
    22
    %
    
    
    33
    %Service
    
    
    39
    %
    
    
    37
    %
    
    
    75
    %
    
    
    31
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Costs of product
    
    
    0
    %
    
    
    8
    %
    
    
    0
    %
    
    
    18
    %Costs of license
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Costs of service
    
    
    23
    %
    
    
    22
    %
    
    
    45
    %
    
    
    18
    %Total cost of revenue
    
    
    23
    %
    
    
    30
    %
    
    
    45
    %
    
    
    36
    %Gross profit
    
    
    77
    %
    
    
    70
    %
    
    
    55
    %
    
    
    64
    %Operating expenses:Research and development
    
    
    28
    %
    
    
    7
    %
    
    
    28
    %
    
    
    29
    %Selling, general and administrative
    
    
    28
    %
    
    
    17
    %
    
    
    36
    %
    
    
    29
    %Restructuring charges
    
    
    0
    %
    
    
    5
    %
    
    
    0
    %
    
    
    5
    %Amortization of patents and patent rights
    
    
    10
    %
    
    
    6
    %
    
    
    11
    %
    
    
    9
    %Stock compensation
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Total operating expenses
    
    
    66
    %
    
    
    35
    %
    
    
    75
    %
    
    
    72
    %Operating income (loss)
    
    
    11
    %
    
    
    35
    %
    
    
    (20
    %)
    
    
    (8
    %)Interest income and other, net
    
    
    4
    %
    
    
    1
    %
    
    
    4
    %
    
    
    1
    %Interest expense
    
    
    (0
    %)
    
    
    (0
    %)
    
    
    (0
    %)
    
    
    (0
    %)Net income (loss)
    
    
    15
    %
    
    
    36
    %
    
    
    (16
    %)
    
    
    (7
    %)
 Total Revenue
  Three Months Ended
    
    

Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Product
    
    $
    507
    
    
    $
    7,927
    
    
    $
    1,457
    
    
    $
    21,401License
    
    
    10,000
    
    
    
    9,628
    
    
    
    10,000
    
    
    
    19,628Service
    
    
    6,810
    
    
    
    10,308
    
    
    
    34,700
    
    
    
    18,390Total revenue
    
    $
    17,317
    
    
    $
    27,863
    
    
    $
    46,157
    
    
    $
    59,419
  19




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##### Table of Contents



Product Revenues.
  License Revenue.
 Service Revenue.
 Services Revenue
 Three Months Ended
    
    

Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Time & Materials Based Contracts
    
    $
    6,665
    
    
    $
    10,308
    
    
    $
    24,715
    
    
    $
    18,140Fixed Fee Development Service
    
    
    
    
    
    
    
    
    
    
    9,838
    
    
    
    Maintenance & Technical Support Services for License
    
    
    145
    
    
    
    
    
    
    
    147
    
    
    
    250Total Services Revenue
    
    $
    6,810
    
    
    $
    10,308
    
    
    $
    34,700
    
    
    $
    18,390
 Maintenance and Technical Support Services Revenue.
 Fixed Fee Development Service Revenue and Cost of Services
 Time and Materials Based Design Service Revenue.
  20




---



##### Table of Contents



Three Months Ended
    

Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Toshiba
    
    
    59
    %
    
    
    *
    %
    
    
    22
    %
    
    
    *
    %Sony Corporation
    
    
    38
    %
    
    
    72
    %
    
    
    54
    %
    
    
    46
    %Hewlett-Packard Corporation
    
    
    *
    %
    
    
    20
    %
    
    
    *
    %
    
    
    14
    %Microsoft Corporation
    
    
    *
    %
    
    
    *
    %
    
    
    21
    %
    
    
    *
    %Fujitsu
    
    
    *
    %
    
    
    *
    %
    
    
    *
    %
    
    
    20
    %
 
 *
    
    represents less than 10% of total revenue  September 30,
    
    December 31,2006
    
    2005Sony Corporation
    
    
    98
    %
    
    
    11
    %3COM Corporation
    
    
    *
    %
    
    
    27
    %OQO, Inc.
    
    
    *
    %
    
    
    14
    %All American
    
    
    *
    %
    
    
    12
    %Microsoft Corporation
    
    
    *
    %
    
    
    12
    %ASEM S.p.A.
    
    
    *
    %
    
    
    11
    %
 
 *
    
    represents less than 10% of net accounts receivable Costs of Revenues
  Products:
  Three Months Ended
    

Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Product revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of product revenue
    
    
    2
    %
    
    
    27
    %
    
    
    7
    %
    
    
    51
    %Product gross margin
    
    
    98
    %
    
    
    73
    %
    
    
    93
    %
    
    
    49
    %
   Licenses:
 Three Months Ended
    
    

Nine Months Ended(in thousands)
    
    September 30, 2006
    
    
    September 30, 2005
    
    
    September 30, 2006
    
    
    September 30, 2005Cost of License revenue
    
    $
    39
    
    
    $
    46
    
    
    $
    39
    
    
    $
    71
  21




---



##### Table of Contents



Services:
   Costs of Services Revenue
 Three Months Ended
    
    

Nine Months Ended(in thousands)
    
    September 30, 2006
    
    
    September 30, 2005
    
    
    September 30, 2006
    
    
    September 30, 2005Time & Materials Based Contract
    
    $
    3,913
    
    
    $
    6,017
    
    
    $
    15,533
    
    
    $
    10,330Fixed Fee Development Service
    
    
    
    
    
    
    
    
    
    
    5,056
    
    
    
    Total Cost of Services
    
    $
    3,913
    
    
    $
    6,017
    
    
    $
    20,589
    
    
    $
    10,330
 Research and Development
 Three Months Ended
    
    

Nine Months Ended(in thousands)
    
    September 30, 2006
    
    
    September 30, 2005
    
    
    September 30, 2006
    
    
    September 30, 2005Research and development expenses
    
    $
    4,838
    
    
    $
    1,905
    
    
    $
    12,859
    
    
    $
    17,118Amount classified to costs of service and deferred costs (1)
    
    $
    3,688
    
    
    $
    5,753
    
    
    $
    15,007
    
    
    $
    11,778
 
 (1)
    
    In fiscal 2006, we classified costs directly attributable to the design and development
services agreements to costs of service revenues. In the prior years, such costs were included
in the R&D activities as the employees involved with such activities were performing R&D
related activities.    22




---



##### Table of Contents



Selling, General and Administrative
 Three Months Ended
    
    

Nine Months Ended(in thousands)
    
    September 30, 2006
    
    
    September 30, 2005
    
    
    September 30, 2006
    
    
    September 30, 2005Selling, general and administrative expenses
    
    $
    4,847
    
    
    $
    4,523
    
    
    $
    16,434
    
    
    $
    17,475
    Restructuring Charges, net
 Three Months Ended
    
    

Nine Months Ended(in thousands)
    
    September 30, 2006
    
    
    September 30, 2005
    
    
    September 30, 2006
    
    
    September 30, 2005Restructuring charges, net
    
    $
    107
    
    
    $
    1,529
    
    
    $
    277
    
    
    $
    2,884
   Amortization of Patents and Patent Rights
 Three Months Ended
    
    

Nine Months Ended(in thousands)
    
    September 30, 2006
    
    
    September 30, 2005
    
    
    September 30, 2006
    
    
    September 30, 2005Amortization of patent and patent rights
    
    $
    1,711
    
    
    $
    1,711
    
    
    $
    5,134
    
    
    $
    5,133
  Stock Compensation
 Three Months Ended
    
    

Nine Months Ended(in thousands)
    

September 30, 2006
    
    
    September 30,2005
    
    
    September 30, 2006
    
    
    September 30, 2005Stock compensation expense
    
    $
    1,101
    
    
    $
    
    
    
    $
    4,328
    
    
    $
    (48
    )
   23




---



##### Table of Contents



Interest Income and Other, Net
 Three Months Ended
    
    
    Nine Months Ended(in thousands)
    

September 30, 2006
    
    
    September 30, 2005
    
    
    September 30, 2006
    
    
    September 30, 2005Interest income and other, net
    
    $
    708
    
    
    $
    305
    
    
    $
    1,801
    
    
    $
    644
  Interest Expense
 Three Months Ended
    
    
    Nine Months Ended(in thousands)
    
    September 30, 2006
    
    
    September 30, 2005
    
    
    September 30, 2006
    
    
    September 30, 2005Interest expense
    
    $
    42
    
    
    $
    132
    
    
    $
    114
    
    
    $
    346
  Liquidity and Capital Resources
   Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005(in thousands)Net cash provided by (used in) operating activities
    
    $
    (10,192
    )
    
    $
    1,118Net cash provided by (used in) investing activities
    
    
    (3,379
    )
    
    
    5,880Net cash provided by financing activities
    
    
    4,671
    
    
    
    2,836Increase (decrease) in cash and cash equivalents
    
    $
    (8,900
    )
    
    $
    9,834
  24




---



##### Table of Contents



Restructuring
  25




---



##### Table of Contents



Excess
    
    
    WorkforceFacilities
    
    
    Reduction
    
    
    TotalBalance as of December 31, 2004
    
    $
    5,245
    
    
    $
    
    
    
    $
    5,245Restructuring charges
    
    
    1,841
    
    
    
    1,502
    
    
    
    3,343Adjustments and reversals
    
    
    (1,278
    )
    
    
    (56
    )
    
    
    (1,334
    )Cash drawdowns
    
    
    (1,552
    )
    
    
    (1,446
    )
    
    
    (2,998
    )Balance as of December 31, 2005
    
    
    4,256
    
    
    
    
    
    
    
    4,256Restructuring charges
    
    
    74
    
    
    
    
    
    
    
    74Cash drawdowns
    
    
    (484
    )
    
    
    
    
    
    
    (484
    )Balance as of March 31, 2006
    
    
    3,846
    
    
    
    
    
    
    
    3,846Restructuring charges
    
    
    96
    
    
    
    
    
    
    
    96Cash drawdowns
    
    
    (498
    )
    
    
    
    
    
    
    (498
    )Balance as of June 30, 2006
    
    
    3,444
    
    
    
    
    
    
    
    3,444Restructuring charges
    
    
    107
    
    
    
    
    
    
    
    107Cash drawdowns
    
    
    (507
    )
    
    
    
    
    
    
    (507
    )Balance as of September 30, 2006
    
    $
    3,044
    
    
    $
    
    
    
    $
    3,044
  Contractual Obligations
  Payments Due by PeriodRemainder
    
    
    2007 to
    
    
    AfterContractual Obligations
    
    Total
    
    
    of 2006
    
    
    2009
    
    
    2009(In thousands)Operating Leases(1)
    
    $
    8,600
    
    
    $
    1,212
    
    
    $
    7,384
    
    
    $
    4Unconditional Purchase Obligations(2)
    
    
    1,563
    
    
    
    1,563
    
    
    
    
    
    
    
    Total
    
    $
    10,163
    
    
    $
    2,775
    
    
    $
    7,384
    
    
    $
    4
 
 (1)
    
    Operating leases include agreements for building facilities.(2)
    
    Purchase obligations include agreements to purchase goods or services that are enforceable
and legally binding on Transmeta and that specify all significant terms, including: fixed or
minimum quantities to be purchased; fixed, minimum or variable price provisions; and the
approximate timing of the transaction. Purchase obligations also include agreements for design
tools and software for use in product development. Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
 Accounting for
Uncertainty in Income Taxes
   Fair Value Measurements
 Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial Statements
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Interest Rate Risk.
 Foreign Currency Exchange Risk.
 
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
  Inherent Limitations on Effectiveness of Controls
  Changes in Internal Control over Financial Reporting
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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 In
re Transmeta Corporation Initial Public Offering Securities Litigation In re
Initial Public Offering Securities Litigation
  
 Item 1A. Risk Factors
 The factors discussed below are cautionary statements that identify important risk factors
that could cause actual results to differ materially from those anticipated in the forward-looking
statements in this Quarterly Report on Form 10-Q . If any of the following risks actually occurs,
our business, financial condition and results of operations would suffer. In this case, the trading
price of our common stock could decline and investors might lose all or part of their investment in
our common stock.
 We have a history of losses, and we must successfully execute on our modified business model if we
are to sustain our operations.
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We might fail to operate successfully under our modified business model.
  We might not be able to execute on our modified business model if we lose key management or
technical personnel, on whose knowledge, leadership and technical expertise we rely.
  Our lawsuit against Intel for patent infringement will be costly to litigate, could be decided
adversely to us, and could adversely affect our intellectual property rights, distract our
management and technical staff, and cause our stock price to decline.
  We may not be able to raise any more financing, or financing may only be available on terms
unfavorable to us or our stockholders.
  
    
    fund expansion;
    
    fund marketing expenditures;
    
    develop or enhance our products or technologies;
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
    
    enhance our operating infrastructure;
    
    hire additional personnel;
    
    fund litigation to enforce our intellectual property rights;
    
    respond to customer concerns about our viability;
    
    respond to competitive pressures; or
    
    acquire complementary businesses or technologies.
  We may fail to meet the continued listing requirements of the Nasdaq Stock Market, which may cause
our stock to be delisted and result in reduced liquidity of our stock, reduce the trading price of
our stock, and impair our ability to raise financing.
  The success of our licensing business depends on maintaining and increasing our LongRun2 licensing
revenue.
  We have limited visibility regarding when and to what extent our licensees will use our LongRun2 or
other licensed technologies.
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
    
    the competition these companies face and the market acceptance of their products;
    
    the pricing policies of our licensees for their products incorporating our technology and
whether those products are competitively priced;
    
    the engineering, marketing and management capabilities of these companies and technical
challenges unrelated to our technology that they face in developing their products; and
    
    the financial and other resources of our licensees.
  Our licensing and services revenue cycle is long and unpredictable, which makes it difficult to
predict future revenues, which may cause us to miss analysts estimates and may result in
unexpected changes in our stock price.
  We might experience payment disputes for amounts owed to us under our LongRun2 licensing
agreements, and this may harm our results of operations.
  Our licensing and other businesses depend in part on our proprietary technology rights, and we
might experience difficulties and expense in obtaining and protecting those rights.
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Our products and technologies 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.
   Any dispute regarding our intellectual property may require us to indemnify certain licensees or
third parties, the cost of which could severely hamper our business operations and financial
condition.
  We have only recently entered the engineering services business, and our ability to succeed in that
line of business is uncertain and subject to many risks
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We could encounter a variety of technical and manufacturing problems that could delay or prevent us
from satisfying customer demand for Efficeon TM8000 series microprocessors manufactured using a 90
nanometer process.
  Our restructuring plan has reduced our resources and ability to pursue opportunities and support
customers in emerging markets for our microprocessor products.
  We currently derive a substantial portion of our revenue from a small number of customers and
licensees, and our revenue would decline significantly if any major customer were to cancel, reduce
or delay a transaction relating to our products, licenses and services.
   We face intense competition in the power management, engineering services and x86-compatible
microprocessor markets. Many of our competitors are much larger than we are and have significantly
greater resources. We may not be able to compete effectively.
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We may experience manufacturing difficulties that could increase the cost and reduce the supply of
our products.
  Our lengthy and variable product sales cycles make it difficult for us to predict when and if a
design win will result in volume shipments.
  If we fail to forecast demand for our products accurately, we could lose sales and incur inventory
losses.
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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.
  We rely on an independent foundry that has no obligation to provide us with fixed pricing or
production capacity for the fabrication of our wafers, and our business will suffer if we are
unable to obtain sufficient production capacity on favorable terms.
  Our reliance on Fujitsu to fabricate our wafers limits our ability to control the production,
supply and delivery of our products.
  
    
    unpredictability of manufacturing yields and production costs;
    
    interruptions in shipments;
    
    Inability to control quality of finished products;
    
    Inability to control product delivery schedules;
    
    potential lack of access to key fabrication process technologies; and
    
    potentially greater exposure to misappropriation of our intellectual property.
 We depend on ASE to provide assembly and test services. If ASE were to cease providing services to
us in a timely manner and on acceptable terms, our business would suffer.
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If our products are not compatible with industry standards, hardware that our customers design into
their systems or that is used by end-users or software applications or operating systems for
x86-compatible microprocessors, market acceptance of our products and our ability to maintain or
increase our revenues would suffer.
    Our products may have defects that could damage our reputation, decrease market acceptance of our
products, cause us to lose customers and revenue and result in liability to us.
  We are subject to general economic and market conditions.
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If we do not keep pace with technological change, our products may not be competitive and our
revenue and operating results may suffer.
  Advances in battery design, cooling systems and power management systems could adversely affect our
ability to achieve widespread market acceptance for our products and technologies.
  The evolution of our business could place significant strain on our management systems,
infrastructure and other resources, and our business may not succeed if we fail to manage it
effectively.
  We have significant international operations, which exposes us to risk and uncertainties.
  
    
    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;
    
    problems in the timeliness or quality of product deliveries;
    
    potentially adverse tax consequences;
    
    major health concerns, such as SARS;
    
    political and economic instability, for example as a result of tensions between Taiwan
and the Peoples Republic of China; and
    
    potentially reduced protection for intellectual property rights.
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Our operating results are difficult to predict and fluctuate significantly. A failure to meet the
expectations of securities analysts or investors could result in a substantial decline in our stock
price.
   Our reported financial results may be adversely affected by changes in accounting principles
generally accepted in the United States.
  The price of our common stock has been volatile and is subject to wide fluctuations.
  
    
    variations in our quarterly results;
    
    market conditions in our industry, the industries of our customers and the economy as a whole;
    
    announcements of technological innovations by us or by our competitors;
    
    introductions of new products or new pricing policies by us or by our competitors;
    
    acquisitions or strategic alliances by us or by our competitors;
    
    recruitment or departure of key personnel;
    
    the gain or loss of significant orders;
    
    the gain or loss of significant customers; and
    
    changes in the estimates of our operating performance or changes in recommendations by securities analysts.
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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 certificate of incorporation and bylaws, stockholder rights plan and Delaware law contain
provisions that could discourage or prevent a takeover, even if an acquisition would be beneficial
to our stockholders.
  
    
    establishing a classified board of directors so that not all members of our board may be elected at one time;
    
    providing that directors may be removed only for cause and only with the vote of 66 2/3% of our outstanding shares;
    
    requiring super-majority voting to amend some provisions in our certificate of incorporation and bylaws;
    
    authorizing the issuance of blank check preferred stock that our board could issue to
increase the number of shares and to outstanding discourage a takeover attempt;
    
    limiting the ability of our stockholders to call special meetings of stockholders;
    
    prohibiting stockholder action by written consent, which requires all stockholder actions
to be taken at a meeting of our stockholders; and
    
    establishing advance notice requirements for nominations for election to our board or for
proposing matters that can be acted upon by stockholders at stockholder meetings.
  We may identify material weaknesses in our internal control over financial reporting.
  
 Item 5:Other Information
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Item 6. Exhibits
 Exhibits.
  Exhibit Number
    
    Exhibit Title10.29
    
    Consulting agreement between Lester
M. Crudele and Transmeta Corporation dated October 31, 200631.01
    
    Certification by Arthur L. Swift pursuant to Rule
13a-14(a) promulgated under the Securities Exchange Act
of 1934.31.02
    
    Certification by Ralph J. Harms pursuant to Rule
13a-14(a) promulgated under the Securities Exchange Act
of 1934.32.01*
    
    Certification by Arthur L. Swift pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.02*
    
    Certification by Ralph J. Harms pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *
    
    As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this quarterly
report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and
are not incorporated by reference in any filing of Transmeta Corporation under the Securities
Act of 1933 or the Securities Exchange Act of 1934, including this quarterly report, whether
made before or after the date hereof and irrespective of any general incorporation language in
any filings.+
    
    Confidential treatment has been requested for portions of this exhibit. These portions have
been omitted from this Report and have been filed separately with the Securities and Exchange
Commission. 40




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##### Table of Contents



SIGNATURES
  TRANSMETA CORPORATIONBy
    
    /s/ RALPH J. HARMSRalph J. HarmsChief Financial OfficerDate: November 6, 2006
    
    
    
    (Principal Financial Officer and Duly Authorized
Officer)
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EXHIBIT INDEX
 Exhibit Number
    
    Exhibit Title10.29
    
    Consulting Agreement between
Lester M. Crudele and Transmeta Corporation dated
October 31, 200631.01
    
    Certification by Arthur L. Swift pursuant to Rule 13a-14(a) promulgated under the
Securities Exchange Act of 1934.31.02
    
    Certification by Ralph J. Harms pursuant to Rule 13a-14(a) promulgated under the
Securities Exchange Act of 1934.32.01*
    
    Certification by Arthur L. Swift pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.32.02*
    
    Certification by Ralph J. Harms pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this quarterly
report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and
are not incorporated by reference in any filing of Transmeta Corporation under the Securities
Act of 1933 or the Securities Exchange Act of 1934, including this quarterly report, whether
made before or after the date hereof and irrespective of any general incorporation language in
any filings.+
    
    Confidential treatment has been requested for portions of this exhibit. These portions have
been omitted from this Report and have been filed separately with the Securities and Exchange
Commission.