##### Table of Contents



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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q


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(Mark One)



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

For the Quarterly Period Ended March 31, 2002
 OR



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

For the Transition Period from                          to
 Commission File Number 000-31803

TRANSMETA CORPORATION

(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 77-0402448                          
|(State or other jurisdiction of
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)



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

There were 133,611,045 shares of the Companys common stock, par value
$0.00001 per share, outstanding on March 31, 2002.



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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Condensed Consolidated Financial Statements                                          
|                              | CONDENSED CONSOLIDATED BALANCE SHEETS                                                        
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|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 March 31, 2002
 TABLE OF CONTENTS

|                              |                                                                                                                          |    |     
|----------------------------- | ------------------------------------------------------------------------------------------------------------------------ | -- | ----
|                              |                                                                                                                          |    | Page
|                              |                                                                                                                          |    |     
|PART I. FINANCIAL INFORMATION
|                             
|Item 1.                       | Condensed Consolidated Financial Statements                                                                              |    | 3   
|                              | Condensed Consolidated Balance Sheets as of March 31, 2002 (unaudited) and December 31, 2001                             |    | 3   
|                              | Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2002
and March 31, 2001 (unaudited) |    | 4   
|                              | Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002
and March 31, 2001 (unaudited) |    | 5   
|                              | Notes to Condensed Consolidated Financial Statements (unaudited)                                                         |    | 6   
|Item 2.                       | Managements Discussion and Analysis of Financial Condition and Results of Operations                                    |    | 8   
|Item 3.                       | Quantitative and Qualitative Disclosures about Market Risk                                                               |    | 23  
|                             
|PART II. OTHER INFORMATION   
|                             
|Item 1.                       | Legal Proceedings                                                                                                        |    | 24  
|Item 2.                       | Changes in Securities and Use of Proceeds                                                                                |    | 25  
|Item 3.                       | Defaults Upon Senior Securities                                                                                          |    | 25  
|Item 4.                       | Submission of Matters to a Vote of Security Holders                                                                      |    | 25  
|Item 5.                       | Other Information                                                                                                        |    | 25  
|Item 6.                       | Exhibits and Reports on Form 8-K                                                                                         |    | 25  
|Signatures                    |                                                                                                                          | 26



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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)
ASSETS

|                                           |                                                                 |                                            |        |             |         |              |        |          |         | 
|------------------------------------------ | --------------------------------------------------------------- | ------------------------------------------ | ------ | ----------- | ------- | ------------ | ------ | -------- | ------- | 
|                                           |                                                                 |                                            |        | March 31,   |         | December 31,
|                                           |                                                                 |                                            |        | 2002        |         | 2001(1)     
|                                           |                                                                 |                                            |        |             |         |             
|                                           |                                                                 |                                            |        | (unaudited) |         |              |        |         
|Current assets:                            |                                                                 |                                            |        |             |         |              |        |         
|                                           | Cash and cash equivalents                                       |                                            | $      | 48,978      |         |              | $      | 57,747   |        
|                                           | Short-term investments                                          |                                            |        | 167,348     |         |              |        | 183,941  |        
|                                           | Accounts receivable, net                                        |                                            |        | 1,974       |         |              |        | 1,749    |        
|                                           | Inventories                                                     |                                            |        | 3,185       |         |              |        | 1,388    |        
|                                           | Prepaid expenses and other current assets                       |                                            |        | 7,030       |         |              |        | 7,091    |        
|                                           |                                                                 |                                            |        |             |         |              |        |         
|                                           |                                                                 | Total current assets                       |        |             | 228,515 |              |        |          | 251,916 | 
|                                           | Property and equipment, net                                     |                                            |        | 12,555      |         |              |        | 11,622   |        
|                                           | Patents and patent rights, net                                  |                                            |        | 41,757      |         |              |        | 43,469   |        
|                                           | Other assets                                                    |                                            |        | 2,316       |         |              |        | 2,017    |        
|                                           |                                                                 |                                            |        |             |         |              |        |         
|                                           |                                                                 | Total assets                               |        | $           | 285,143 |              |        | $        | 309,024 | 
|                                           |                                                                 |                                            |        |             |         |              |        |         
|                                          
|LIABILITIES AND STOCKHOLDERS EQUITY      
|                                          
|Current liabilities:                       |                                                                 |                                            |        |             |         |              |        |         
|                                           | Accounts payable                                                |                                            | $      | 6,212       |         |              | $      | 5,421    |        
|                                           | Accrued compensation and related compensation liabilities       |                                            |        | 4,185       |         |              |        | 5,129    |        
|                                           | Other accrued liabilities                                       |                                            |        | 7,865       |         |              |        | 6,553    |        
|                                           | Current portion of long-term debt and capital lease obligations |                                            |        | 2,133       |         |              |        | 3,052    |        
|                                           | Current portion of long-term payables                           |                                            |        | 15,000      |         |              |        | 15,000   |        
|                                           |                                                                 |                                            |        |             |         |              |        |         
|                                           |                                                                 | Total current liabilities                  |        |             | 35,395  |              |        |          | 35,155  | 
|Long-term payables, net of current portion |                                                                 |                                            | 28,540 |             |         |              | 28,904 |         
|Commitments and contingencies              |                                                                 |                                            |        |             |         |              |        |         
|Stockholders equity:                      |                                                                 |                                            |        |             |         |              |        |         
|                                           | Preferred stock, $0.00001 par value (none issued)               |                                            |        |            |         |              |        |         |        
|                                           | Common stock, $0.00001 par value, at amounts paid in            |                                            |        | 607,126     |         |              |        | 603,464  |        
|                                           | Treasury stock                                                  |                                            |        | (2,439      | )       |              |        | (2,439   | )      
|                                           | Deferred stock compensation                                     |                                            |        | (8,108      | )       |              |        | (11,818  | )      
|                                           | Accumulated other comprehensive income                          |                                            |        | 477         |         |              |        | 720      |        
|                                           | Accumulated deficit                                             |                                            |        | (375,848    | )       |              |        | (344,962 | )      
|                                           |                                                                 |                                            |        |             |         |              |        |         
|                                           |                                                                 | Total stockholders equity                 |        |             | 221,208 |              |        |          | 244,965 | 
|                                           |                                                                 |                                            |        |             |         |              |        |         
|                                           |                                                                 | Total liabilities and stockholders equity |        | $           | 285,143 |              |        | $        | 309,024 | 
|                                           |                                                                 |                                            |        |             |         |              |        |         



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|(1) |  | Derived from the Companys audited financial statements as of December
31, 2001, included in the Companys Form 10-K filed with the Securities
and Exchange Commission.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

(See accompanying notes)



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

|                                                        |                                                             |                          |         |                    |        |           |         |        |        | 
|------------------------------------------------------- | ----------------------------------------------------------- | ------------------------ | ------- | ------------------ | ------ | --------- | ------- | ------ | ------ | 
|                                                        |                                                             |                          |         | Three Months Ended
|                                                        |                                                             |                          |         |                   
|                                                        |                                                             |                          |         | March 31,          |        | March 31,
|                                                        |                                                             |                          |         | 2002               |        | 2001     
|                                                        |                                                             |                          |         |                    |        |          
|Net revenue                                             |                                                             | $                        | 4,147   |                    |        | $         | 18,570  |       
|Cost of revenue                                         |                                                             |                          | 2,836   |                    |        |           | 10,381  |       
|                                                        |                                                             |                          |         |                    |        |           |         |       
|Gross profit                                            |                                                             |                          | 1,311   |                    |        |           | 8,189   |       
|Operating expenses:                                     |                                                             |                          |         |                    |        |           |         |       
|                                                        | Research and development(1)                                 |                          |         | 18,080             |        |           |         | 17,126 |       
|                                                        | Selling, general and administrative(2)                      |                          |         | 7,934              |        |           |         | 8,990  |       
|                                                        | Amortization of deferred charges, patents
and patent rights |                          |         | 2,848              |        |           |         | 3,379  |       
|                                                        | Stock compensation                                          |                          |         | 4,804              |        |           |         | 6,127  |       
|                                                        |                                                             |                          |         |                    |        |           |         |       
|                                                        |                                                             | Total operating expenses |         |                    | 33,666 |           |         |        | 35,622 | 
|                                                        |                                                             |                          |         |                    |        |           |         |       
|Operating loss                                          |                                                             |                          | (32,355 | )                  |        |           | (27,433 | )     
|                                                        | Interest income                                             |                          |         | 1,795              |        |           |         | 5,072  |       
|                                                        | Interest expense                                            |                          |         | (304               | )      |           |         | (331   | )     
|                                                        |                                                             |                          |         |                    |        |           |         |       
|Loss before income taxes                                |                                                             |                          | (30,864 | )                  |        |           | (22,692 | )     
|                                                        | Provision for income taxes                                  |                          |         | 23                 |        |           |         | 14     |       
|                                                        |                                                             |                          |         |                    |        |           |         |       
|Net loss                                                |                                                             | $                        | (30,887 | )                  |        | $         | (22,706 | )     
|                                                        |                                                             |                          |         |                    |        |           |         |       
|Net loss per share  basic and diluted                  |                                                             | $                        | (0.23   | )                  |        | $         | (0.18   | )     
|                                                        |                                                             |                          |         |                    |        |           |         |       
|Weighted average shares outstanding  basic and diluted |                                                             |                          | 132,997 |                    |        |           | 125,970 |       
|                                                        |                                                             |                          |         |                    |        |           |         |       



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|(1) |  | Excludes $1,980 and $3,660 in amortization of stock compensation for the
three months ended March 31, 2002 and March 31, 2001, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Excludes $2,824 and $2,467 in amortization of stock compensation for the
three months ended March 31, 2002 and March 31, 2001, respectively.

(See accompanying notes)



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TRANSMETA CORPORATION
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

|                                                       |                                                                                 |                                                     |         |                    |        |           |         |         |         |  
|------------------------------------------------------ | ------------------------------------------------------------------------------- | --------------------------------------------------- | ------- | ------------------ | ------ | --------- | ------- | ------- | ------- | -
|                                                       |                                                                                 |                                                     |         | Three Months Ended
|                                                       |                                                                                 |                                                     |         |                   
|                                                       |                                                                                 |                                                     |         | March 31,          |        | March 31,
|                                                       |                                                                                 |                                                     |         | 2002               |        | 2001     
|                                                       |                                                                                 |                                                     |         |                    |        |          
|Net cash used in operating activities                  |                                                                                 | $                                                   | (22,892 | )                  |        | $         | (31,082 | )      
|                                                       |                                                                                 |                                                     |         |                    |        |           |         |        
|Cash flows (used in)/provided by investing activities: |                                                                                 |                                                     |         |                    |        |           |         |        
|                                                       | Purchase of available-for-sale investments                                      |                                                     |         | (57,315            | )      |           |         | (30,257 | )      
|                                                       | Proceeds from sale or maturity of available-for-sale investments                |                                                     |         | 73,666             |        |           |         | 22,512  |        
|                                                       | Purchase of property and equipment                                              |                                                     |         | (2,377             | )      |           |         | (2,908  | )      
|                                                       | Partial payment of long-term obligation for purchased patents and patent rights |                                                     |         | (1,500             | )      |           |         | (4,000  | )      
|                                                       |                                                                                 |                                                     |         |                    |        |           |         |        
|                                                       |                                                                                 | Net cash (used in)/provided by investing activities |         |                    | 12,474 |           |         |         | (14,653 | )
|                                                       |                                                                                 |                                                     |         |                    |        |           |         |        
|Cash flows (used in)/provided by financing activities: |                                                                                 |                                                     |         |                    |        |           |         |        
|                                                       | Expenses related to initial public offering of common stock                     |                                                     |         |                   |        |           |         | (256    | )      
|                                                       | Common stock issued under stock option and ESPP plans                           |                                                     |         | 2,569              |        |           |         | 45      |        
|                                                       | Repayment of debt and capital lease obligations                                 |                                                     |         | (920               | )      |           |         | (1,391  | )      
|                                                       |                                                                                 |                                                     |         |                    |        |           |         |        
|                                                       |                                                                                 | Net cash (used in)/provided by financing activities |         |                    | 1,649  |           |         |         | (1,602  | )
|                                                       |                                                                                 |                                                     |         |                    |        |           |         |        
|                                                       | Change in cash and cash equivalents                                             |                                                     |         | (8,769             | )      |           |         | (47,337 | )      
|                                                       | Cash and cash equivalents at beginning of period                                |                                                     |         | 57,747             |        |           |         | 259,744 |        
|                                                       |                                                                                 |                                                     |         |                    |        |           |         |        
|                                                       | Cash and cash equivalents at end of period                                      |                                                     | $       | 48,978             |        |           | $       | 212,407 |        
|                                                       |                                                                                 |                                                     |         |                    |        |           |         |        

(See accompanying notes)



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TRANSMETA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission and 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 31, 2001. The results of operations for the
three months ended March 31, 2002 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
quarters of fiscal 2001 and fiscal 2002 each consisted of 13 weeks. For ease of
presentation, the accompanying condensed financial statements have been shown
as ending on December 31 and calendar quarter ends for all annual and quarterly
financial statement captions.

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                          
|                                       |                                                                                |   |                                             
|                                       |                                                                                |   | March 31,                                    |         | March 31,
|                                       |                                                                                |   | 2002                                         |         | 2001     
|                                       |                                                                                |   |                                              |         |          
|                                       |                                                                                |   | (in thousands, except for per share amounts)
|Basic and diluted:                     |                                                                                |   |                                              |         |           |   |       |        
|                                       | Net loss                                                                       |   | $                                            | (30,887 | )         |   | $     | (22,706 | )
|                                       |                                                                                |   |                                              |         |           |   |       |        
|Basic and diluted:                     |                                                                                |   |                                              |         |           |   |       |        
|                                       | Weighted average
shares outstanding                                            |   |                                              | 133,342 |           |   |       | 131,083 |  
|                                       | Less: Weighted
average shares
subject to
repurchase                            |   |                                              | (345    | )         |   |       | (5,113  | )
|                                       |                                                                                |   |                                              |         |           |   |       |        
|                                       | Weighted average
shares used in
computing basic and
diluted net loss
per share |   |                                              | 132,997 |           |   |       | 125,970 |  
|                                       |                                                                                |   |                                              |         |           |   |       |        
|Net loss per share  basic and
diluted |                                                                                | $ | (0.23                                        | )       |           | $ | (0.18 | )      
|                                       |                                                                                |   |                                              |         |           |   |       |        

The Company has excluded all outstanding stock options and warrants 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 27,770,545 and 17,283,037 shares of common stock at March 31, 2002 and
March 31, 2001, respectively, determined using the treasury stock method, were
not included



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##### Table of Contents



in the computation of diluted net loss per share. These
securities, had they been dilutive, would have been included in the computation
of diluted net loss per share using the treasury stock method.

3. Net Comprehensive Loss

Net comprehensive loss was $31.1 million for the first quarter of fiscal
2002 compared to $22.2 million for the same period last year. Net comprehensive
loss for the first quarter of fiscal 2002 includes $243,000 of accumulated
comprehensive loss due to unrealized losses on available-for-sale investments,
whereas net comprehensive loss for the first quarter of fiscal 2001 includes
$700,000 of accumulated comprehensive income due to unrealized gains on
available-for-sale investments.

4. Segment Information

Transmeta operates solely in one segment, the development, 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 quarter of fiscal 2002 accounted for 92%, 6% and 2% of net
revenue, respectively, compared to 56%, 27% and 17% for the respective
countries for the same period last year. Sales to two customers accounted for
55% and 27%, respectively, of net revenue for the first
quarter of fiscal 2002 compared to three customers accounting for
36%, 14% and 13%, respectively, of net revenue for the same period last year.

5. Inventories

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

|                 |  |           |       |              |  |   |       | 
|---------------- |  | --------- | ----- | ------------ |  | - | ----- | 
|                 |  | March 31, |       | December 31,
|                 |  | 2002      |       | 2001        
|                 |  |           |       |             
|Work in progress |  | $         | 2,688 |              |  | $ | 838   | 
|Finished goods   |  |           | 497   |              |  |   | 550   | 
|                 |  |           |       |              |  |   |       | 
|                 |  | $         | 3,185 |              |  | $ | 1,388 | 
|                 |  |           |       |              |  |   |       | 

6. Legal Proceedings

Beginning in June 2001, Transmeta, its directors, and certain of its
officers were named as defendants in several putative shareholder class actions
filed in the United States District Court for the Northern District of
California. The Court has consolidated those complaints into a single action
entitled In re Transmeta Corporation Securities Litigation, Case No. C 01-02450
WHA. On December 20, 2001, plaintiffs filed their consolidated amended
complaint. On March 5, 2002, the Court granted in part and denied in part
defendants motion to dismiss the consolidated amended complaint, and allowed
plaintiffs to amend their pleading. On March 22, 2002, plaintiffs filed a
second amended complaint. Like its antecedents, the second amended complaint
purports to allege a class action on behalf of all persons, other than the
individual defendants and the other officers of Transmeta, who purchased or
acquired common stock of Transmeta during the period from November 7, 2000 to
July 19, 2001. The second amended complaint alleges violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder, and Sections 11 and 15 of the Securities Act of 1933.
On April 5, 2002, defendants filed a motion to dismiss the second amended
complaint. The Company believes that the allegations in the second amended
complaint and the antecedent complaints are without merit and intends to defend
the consolidated action vigorously.

Beginning in June 2001, the directors and certain officers of Transmeta
were sued in three purported shareholder derivative actions filed in the
Superior Courts of the State of California for the Counties of Santa Clara and
San Mateo. In October 2001, those cases were consolidated in and by the
Superior Court for Santa Clara County into a single action entitled
In re Transmeta Corporation Derivative Litigation, Master File
No. CV 799491. On April 29, 2002, plaintiffs filed a
consolidated amended complaint. Like its antecedents, the consolidated amended
complaint is based upon the same general allegations set out in the purported
shareholder class actions described above. The consolidated amended complaint
alleges that certain individual defendants sold shares of Transmeta common
stock, purportedly in breach of their fiduciary duties to Transmeta, and that
the so-called Selling Defendants were aided and abetted by the other individual
defendants. The complaint also alleges gross mismanagement, waste of
corporate assets and abuse of control, all based upon the same general
allegations. Transmeta and the individual defendants have moved to stay
discovery and intend to file demurrers during June 2002. The Company believes
that the allegations in the consolidated complaint and it antecedents are
without merit and intend to challenge the complaint and defend the
consolidated action
vigorously.



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Beginning in June 2001, Transmeta, certain of its directors and officers,
and certain of the underwriters for its initial public offering were named as
defendants in two putative shareholder class actions filed in the United States
District Court for the Southern District of New York:Schwarz v. Transmeta
Corp., et al.(Case No. 01 CV 6492, S.D.N.Y.) and Robin v. Transmeta Corp., et
al.
(Case No. 01 CV 10060, S.D.N.Y.). In October 2001, the Court dismissed all
claims against the Company and its directors and officers in the Schwarzcase
without prejudice to plaintiffs right to pursue such claims in the
consolidated class action pending in the Northern District of California. In
January 2002, the Court ordered that all matters in the Southern District of
New York be consolidated under In re Transmeta Corporation Initial Public
Offering Securities Litigation, No. 01 CV 6492. On April 19, 2002, plaintiffs
filed a consolidated amended complaint. The consolidated amended complaint
alleges that the prospectus from Transmetas November 7, 2000 initial public
offering failed to disclose certain alleged actions by the underwriters for the
offering. The consolidated amended complaint alleges claims against Transmeta
and several of its officers and directors under Sections 11 and 15 of the
Securities Act of 1933, as amended, and under Sections 10(b) and Section 20(a)
of the Securities Exchange Act of 1934, as amended. Other actions have been
filed making similar allegations regarding the initial public offerings of more
than 300 other companies. All of these cases have been coordinated
for pretrial purposes as In re Initial Public Offering Securities Litigation,
Master File No. 21 MC 92 (SAS). The Company believes that the allegations in
the consolidated amended complaint and its antecedents are without merit and
intend to defend the action vigorously. Transmeta and the individual defendants
have not yet responded to the consolidated amended complaint, because the time
for defendants to move as to any such complaint is presently adjourned pending
further instruction from the Honorable Shira A. Scheindlin, U.S. District Court
Judge, Southern District of New York.

Although the prospective outcome of any litigation is subject to many
contingencies and inherently uncertain, Transmeta management believes, based
upon all information presently known to us, that the ultimate resolution of
these lawsuits is unlikely to have a material adverse effect on our business,
including our financial position, results of operations or cash flows.






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

Caution Regarding Forward-Looking Statements

The following discussion and analysis should be read in conjunction with
the condensed consolidated financial statements and the related notes contained
in this report and with the information included in the Companys Annual Report
on Form 10-K for the year ended December 31, 2001 and subsequent reports filed
with the Securities and Exchange Commission. The information contained in this
report is not a complete description of our business or the risks associated
with an investment in our common stock. We urge you to carefully review and
consider the various disclosures made by us in this report and in our other
reports filed regularly with the SEC, some of which reports discuss our
business in greater detail.

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

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



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Overview

We develop and sell software-based microprocessors and develop additional
hardware and software technologies that enable computer manufacturers to build
mobile Internet computers, which are portable computing and communication
devices that are compatible with PC software and deliver the high performance
required to run standard PC and Internet applications while also offering long
battery life. We rely on independent, third party contractors to perform
manufacturing, assembly and test functions. Our fabless approach allows us to
focus on designing, developing and marketing our products and to significantly
reduce the amount of capital needed to invest in manufacturing products.

From our inception in March 1995 through September 2000, we were engaged
primarily in research and development. In 1999, we began focusing on achieving
design wins with original equipment manufacturers, or OEMs, in addition to our
ongoing development activities. In January 2000, we introduced our Crusoe
family of microprocessors and began recognizing product revenue from sales of
these microprocessors in the first half of 2000. Through June 30, 2000, product
shipments consisted of development systems and prototypes. 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 directly to OEMs and, to a lesser extent,
through distributors. Siltrontech Electronics is our exclusive distributor in
Taiwan, Hong Kong and China and All American Semiconductor is our exclusive
distributor in North America. Both Siltrontech and All American are restricted
from selling to certain OEMs and major notebook manufacturers and have
provisions in their agreements specifying inventory levels, price protection
policies and rights of return policies for non end-of-life products.

We derive a
significant portion of our net revenues from Asia. Sales
to two customers located in Asia Pacific accounted for 55% and 27%,
respectively, of our net revenue during the first quarter of fiscal 2002. This
compares to three customers in Asia Pacific accounting for 36%, 14% and 13%,
respectively, of our net revenue during the first quarter of fiscal 2001. The
loss of a major customer, or the delay of significant orders from these
customers could 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. Our sales during the
first quarter of fiscal years 2002 and 2001 were primarily made to the notebook
computer market. If our Crusoe products fail to achieve widespread acceptance
in the notebook computer market we may not achieve revenue sufficient to
sustain our business.

Cost of revenue consists primarily of the costs of manufacturing, assembly
and test of our silicon chips, and compensation and associated costs related to
manufacturing support, logistics and quality assurance personnel. Research and
development expenses consist primarily of salaries and related overhead costs
associated with employees engaged in research, design and development
activities, as well as the cost of masks, wafers and other materials and
related test services and equipment used in the development process. Selling,
general and administrative expenses consist of salaries and related overhead
costs for sales, marketing and administrative personnel and legal and
accounting services.

We recorded deferred stock compensation representing the difference
between the deemed fair value of our common stock at the date of grant for
accounting purposes and the exercise price of these options. Deferred stock
compensation is presented as a reduction of stockholders equity and is
amortized on the graded vesting method. As of March 31, 2002 approximately $8.1
million was recorded on our balance sheet, which will be amortized through 2004
using an accelerated graded method.

Historically we have incurred significant losses. As of March 31, 2002, we
had an accumulated deficit of $375.8 million. We expect to incur substantial
losses for the foreseeable future. We also expect to incur significant research
and development and selling, general and administrative expenses. As a result,
if our revenue does not increase substantially, our operating results will be
adversely affected, and we will not achieve profitability. During the fourth
quarter of fiscal 2001 and into the first quarter of fiscal 2002 our revenue
was primarily impacted by production constraints as well as the slow
worldwide and Japanese economies. If we experience additional production
constraints or if economic conditions do not improve, or worsen, we would
continue to experience adverse impacts on our revenue and operating results.

For ease of presentation, the accompanying financial information has been
shown as of December 31 and calendar quarter ends for all annual and quarterly
financial statement captions. The first quarters of fiscal 2001 and 2002 each
consisted of 13 weeks.



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Critical Accounting Policies

The process of preparing financial statements requires the use of
estimates on the part of our management. The estimates used by management are based
on our historical experiences combined with managements
understanding of current facts and circumstances. Certain of our accounting policies are considered critical as they are both important to the
portrayal of our financial condition and results and require
significant or complex judgment on the part of management. For a
description of what we believe to be our most critical
accounting policies and estimates, refer to our Annual Report on Form 10-K for
the year ended December 31, 2001 filed with the Securities and Exchange
Commission on March 27, 2002. There have been no changes in any of our
accounting policies since December 31, 2001.

Results of Operations

Net Revenue.Net revenue in the first quarter of fiscal 2002 was $4.1
million, compared to $18.6 million for the same period last year. The decrease
is due to several factors, including the depressed economic conditions, which
began in the second quarter of 2001, and difficulties in shipping our new
products in production volume levels. Net revenue in the first quarter of
fiscal 2002 increased 273% from net revenue of $1.5 million in the fourth
quarter of fiscal 2001. The increase in revenue from the prior quarter is due
to our ability in the first quarter to begin shipping at certain limited
quantities our most recent products at production level quantities. However, we
continue to be impacted by the weak worldwide and Japanese economies. Demand
for our products continues to depend in large part upon sales by our OEM
customers of notebook computers that incorporate our products. Sales to two
customers accounted for more than 10% each and for 82% in the aggregate of net
revenue for the first quarter of fiscal 2002 compared to three customers
accounting for more than 10% each and 63% in the aggregate of net revenue for
the same period last year.

Gross Profit.Gross margin is the percentage derived from dividing gross
profit by net revenue. Gross margin in the first quarter of fiscal 2002 was
31.6%, compared to 44.1% for the same period last year. Our gross margin
decreased as a result of under absorption of overhead due to reduced production
levels compared with those of the same period last year. Additionally, the
decrease is a result of higher per unit costs of producing our .13 micron
product during the first quarter of fiscal 2002 compared to producing our .18
micron product during the same period last year.

Research and Development.Research and development expenses in the first
quarter of fiscal 2002 were $18.1 million, compared to $17.1 million for the
same period last year. This increase was primarily a result of hiring
additional development personnel during the last nine months of fiscal 2001 and
secondarily the result of developing new products and incurring additional
product bring-up costs associated with these products.

Selling, General and Administrative.Selling, general and administrative
expenses in the first quarter of fiscal 2002 were $7.9 million, compared to
$9.0 million for the same period last year. The decrease was primarily due to
decreased spending at industry trade-shows during the first quarter of fiscal
2002 compared to the same period last year.

Amortization of Deferred Charges, Patents and Patent Rights.In connection
with amortization of certain patents and patent rights acquired during the
first and second quarters of fiscal 2001, we recorded amortization of $2.8
million in the first quarter of fiscal 2002, compared to $366,000 for the same
period last year.

In connection with the amortization of deferred charges as a result of
entering into technology license agreements with IBM in 1997 and Toshiba in
1998, we amortized $3.4 million in the first quarter of fiscal 2001.
Amortization of the IBM and Toshiba deferred charges ceased at the end of the
fourth quarter of fiscal 2001 when, as a result of applying our accounting
policies related to long-lived assets, we wrote down the value of these assets
to zero. As a result of writing off these deferred charges, we will not incur
future amortization expense of approximately $2.3 million per quarter.

Stock Compensation.Amortization of deferred stock compensation associated
with options granted prior to November 2000, net of cancellation, was $2.1
million in the first quarter of fiscal 2002. This compares to $6.1 million of
deferred stock compensation in the first quarter of fiscal 2001. The decrease
in amortization expenses related to deferred stock compensation is a result of
amortizing the deferred charge on an accelerated grading method.

Stock compensation for the first quarter of fiscal 2002 also included $2.7
million in variable stock compensation. Because, during the fourth quarter of
fiscal 2001, we did not enforce the recourse provisions of certain employee
notes associated with option exercises, we are accounting for all outstanding
notes as if they had terms equivalent to non-recourse notes, even though the
terms of these notes were not in fact changed from recourse to non-recourse. As
a result, we have and will continue to record variable stock



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compensation expense on the associated stock awards until the notes are
paid. This variable stock compensation charge is based on the excess, if any,
of the current market price of our stock as of period-end over the purchase
price of the stock award, adjusted for vesting and prior stock compensation
expense recognized on the stock award.

Interest Income.Interest income in the first quarter of fiscal 2002 was
$1.8 million, compared to $5.1 million for the same period last year. The
decrease is primarily due to lower average yields as a result of re-investing
matured securities at lower rates of return than originally invested.
Additionally, the decrease is due to due to lower cash balances as a result of
funding operations. We invest in highly liquid securities, which have been
affected by declining interest rates.

Interest Expense.Interest expense for the first quarter of fiscal 2002
was $304,000, compared to $331,000 for the same period last year.

Provision for Income Taxes.We recorded a provision for income taxes of
$23,000 for the first quarter of fiscal 2002 for state and local taxes and
foreign taxes. This compares to $14,000 recorded for the first quarter of
fiscal 2001 primarily relating to foreign income taxes in Taiwan.

Liquidity and Capital Resources

As of March 31, 2002 we had $216.3 million in cash and cash equivalents
and short-term investments, a decrease of $25.4 million from December 31, 2001.

Net cash used in operating activities during the first quarter of fiscal
2002 was $22.9 million, compared to $31.1 million used during the same period
last year. Although our net loss for the first quarter of fiscal 2002 was
greater by $8.2 million compared to the same period last year, our net cash
used in operating activities during the first quarter of fiscal 2002 was $8.2
million less than that of the same period last year due to smaller fluctuations
in operating asset and liability balances and smaller non-cash offset charges.
Net changes in operating assets and liabilities during the first quarter of
fiscal 2002 were $1.1 million, compared to $19.8 million for the same period
last year. The changes in operating assets and liabilities were offset by
non-cash charges, including depreciation, amortization of deferred charges,
patents and patent rights and stock compensation of $9.1 million during the
first quarter of fiscal 2002 and $11.4 million during the first quarter of
fiscal 2001.

Net cash provided by investing activities during the first quarter of
fiscal 2002 was $12.5 million, compared to $14.7 million used during the same
period last year. Net cash provided by investing activities in the first
quarter of fiscal 2002 consisted primarily of the proceeds from the maturity of
available-for-sale investments, partially offset by the purchase of fixed
assets and partial settlement of long-term payable obligations for patents and
patent rights. Net cash used during the same period last year was primarily the
result of the investing excess cash in available-for-sale investment
securities, the purchase of property and equipment and the partial payment
obligations related to the purchase of patents and patent rights.

Net cash provided for financing activities during the first quarter of
fiscal 2002 was $1.6 million, compared to $1.6 million used during the same
period last year. Net cash provided during the first quarter of fiscal 2002 was
primarily due to proceeds from option exercises and employee stock purchase
plan purchases, partially offset by the repayment of debt and lease
obligations. Net cash used during the same period last year is primarily
attributable to the repayment of debt and lease obligations.



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At March 31, 2002, we had $49.0 million in cash and cash equivalents and
$167.3 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 March 31, 2002, we had the following contractual obligations:

|                                   |  |                        |        |                  |  |           |        |               |  |   |        |  |  |   |        | 
|---------------------------------- |  | ---------------------- | ------ | ---------------- |  | --------- | ------ | ------------- |  | - | ------ |  |  | - | ------ | 
|                                   |  | Payments Due by Period
|                                   |  |                       
|Contractual Obligations            |  | Total                  |        | Less Than 1 Year |  | 1-3 Years |        | After 4 Years
|                                   |  |                        |        |                  |  |           |        |              
|                                   |  | (In thousands)        
|Long Term Debt                     |  | $                      | 678    |                  |  | $         | 678    |               |  |   |       |  |  |   |       | 
|Capital Lease Obligations          |  | $                      | 1,454  |                  |  | $         | 1,221  |               |  | $ | 233    |  |  |   |       | 
|Operating Leases                   |  | $                      | 27,468 |                  |  | $         | 4,028  |               |  | $ | 12,931 |  |  | $ | 10,509 | 
|Unconditional Purchase Obligations |  | $                      | 3,361  |                  |  | $         | 3,361  |               |  |   |       |  |  |   |       | 
|Other Long Term Obligations        |  | $                      | 53,000 |                  |  | $         | 15,000 |               |  | $ | 38,000 |  |  |   |       | 

We believe that existing cash and cash equivalents and short-term
investments balances will be sufficient to fund our operations for 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 combinations 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 $30.9 million in the first quarter of fiscal
2002, $171.3 million in 2001, $97.7 million in 2000 and $41.1 million in 1999.
As of March 31, 2002, we had an accumulated deficit of $375.8
million. We intend to increase our research and development, sales and
marketing, and administrative expenses over time. We also expect to incur
substantial non-cash charges relating to the amortization of deferred charges,
patents and patent rights and deferred stock and variable 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.
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



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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. Such was the case in the
third and fourth quarters of 2001 where revenues declined quarter over quarter
as a result of manufacturing difficulties which delayed us from shipping our
new products in high volumes. If demand for our Crusoe products does not
increase, our revenue will not increase and the value of an investment in our
common stock would likely decline further.

We Are Subject to General Economic and Market Conditions.

Our business is subject to the effects of general economic conditions in
the United States and worldwide, and, in particular, market conditions in the
semiconductor and notebook computer industries. In fiscal 2001 and
the first quarter of fiscal 2002, our operating
results were adversely affected by unfavorable global economic conditions and
reduced capital spending, particularly in Japan, where we currently generate
the majority of our revenue. These adverse conditions resulted in decreased
demand for notebook computers and, as a result, our products, which are
components of notebook computers. Further, demand for our products decreases as
computer manufacturers seek to manage their component and finished product
inventory levels. If the economic conditions in Japan and worldwide do not
improve, or worsen, we may continue to experience material adverse effects on
our business, operating results, and financial condition.

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

We are currently producing 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 and other new manufacturing processes have led to delays in
product deliveries and increased expenses. In particular, we experienced
difficulties in bringing our products into high volume production and
distribution. As a result, in part, of these delays, our net revenue in
2001 declined from $10.5 million in the second quarter to $5.0 million in the
third quarter and then to $1.5 million in the fourth quarter. In addition, if
we experience continued delays in product deliveries, our target customers
could design a competitors microprocessor into their product, which would lead
to lost sales and impede our ability to increase our revenue. Further, problems
associated with manufacturing processes divert engineering personnel from
product development and other tasks.

Our Future Revenue Depends 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 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 Emerging
Markets and Our Ability to Meet the Needs of These Markets.

The growth of our business depends in part on acceptance and use of our
products in new 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



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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 and again in 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.

Our operating results fluctuate significantly from quarter to quarter and
we expect our results to fluctuate in the future. You should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of
our future performance. Our stock price declined substantially 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.

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.



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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.                                     

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

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

Our success depends heavily upon the contributions of our key management
and technical personnel, whose knowledge, leadership and technical expertise
would be difficult to replace. Many of these individuals have been with us for
several years and have developed specialized knowledge and skills relating to
our technology and business. Others, including our chief executive officer and
president and senior vice president for worldwide sales, have joined us in
these management roles only very recently. Effective April 2002, Matthew R.
Perry joined us as chief executive officer and president, replacing Murray A.
Goldman and R. Hugh Barnes, who served in positions of chief executive
officer and president and chief operating officer, respectively, from
October 2001 to April 2002. In October
2001, Fred Brown joined us as senior vice president of worldwide sales. Further, we expect that Svend-Olav Carlsen, our vice president of finance and corporate
controller, will begin serving as acting chief financial officer in
June 2002, pending our decision about a permanent appointment to that
office. Our
success will depend in part upon the ability of these new executives to work
effectively together and with the rest of our employees to continue to develop
our technology and manage the operation and growth of our business. All of our
executive officers and key personnel are employees at will. We have no
employment contracts and do not maintain key person insurance on any of our
personnel. We might not be able to execute on our business plan if we were to
lose the services of any of our key personnel. If any of these individuals were
to leave Transmeta unexpectedly, we could face substantial difficulty in hiring
qualified successors and could experience a loss in productivity while any such
successor develops the necessary training and experience.



15



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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 securities analysts.

In addition, the stock market generally and the market for semiconductor
and other technology-related stocks in particular has experienced a decline
during 2000 and 2001, as well as during the first quarter of 2002, and could decline further, which could cause the market
price of our common stock to fall for reasons not necessarily related to our
business, results of operations or financial condition. The market price of our
stock also might decline in reaction to events that affect other companies in
our industry even if these events do not directly affect us. Accordingly, you
may not be able to resell your shares of common stock at or above the price you
paid. Securities class action litigation is often brought against a company
following a period of volatility in the market price of its securities, and we
have recently been sued in several purported securities class action lawsuits.
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
our business and the price of our stock.

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

The market for microprocessors is dominated by established firms and
subject to rapid technological change. We have not yet succeeded in selling our
products to companies based in the U.S., 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
increase our losses. 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 Intel and other providers of x86 compatible microprocessors for the high-density server 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.



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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. 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 two customers in the aggregate accounted for 82% of net revenue
in the first quarter of fiscal 2002. These customers are located in Japan, which subjects us to economic
cycles in that country. We expect that a small number of OEM customers and
distributors will continue to account for a significant portion of our revenue.
Our future success will depend upon the timing and size of future purchase
orders, if any, from these customers and new customers and, in particular:



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

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

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 September 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. The demand for
our products depends upon many factors and is 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 have
caused, and in the future could cause, problems in our operations.

The lead-time required to fabricate large volumes of wafers is often
longer than the lead-time our customers provide to us for delivery of their
product requirements. Therefore, we often must place our orders in advance of
expected purchase orders from our customers. As a result, we have only a
limited ability to react to fluctuations in demand for our products, which
could cause us to have



17



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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-downs and 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 and third quarters of
2001, we recorded a net charge of $25.6 million to cost of net 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 decreases. Conversely, if demand exceeds our
expectations, TSMC, might not be able to fabricate wafers as quickly as we need
them. Also, ASE might not be able to increase assembly functions in a timely
manner. In that event, we would need to increase production and assembly
rapidly at 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 TSMC 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.                  

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

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



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Our Dependence on ASE 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, which could increase our costs or
delay delivery of our products. We do not have a contract with ASE for test and
assembly services, and we typically procure these services from ASE on a per
order basis. ASE could cease to perform all of the services that we require, or
could change the terms upon which it performs services for us. Therefore, we
may not be able to obtain assembly and testing services for our products on
acceptable terms, or at all. If we are required to find and qualify alternative
assembly or testing services, we could experience delays in product shipments,
increased product costs or a decline in product quality.

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

Our California facilities, including our principal executive offices, are
located near major earthquake fault lines. If there is a major earthquake or
any other natural disaster in a region where one of our facilities is located,
our business could be materially and adversely affected. In addition, TSMC,
upon which we currently rely to fabricate our wafers, and ASE, upon which we
currently rely for 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.

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

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

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

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

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

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

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

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



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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 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. During 2001, we focused on wafer
fabrication and volume production of our products. We plan to continue 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. Any such 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.

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. If our
customers cancel projects or change product plans, we could lose anticipated
sales. We can offer no assurance that we will achieve further design wins or
that the products for which we achieve design wins will ultimately be
introduced or will, if introduced, be commercially successful.

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

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



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



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

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

If We Are Unable to Protect Our Proprietary Rights Adequately, Our Competitors
Might Gain Access to Our Technology and We Might Not Compete Successfully In
Our 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. Our
patents, including any patents which may result from our patent applications
may not provide us with any competitive advantage or may be challenged by third
parties. If challenged, our patents might not be upheld or their claims could
be narrowed. Any litigation surrounding our rights could force us to divert
important financial and other resources from our business operations.

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. 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



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complex products, we will need to hire additional engineering staff of
various experience levels in order to meet our product roadmap. We may not be
able to hire on a timely basis a sufficient number of skilled employees, which
could lead to delays in product deliveries ore the development of new products.
Competition for skilled employees, particularly in the San Francisco Bay Area,
is intense. We may have difficulty recruiting potential employees and retaining
our key personnel if prospective or current employees perceive the equity
component of our compensation package to be less valuable than that of other
employers.

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

We may acquire companies and technology to expand our business and for
other strategic reasons. Integrating newly acquired organizations and
technologies into our company could put a strain on our resources and be
expensive and time consuming. We may not be successful in integrating acquired
businesses or technologies and may not achieve anticipated revenue and cost
benefits. In addition, future acquisitions could result in potentially dilutive
issuances of equity securities or the incurrence of debt, contingent
liabilities or 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 have sold, and in the future we expect to sell
a significant portion of our products to customers in Asia. As part of our
international expansion, we have personnel in Taiwan 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, 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.

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;



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

In addition, the stockholder rights, which we implemented in 2002, and
Section 203 of the Delaware General Corporation Law may discourage, delay or
prevent a change in control.

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

We 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;

 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 March 31, 2002, 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 3.6%. Due to the relative short-term nature of our investment
portfolio, our interest income is extremely vulnerable to sudden changes in
market interest rates. Assuming a decline of 10% in the market interest rates
at March 31, 2002, with consistent cash equivalents and available-for-sale
investment balances, interest income for the remaining quarter of fiscal 2001
would be adversely affected by approximately $130,000. We do not use our
investment portfolio for trading or other speculative purposes.



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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.




PART II. OTHER INFORMATION




Item 1.Legal Proceedings

Beginning in June 2001, Transmeta, its directors, and certain of its
officers were named as defendants in several putative shareholder class actions
filed in the United States District Court for the Northern District of
California. The Court has consolidated those complaints into a single action
entitled In re Transmeta Corporation Securities Litigation, Case No. C 01-02450
WHA. On December 20, 2001, plaintiffs filed their consolidated amended
complaint. On March 5, 2002, the Court granted in part and denied in part
defendants motion to dismiss the consolidated amended complaint, and allowed
plaintiffs to amend their pleading. On March 22, 2002, plaintiffs filed a
second amended complaint. Like its antecedents, the second amended complaint
purports to allege a class action on behalf of all persons, other than the
individual defendants and the other officers of Transmeta, who purchased or
acquired common stock of Transmeta during the period from November 7, 2000 to
July 19, 2001. The second amended complaint alleges violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder, and Sections 11 and 15 of the Securities Act of 1933.
On April 5, 2002, defendants filed a motion to dismiss the second amended
complaint. We believe that the allegations in the second amended complaint and
the antecedent complaints are without merit and intend to defend the
consolidated action vigorously.

Beginning in June 2001, the directors and certain officers of Transmeta
were sued in three purported shareholder derivative actions filed in the
Superior Courts of the State of California for the Counties of Santa Clara and
San Mateo. In October 2001, those cases were consolidated in and by the
Superior Court for Santa Clara County into a single action entitled
In re Transmeta Corporation Derivative Litigation, Master File No. CV
799491. On April 29, 2002, plaintiffs filed a
consolidated amended complaint. Like its antecedents, the consolidated amended
complaint is based upon the same general allegations set out in the purported
shareholder class actions described above. The consolidated amended complaint
alleges that certain individual defendants sold shares of Transmeta common
stock, purportedly in breach of their fiduciary duties to Transmeta, and that
the so-called Selling Defendants were aided and abetted by the other individual
defendants. The complaint also alleges gross mismanagement, waste of
corporate assets and abuse of control, all based upon the same general
allegations. Transmeta and the individual defendants have moved to stay
discovery and intend to file demurrers during June 2002. We believe that the
allegations in the consolidated complaint and it antecedents are without merit
and intend to challenge the complaint and defend the consolidated action vigorously.

Beginning in June 2001, Transmeta, certain of its directors and officers,
and certain of the underwriters for its initial public offering were named as
defendants in two putative shareholder class actions filed in the United States
District Court for the Southern District of New York: Schwarz v. Transmeta
Corp., et al.(Case No. 01 CV 6492, S.D.N.Y.) and Robin v. Transmeta Corp., et
al.(Case No. 01 CV 10060, S.D.N.Y.). In October 2001, the Court dismissed all
claims against the Company and its directors and
officers in theSchwarz case without prejudice to plaintiffs right to pursue such claims in the
consolidated class action pending in the Northern District of California. In
January 2002, the Court ordered that all matters in the Southern District of
New York be consolidated under In re Transmeta Corporation Initial Public
Offering Securities Litigation, No. 01 CV 6492. On April 19, 2002, plaintiffs
filed a consolidated amended complaint. The consolidated amended complaint
alleges that the prospectus from Transmetas November 7, 2000 initial public
offering failed to disclose certain alleged actions by the underwriters for the
offering. The consolidated amended complaint alleges claims against Transmeta
and several of its officers and directors under Sections 11 and 15 of the
Securities Act of 1933, as amended, and under Sections 10(b) and Section 20(a)
of the Securities Exchange Act of 1934, as amended. Other actions have been
filed making similar allegations regarding the initial public offerings of more
than 300 other companies. All of these cases have been coordinated
for pretrial purposes as In re Initial Public Offering Securities Litigation,
Master File No. 21 MC 92 (SAS). We believe that the allegations in the
consolidated amended complaint and its antecedents are without merit and intend
to defend the action vigorously. Transmeta and the individual defendants have
not yet responded to the consolidated amended complaint, because the time for
defendants to move as to any such complaint is presently adjourned pending
further instruction from the Honorable Shira A. Scheindlin, U.S. District Court
Judge, Southern District of New York.

Although the prospective outcome of any litigation is subject to many
contingencies and inherently uncertain, Transmeta management believes, based
upon all information presently known to us, that the ultimate resolution of
these lawsuits is unlikely to have a material adverse effect on our business,
including our financial position, results of operations or cash flows.



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Item 2.Changes in Securities and Use of Proceeds

Recent Sales of Unregistered Securities

None

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 March 31, 2002, 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 $13.0 million for the purchase of intellectual property and
related assets from Seiko Epson and other intellectual property owners. We have
also paid approximately $119.6 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

Not Applicable.




Item 5.Other Information

On April 10,
2002, our Board of Directors named Matthew R. Perry
as Transmetas new chief executive officer and president, replacing Murray A.
Goldman as chief executive officer and R. Hugh Barnes as president. Dr. Perry
will also serve as a director on the board of directors. Dr. Goldman and Mr.
Barnes will continue to actively serve as directors on the board of directors.

On April 18,
2002, we announced that Merle McClendon, our
chief financial officer since March 2000, plans to resign at the end of May
2002 to pursue other interests. Ms. McClendon will assist us in the
transition of her duties until and following her departure. We expect
that our vice
president of finance, Svend-Olav Carlsen, will serve as acting chief
financial officer beginning in June 2002, pending our decision about a
permanent appointment to that office. Mr. Carlsen joined us as corporate
controller in November 2000 and was promoted to vice president of finance in
December 2001.




Item 6.Exhibits and Reports on Form 8-K

(a)  Exhibits.

Not applicable.

(b)  Reports on Form 8-K

On January 16,
2002, we filed a current report on Form 8-K, disclosing
our issuance of a press release dated January 15, 2002
announcing the adoption of a stockholder rights plan by our board of
directors.



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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: May 10, 2002 | TRANSMETA CORPORATION                                                                              
|                  
|                   | By:                                                                                                 | /s/ MERLE A. MCCLENDON
|                   |                                                                                                    
|                   | Merle A. McClendonChief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)



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