e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File Number 000-31803

TRANSMETA CORPORATION

(Exact name of Registrant as specified in its charter)


Delaware		77-0402448
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)

2540 Mission College Boulevard, Santa Clara, CA 95054
(Address of principal executive offices, including zip code)
(408) 919-3000
(Registrant’s telephone number, including area code)

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
	(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

There were 12,152,065 shares of the Registrant’s common stock, par value $0.00001 per share, outstanding on July 15, 2008.

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 our Annual Report on Form 10-K for the year ended December 31, 2007 and subsequent reports filed with the Securities and Exchange Commission (SEC). 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 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 Part II, Item 1A entitled “Risk Factors”. 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.

Financial terminology, used widely throughout this Quarterly Report on Form 10-Q, has been abbreviated and, as such, these abbreviations are defined below for your convenience


Accounting Principles Board opinion		APB Opinion
Black-Scholes-Merton valuation model		BSM model
FASB Emerging Issues Task Force issue		EITF Issue
FASB Interpretation		FIN
FASB Staff Accounting Position		FSP
Financial Accounting Standards Board		FASB
SEC Staff Accounting Bulletin		SAB
Securities and Exchange Commission		SEC
Statement of Financial Accounting Standards		SFAS

From time to time we will refer to the abbreviated names of certain entities and, as such, have provided a chart to indicate the full names of those entities for your convenience.


Advanced Micro Devices, Inc.		AMD
Intel Corporation		Intel
Microsoft Corporation		Microsoft
NEC Electronics		NEC
NVIDIA Corporation		NVIDIA
Seiko Epson Corporation		Epson
Sony Corporation		Sony
Toshiba Corporation		Toshiba

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

TRANSMETA CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS


	June 30,			December 31,
	2008			2007(1)
	(unaudited)
	(In thousands, except for share data)
ASSETS
Current assets:
Cash and cash equivalents	$	96,919		$	15,607
Short-term investments		44,840			2,968
Accounts receivable		44			163
Other receivables, current		19,393			149,400
Prepaid expenses and other current assets		2,064			2,476

Total current assets		163,260			170,614
Other receivables, long-term		68,089			85,200
Property and equipment, net		231			284
Patents and patent rights, net		—			2,388
Other assets		400			800

Total assets	$	231,980		$	259,286

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	593		$	341
Accrued compensation		934			15,351
Income tax payable		15			3,306
Accrued restructuring costs		511			1,592
Other accrued liabilities		882			1,028
Current portion of deferred income from settlement and licensing		23,460			23,460
Current portion of long-term payable		800			667

Total current liabilities		27,195			45,745
Long-term deferred income from settlement and licensing, net of current portion		199,410			211,140
Long-term payables, net of current portion		400			800

Total liabilities		227,005			257,685

Commitments and contingencies (notes 13 and 15)
Stockholders’ equity:
Convertible preferred stock, $0.00001 par value, at amounts paid in; authorized shares — 5,000,000. Issued and outstanding shares — 1,000,000 and liquidation preference of $7.5 million, at June 30, 2008 and December 31, 2007		6,966			6,966
Common stock, $0.00001 par value, at amounts paid in; authorized shares — 50,000,000. Issued and outstanding — 12,152,065 shares at June 30, 2008 and 12,021,388 at December 31, 2007		742,441			739,268
Treasury stock — 39,843 shares at June 30, 2008 and December 31, 2007		(2,439	)		(2,439	)
Accumulated other comprehensive income		57			29
Accumulated deficit		(742,050	)		(742,223	)

Total stockholders’ equity		4,975			1,601

Total liabilities and stockholders’ equity	$	231,980		$	259,286


(1)		Derived from the audited financial statements of Transmeta Corporation as of December 31, 2007 but does not include all disclosures required by accounting principles generally accepted in the United States.

(See Notes to Unaudited Condensed Consolidated Financial Statements)

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TRANSMETA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(In thousands, except for per share data)
Revenue:
Product	$	—		$	25		$	253		$	167
License		366			—			606			—
Service		—			146			168			2,143

Total revenue		366			171			1,027			2,310

Cost of revenue:
Product		—			—			3			80
License		—			—			—			—
Service(*)		—			80			163			1,218
Impairment charge on inventories		—			—			—			364

Total cost of revenue		—			80			166			1,662

Gross profit		366			91			861			648
Operating expenses:
Income from settlement and licensing		(5,865	)		—			(11,730	)		—
Research and development(*)		2,315			2,537			5,165			7,473
Selling, general and administrative(*)		4,108			5,644			8,450			11,750
Restructuring charges, net		455			1,978			797			8,701
Amortization of patents and patent rights		908			1,711			2,388			3,423
Impairment charge on long-lived and other assets		—			8			—			302

Total operating expenses		1,921			11,878			5,070			31,649

Operating loss		(1,555	)		(11,787	)		(4,209	)		(31,001	)
Interest income and other, net		1,769			350			4,384			859
Interest expense		—			(28	)		(2	)		(38	)

Net income (loss) before income tax		214			(11,465	)		173			(30,180	)
Provision for income taxes		—			(15	)		—			4

Net income (loss)	$	214		$	(11,450	)	$	173		$	(30,184	)


Net income (loss) per share — basic	$	0.02		$	(1.15	)	$	0.01		$	(3.02	)

Net income (loss) per share — diluted	$	0.02		$	(1.15	)	$	0.01		$	(3.02	)


Weighted average shares outstanding — basic		12,152			9,997			12,133			9,979


Weighted average shares outstanding — diluted		13,242			9,997			13,197			9,979


(*) Includes stock-based compensation:
Cost of service revenue	$	—	$	14	$	82	$	17
Research and development		596		364		1,443		282
Selling, general and administrative	$	684	$	315	$	1,316	$	697

(See Notes to Unaudited Condensed Consolidated Financial Statements)

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TRANSMETA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended June 30,
	2008			2007
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	173		$	(30,184	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Stock-based compensation expense		2,841			996
Depreciation		147			352
Gain on disposal of fixed assets, net		(15	)		(169	)
Realized gain on marketable securities		(14	)		—
Amortization of patents and patent rights		2,388			3,423
Impairment charge on inventories		—			364
Impairment charge on long-lived and other assets		—			302
Non cash restructuring charges		797			8,701
Changes in operating assets and liabilities:
Accounts receivable, current		119			86
Inventories		—			(360	)
Prepaid expenses and other current assets		412			437
Other receivables		147,118			—
Other assets		400			133
Accounts payable and accrued liabilities		(14,564	)		(2,863	)
Income tax payable		(3,291	)		(40	)
Deferred operating income from settlement and licensing		(11,730	)		—
Deferred revenue		—			(15	)
Advances from customers		—			(1,320	)
Accrued restructuring charges		(1,878	)		(7,914	)

Net cash provided by (used in) operating activities		122,903			(28,071	)

Cash flows from investing activities:
Purchase of available-for-sale investments		(89,578	)		—
Proceeds from sale or maturity of available-for-sale investments		47,734			19,000
Proceeds from fixed asset disposals		15			184
Purchase of property and equipment		(94	)		(45	)

Net cash provided by (used in) investing activities		(41,923	)		19,139

Cash flows from financing activities:
Proceeds from sales of common stock under employee stock purchase and incentive option plans		128			1,604
Proceeds from exercise of warrants		204			—

Net cash provided by financing activities		332			1,604

Increase (decrease) in cash and cash equivalents		81,312			(7,328	)
Cash and cash equivalents at beginning of period		15,607			11,595

Cash and cash equivalents at end of period	$	96,919		$	4,267

(See Notes to Unaudited Condensed Consolidated Financial Statements)

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TRANSMETA CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Overview

Formation and Business of the Company

Transmeta Corporation (the “Company” or “Transmeta”) develops and licenses innovative computing, microprocessor and semiconductor technologies and related intellectual property. Incorporated in California as Transmeta Corporation on March 3, 1995, Transmeta was reincorporated on October 26, 2000 as a Delaware corporation. Transmeta first became known for designing, developing and selling its highly efficient x86-compatible software-based microprocessors, which deliver a balance of low power consumption, high performance, low cost and small size suited for diverse computing platforms.

The Company is presently focused on licensing to other companies its advanced power management technologies for controlling leakage and increasing power efficiency in semiconductor devices (licensed under its LongRun2 tm trademark) and its portfolio of intellectual property rights.

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 (“SEC”) and the generally accepted accounting principles (“GAAP”) in the United States for interim financial information. However, certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP in the United States have been condensed, or omitted, pursuant to the rules and regulations of the SEC. The December 31, 2007 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP in the United States, although the Company believes that the disclosures made are adequate to make the information presented not misleading. The preparation of financial statements in accordance with GAAP in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Significant estimates made in preparing the financial statements include revenue recognition and costs of revenue, long-lived and intangible asset valuations, restructuring charges and loss contingencies. In the opinion of management, the financial 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 the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. The results of operations for the three and six months ended June 30, 2008 are not necessarily indicative of the operating results for the full fiscal year or any future period.

Reclassifications

Certain reclassifications have been made to prior year balances in order to conform to the current year presentation. Such reclassifications have had no impact on previously reported net loss or working capital.

2. Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115” (“SFAS 159”). This statement allows entities to elect to measure many financial instruments and certain other items that are similar to financial instruments at fair value that are not currently required to be measured at fair value. The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, the statement specifies that all subsequent changes in fair value for that instrument shall be reported in earnings. Upon initial adoption, SFAS 159 provides entities with a one-time chance to elect the fair value option for the eligible items. The effect of the first measurement to fair value should be reported as a cumulative-effect adjustment to the opening balance of retained earnings (cumulative deficit) in the year the statement is adopted. SFAS 159 became effective for the Company beginning on January 1, 2008. The Company did not make any elections for fair value accounting and therefore, it did not record a cumulative-effect adjustment to its opening cumulative deficit balance.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations ” (“SFAS 141(R)”). SFAS 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. SFAS 141(R) requires the acquirer to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair values as of the acquisition date. Additionally, non-controlling interests (formerly known as “minority interests”) will be valued at fair value at the acquisition date. SFAS 141(R) further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, that restructuring costs generally be expensed in periods subsequent to the acquisition date, and that changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally be recorded as income tax expense. In addition, acquired in-process research and development will be capitalized as an intangible asset and amortized over its estimated useful life. The Company’s adoption of SFAS 141(R) will prospectively change its accounting treatment for any business combinations effected starting January 1, 2009. Earlier adoption is prohibited.

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In December 2007, the FASB issued SFAS No.160, “Non-controlling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 changes the accounting and reporting for minority interests, which will be re-characterized as non-controlling interests and classified as a component of equity. The amount of net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. As of June 30, 2008, the Company did not have any minority interests, so it anticipates no impact from adopting SFAS 160. The Company’s adoption of SFAS 160 will prospectively change its accounting treatment for any non-controlling interests acquired starting January 1, 2009. Earlier adoption is prohibited.

In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, “Effective Date of FASB Statement No. 157 ” (“FSP 157-2”), to partially defer FASB SFAS No. 157, “ Fair Value Measurements ” (“SFAS 157”). FSP 157-2 defers by one year the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), which for the Company is effective beginning January 1, 2009. The Company is currently evaluating the impact of adopting the provisions of FSP 157-2.

On April 25, 2008, the FASB issued FSP No.142-3, “Determination of the Useful Life of Intangible Asset” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible Assets” (“SFAS 142”. The intent of FSP 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R), “Business Combinations”, and other U.S. generally accepted accounting principles. FSP 142-3 is effective for the Company beginning January 1, 2009. As of June 30, 2008, the Company did not have any intangible assets, so it anticipates no impact from adopting FSP 142-3. The Company’s adoption of FSP 142-3 will prospectively change its accounting treatment for any intangible assets acquired starting January 1, 2009. Early adoption is prohibited.

On May 9, 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for nongovernmental entities. SFAS 162 becomes effective 60 days following the Securities and Exchanges Commission’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The Company anticipates no impact from adopting SFAS 162.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants (“AICPA”) and the SEC did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

3. Net Comprehensive Income (Loss)

Net comprehensive income (loss) includes the Company’s net income (loss), as well as accumulated other comprehensive income (loss) on available-for-sale investments and foreign currency translation adjustments. Net comprehensive income (loss) for the three and six months ended June 30, 2008 and 2007, was as follows:


	Three Months Ended June 30,					Six Months Ended June 30,
(In thousands)	2008		2007			2008		2007
Net income (loss)	$	214	$	(11,450	)	$	173	$	(30,184	)
Net change in unrealized gain on investments		26		3			14		29
Net change in foreign currency translation adjustments		—		(3	)		14		44

Net comprehensive income (loss)	$	240	$	(11,450	)	$	201	$	(30,111	)

The components of accumulated other comprehensive income, net of taxes, as of June 30, 2008 and December 31, 2007 were as follows:


	June 30,		December 31,
(In thousands)	2008		2007
Net unrealized gain (loss) on investments	$	10	$	(4	)
Cumulative foreign currency translation adjustments		47		33

Accumulated other comprehensive income	$	57	$	29

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4. Income from Settlement and Licensing

On December 31, 2007, the Company entered into a settlement, release and license agreement and a LongRun and LongRun2 technology license agreement with Intel, thus settling patent infringement litigation between the Company and Intel. Under the terms of the agreement, the Company received from Intel an initial payment of $150 million in January 2008. In addition, the Company will receive from Intel annual payments of $20 million for each of the next five years, for total additional payments of $100 million. The agreement grants Intel a perpetual non-exclusive license to all of the Company’s patents and patent applications, including any patent rights later acquired by the Company, now existing or as may be filed during the next ten years. The Company also agreed to transfer technology and to grant to Intel a non-exclusive license to Transmeta’s LongRun and LongRun2 technologies and future improvements. Intel granted Transmeta a covenant not to sue for the Company’s development and licensing to third parties of its LongRun and LongRun2 technologies.

The Company expects to recognize the fair value of the proceeds from Intel using the subscription model since the fair value of the license to Intel for future patents filed or acquired by the Company during the ten-year capture period cannot be determined. The Company reviewed FASB Concept Statements Nos. 5 and 6, and concluded that elements of both revenue and gain were present and that the relative values of the revenue and gain elements cannot be determined. Therefore, the Company expects to recognize the entire present value of $234.6 million as a ratable ten-year income from settlement and licensing within operations of $23.5 million per year in years 2008 through 2017. The Company applied Accounting Principles Board Opinion No. 21 “Interest on Receivables and Payables” in recording the present value of $234.6 million. The $15.4 million difference between the settlement amount of $250 million and the present value of the payments from Intel will be recognized as imputed interest income in years 2008 to 2013.

As of June 30, 2008 and December 31, 2007, the present value of other receivables from Intel was as follows:


	June 30,			December 31,
(In thousands)	2008			2007
Non-interest bearing note, consisting of
Payments of 5 x $20 million (due Jan 2009-Jan 2013) as of June 30, 2008; plus the initial $150 million payment (due Jan 2008) as of December 31, 2007	$	100,000		$	250,000

Unamortized discount on $150 million initial payment, based on 4.70% imputed interest rate		—			(600	)
Unamortized discount on $100 million of 2009-2013 payments, based on 5.41% imputed interest rate		(12,518	)		(14,800	)

Less unamortized discount based on imputed interest rates		(12,518	)		(15,400	)

Present value of other receivables from Intel	$	87,482		$	234,600


Other receivables, current		19,393			149,400
Other receivables, long-term		68,089			85,200

Present value of other receivables from Intel	$	87,482		$	234,600

As of June 30, 2008, the Company expects to recognize income from settlement and licensing within operations of $5.9 million per quarter through the fourth quarter of 2017. In addition, the Company expects to recognize imputed interest income of $12.5 million over the period extending from the third quarter 2008 through the first quarter 2013.

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5. Financial Statement Components

Property and Equipment

The following table presents property and equipment information as of June 30, 2008 and December 31, 2007:


	June 30,			December 31,
(In thousands)	2008			2007
Property and equipment, net
Leasehold improvements	$	2,325		$	2,325
Computer equipment		3,589			3,519
Furniture and fixtures		395			395
Computer software		719			775

		7,028			7,014
Less accumulated depreciation and amortization		(6,797	)		(6,730	)

Total	$	231		$	284

6. Cash and Cash Equivalents, Marketable Securities and Fair Value of Financial Instruments

The Company considers all highly liquid investment securities with remaining maturities, at the date of purchase, of three months or less, to be cash equivalents. The Company determines the appropriate classification of marketable securities at the time of purchase and evaluates such designation as of each balance sheet date. To date, all marketable securities have been classified as available-for-sale and are carried at fair value with unrealized gains and losses, if any, included as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Interest, dividends and realized gains and losses are included in interest income and other, net. Realized gains and losses are recognized based on the specific identification method.

All cash equivalents and short-term investments as of June 30, 2008 and December 31, 2007, which were classified as available-for-sale, are summarized below:


					Gross
					Unrealized Gain
(In thousands)	Fair Value		Book Value		(Loss)
As of June 30, 2008
Money market funds	$	3,327	$	3,327	$	—
Federal agency paper		137,729		137,719		10
Commercial paper		—		—		—

Total available for sale marketable securities		141,056		141,046		10
Cash		703		703		—

Total cash, cash equivalents and short term investments	$	141,759	$	141,749	$	10


As of December 31, 2007
Money market funds	$	14,627	$	14,627	$	—
Federal agency paper		—		—		—
Commercial paper		2,968		2,972		(4	)

Total available for sale marketable securities		17,595		17,599		(4	)
Cash		980		980		—

Total cash, cash equivalents and short term investments	$	18,575	$	18,579	$	(4	)

Available-for-sale securities and cash are reported at fair value and classified as follows:


	June 30,
(In thousands)	2008		December 31, 2007
Cash	$	703	$	980
Cash equivalents		96,216		14,627
Short term investments		44,840		2,968

Total cash, cash equivalents and short term investments	$	141,759	$	18,575

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The following is a summary of estimated fair values of marketable securities, and the associated net unrealized gain (loss), by contractual maturity:


					Gross
					Unrealized Gain
(In thousands)	Fair Value		Book Value		(Loss)
As of June 30, 2008:
Amounts maturing within one year	$	141,056	$	141,046	$	10
Amounts maturing after one year, within five years		—		—		—

Total cash equivalents and short term investments	$	141,056	$	141,046	$	10


As of December 31, 2007:
Amounts maturing within one year	$	17,595	$	17,599	$	(4	)
Amounts maturing after one year, within five years		—		—		—

Total cash equivalents and short term investments	$	17,595	$	17,599	$	(4	)

The Company had restricted cash balance of $110,000 at December 31, 2007 which served as collateral for the Company’s credit card program. In April 2008, the cash restrictions were released and the Company no longer has any restricted cash.

The Company manages its cash equivalents and short-term investments as a single portfolio of highly marketable securities that is intended to be available to meet its current cash requirements. For the three months ended June 30, 2008 and 2007, the Company had no gross realized gains or losses on sales of its available-for-sale securities. For the six months ended June 30, 2008 and 2007, the gross realized gain on sales was $14,000 and zero, respectively. There were no realized losses for the six months ended June 30, 2008 and 2007.

To date, there have been no impairment charges on the Company’s available-for-sale securities related to other-than-temporary declines in market value.

The gross unrealized losses related to the Company’s portfolio of available-for-sale securities were primarily due to a decrease in the fair value of debt securities purchased during the most recent three months. The Company has determined that the gross unrealized losses on its available-for-sale securities as of June 30, 2008 are temporary in nature. The Company reviewed its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include the magnitude of the decline in market value, the length of time the market value has been below cost (or adjusted cost), credit quality, and the Company’s ability and intent to hold the securities for a period of time sufficient to allow for any anticipated recovery in market value.

The total net unrealized gain of $10,000 is comprised of gross unrealized gains of approximately $18,000 and of gross unrealized loss of approximately $8,000 as of June 30, 2008. The gross unrealized loss relates to securities with a fair value of $44.9 million that have been in a loss position for less than twelve months.

Fair Value of Financial Instruments

On January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements ” (“SFAS 157”) which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. SFAS 157 applies whenever other statements require or permit assets or liabilities to be measured at fair value. SFAS 157 is effective for the Company beginning January 1, 2008, except for non financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, for which application has been deferred for one year.

The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

SFAS 157 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:


Level 1	-	Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2	-	Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.

Level 3	-	Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable (i.e., supported by little or no market activity).

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The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2008 and the basis for that measurement:

(Level 1)

(Level 2)

Quoted Prices in

Balance as of

Active Markets of

Significant Other

(In thousands)

June 30, 2008

Identical Assets

Observable Inputs

Available-for-sale securities

141,056

3,327

137,729

The Company’s financial assets and liabilities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily-available pricing sources for comparable instruments. As of June 30, 2008, the Company did not have any financial assets or liabilities without observable market values that would require a high level of judgment to determine fair value (Level 3).

FASB’s SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115” also became effective the first quarter of fiscal 2008. This option was not chosen, so marketable securities continue to be accounted for as available-for-sale securities under SFAS 115 “Accounting for Certain Investments in Debt and Equity Securities.”

7. Stock Based Compensation

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment ” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options and employee stock purchases, related to all the Company’s stock-based compensation plans.

Stock-based compensation expense is measured at grant date, based on the estimated fair value of the award, reduced by an estimate of the annualized rate of stock option forfeitures, and is recognized as expense over the employees’ expected requisite service period, using the straight-line method.

The following table summarizes stock-based compensation expense related to employee stock options and employee stock purchase grants under SFAS 123(R) for the three and six months ended June 30, 2008 and 2007:


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except for per share data)	2008		2007		2008		2007
Stock-based compensation expense by type of award:
Employee stock options	$	1,248	$	409	$	2,767	$	1,343
Employee stock purchase plan		32		284		74		(347	)

Total stock-based compensation		1,280		693		2,841		996
Tax effect on stock-based compensation		—		—		—		—

Net effect of stock-based compensation on net income (loss)	$	1,280	$	693	$	2,841	$	996


Effect on earnings per share:
Basic	$	0.11	$	0.07	$	0.23	$	0.10

Diluted	$	0.10	$	0.07	$	0.22	$	0.10

Stock Options and Employee Stock Purchase Plan (“ESPP”): Net cash proceeds from the sales of common stock under employee stock purchase and incentive stock option plans were zero and $99,000 for the three months ended June 30, 2008 and 2007, respectively, and $0.1 million and $1.6 million for the six months ended June 30, 2008 and 2007, respectively. No income tax benefit was realized from the sales of common stock under employee stock purchase and incentive stock plans during either the three or six months ended June 30, 2008 and 2007. In accordance with SFAS 123(R), the Company presents excess tax benefits from the exercise of stock options, if any, as financing cash flows rather than operating cash flows.

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For the three months ended June 30, 2008 and 2007, the Company recorded $32,000 and $0.3 million, respectively, of stock-based compensation expense related to ESPP. For the six months ended June 30, 2008 and 2007, the Company recorded $0.1 million of stock-based compensation expense related to ESPP and $0.3 million of ESPP credit, respectively. The $0.3 million ESPP credit recorded for the six months ended June 30, 2007 was due to true-up of prior accruals upon the January 31, 2007 purchase date reflecting reduced employee contributions due to the headcount reductions.

In accordance with the terms of the 2000 Employee Stock Purchase Plan (“2000 Purchase Plan”), if the fair market value on any given purchase date is less than the fair market value on the grant date, the grant offering is cancelled and all participants are enrolled in the next subsequent grant offering. A modification charge is recorded as a result of this grant offering cancellation and the issuance of a new grant offering. There were no modification charges recorded during the three months ended June 30, 2008 and 2007. In the six months ended June 30, 2008 and 2007, the Company recorded modification charges of zero and $20,000, respectively, related to the 2000 Purchase Plan, which is included in the table above under the caption “Employee stock purchase plan”.

Valuation Assumptions

The Company estimates the fair value of stock options using the BSM model. This is the same model that the Company previously used in preparing its pro forma disclosure required under SFAS 123. The BSM model determines the fair value of stock-based compensation and is affected by the Company’s stock price on the date of the grant as well as assumptions regarding a number of highly complex and subjective variables. These variables include expected volatility, expected life of the award, expected dividend rate, and expected risk-free rate of return. The assumptions for expected volatility and expected life are the two assumptions that significantly affect the grant date fair value. The BSM option-pricing model was developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, if actual results differ significantly from these estimates, stock-based compensation expense and the Company’s results of operations could be materially impacted.

The fair value of stock awards and ESPP offerings is estimated as of the grant date using the BSM option-pricing model assuming a dividend yield of 0% and the additional weighted-average assumptions as listed in the following tables:


	Three Months Ended June 30,					Six Months Ended June 30,
Employee Stock Option Plans	2008			2007		2008			2007
Risk-free interest rate		2.9	%		—		2.9	%		4.7	%
Expected life in years		4.4			—		4.3			4.0
Expected dividend yield		—			—		—			—
Expected stock price volatility		105.0	%		—		104.8	%		87.0	%
Weighted-average fair value of stock options granted	$	10.71			—	$	10.53		$	8.71


	Three Months Ended June 30,				Six Months Ended June 30,
Employee Stock Purchase Plan (ESPP)	2008		2007		2008			2007
Risk-free interest rate		—		—		2.1	%		5.1	%
Expected life in years		—		—		1.3			1.3
Expected dividend yield		—		—		—			—
Expected stock price volatility		—		—		151.0	%		71.0	%
Weighted-average fair value of purchase rights granted		—		—	$	9.27		$	6.40

In the Company’s pro forma disclosures prior to the adoption of SFAS 123(R), the Company accounted for forfeitures upon occurrence. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ from those estimates. Based on the Company’s historical experience of option pre-vesting cancellations, the Company has assumed an annualized forfeiture rate of 24.0% and 7.0% for its employees’ options and directors’ and officers’ options, respectively. The Company also has assumed an annualized forfeiture rate of 55.0% and 32.0% for its employee stock purchases for the three months ended June 30, 2008 and 2007, respectively. Accordingly, as of June 30, 2008, the Company estimated that the stock-based compensation for the awards not expected to vest was approximately $4.5 million. Therefore, the unrecorded deferred stock-based compensation balance related to stock options was adjusted to approximately $11.2 million after including estimated forfeitures. This will be recognized over a weighted-average period of approximately 3.1 years and will be adjusted for subsequent changes in estimated forfeitures on a quarterly basis.

The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based on the historical volatility of the Company’s common stock. The risk-free interest rates are taken from the Daily Federal Yield Curve Rates as of the grant dates as published by the Federal Reserve and represent the yields on actively traded treasury securities for terms equal to the expected life of the options. The expected life calculation for employee stock option plans is based on historical trends. The expected life assumption used for the ESPP is the weighted average expected life for the four purchase periods within each 24-month offering period.

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Tax effects of stock-based compensation

The Company has adopted the “alternative transition method” in accordance with SFAS 123(R) to calculate the excess tax credit pool.

8. Employee Stock Option Plans

Equity Incentive Plans

The Company’s Equity Incentive Plans authorize the award of options, restricted stock and stock bonuses, and provide for the grant of both incentive stock options that qualify under Section 422 of the Internal Revenue Code to employees and nonqualified stock options to employees, directors and consultants. Under the Company’s Equity Incentive Plans, stock options generally have a vesting period of four years, are exercisable for a period not to exceed ten years from the date of issuance and are generally granted at prices not less than the fair market value of the Company’s common stock at the grant date.

The Company initially reserved 350,000 shares of common stock under its 2000 Equity Incentive Plan. The aggregate number of shares reserved for issuance under the Company’s 2000 Equity Incentive Plan increases automatically on January 1 of each year starting on January 1, 2001 by an amount equal to 5% of the total outstanding shares of the Company on the immediately preceding December 31.

The following is a summary of the Company’s stock option activity under the Equity Incentive Plans, and related information for the six months ended June 30, 2008:


				Stock Options Outstanding
									Weighted
									Average
							Weighted		Remaining
							Average		Contractual		Aggregate
	Shares Available			Number of			Exercise		Term		Intrinsic Value
	for Grant			Shares			Price		(In Years)		(In thousands)
Balance as of December 31, 2007		1,429,195			1,897,368		$	19.42
Additional shares reserved		601,069			—
Options granted		(209,750	)		209,750			14.29
Options exercised		—			(122,000	)		—
Options forfeited / canceled / expired		375,537			(375,537	)		23.55

Balance as of June 30, 2008		2,196,051			1,609,581		$	19.26		8.5	$	804


Vested and expected to be vested					1,151,765		$	21.43		8.2	$	537


Shares exercisable:
June 30, 2008					430,028		$	34.61		6.0	$	112

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the second quarter of fiscal 2008 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2008. This amount changes based on the fair market value of the Company’s stock. Total intrinsic value of options exercised was zero and $20,000 for the three months ended June 30, 2008 and 2007, respectively, and $1.5 million and $0.1 million for the six months ended June 30, 2008 and 2007, respectively.

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The exercise prices for options outstanding and exercisable as of June 30, 2008 and their weighted average remaining contractual lives were as follows:


		Outstanding						Exercisable
				Weighted		Weighted
				Average		Average				Weighted
		Shares		Contractual		Exercise		Shares		Average
Range of Exercise Prices		Outstanding		Life Years		Price		Exercisable		Exercise Price
$10.04	- $13.32		162,143		9.15	$	11.20		45,308	$	11.55
$13.36	- $13.36		791,550		9.46		13.36		—		—
$13.40	- $14.40		102,250		8.90		13.70		32,832		13.72
$14.41	- $14.41		175,000		9.86		14.41		—		—
$15.00	- $24.60		175,022		6.46		17.77		172,939		17.69
$24.80	- $49.20		163,056		5.49		38.76		138,389		40.41
$49.60	- $190.00		36,076		2.67		114.18		36,076		114.18
$223.40	- $223.40		450		2.85		223.40		450		223.40
$244.80	- $244.80		600		2.91		244.80		600		244.80
$260.20	- $260.20		3,434		2.88		260.20		3,434		260.20

$10.04	- $260.20		1,609,581		8.54	$	19.26		430,028	$	34.61

Par Value Stock Options

On December 17, 2007, the Company’s Board of Directors approved the issuance of two groups of grants of restricted shares to employees in the form of stock options to purchase shares of the Company’s common stock at a per share exercise price equal to the par value of the underlying common stock. A total of 122,000 shares were granted under the two grants. The first group of grants, for an aggregate of 25,100 shares, vested with respect to 100% of the shares upon Transmeta’s receipt of the initial $150 million payment from Intel in January 2008. The second group of grants, for an aggregate of 96,900 shares, will vest with respect to 100% of the shares on August 22, 2008. In the six months ended June 30, 2008, a total of 27,600 shares from the second group were repurchased and retired by the Company due to termination of employment for certain employees.

Employee Stock Purchase Plan

The Company adopted the 2000 Employee Stock Purchase Plan (the “Purchase Plan”) in November 2000. The Purchase Plan allows employees to designate up to 15% of their total compensation to purchase shares of the Company’s common stock at 85% of the lesser of the fair market value of the Company’s common stock at either the first or last day of each offering period. Upon effectiveness of the Purchase Plan, the Company reserved 100,000 shares of common stock under the Purchase Plan. In addition, the aggregate number of shares reserved for issuance under the Purchase Plan will be increased automatically on January 1 of each year starting on January 1, 2001 by an amount equal to 1% of the total outstanding shares of the Company on the immediately preceding December 31. There were no shares purchased under the Purchase Plan during the three months ended June 30, 2008 and 2007, respectively, and 13,622 and 77,563 shares purchased during the six months ended June 30, 2008 and 2007, respectively. As of June 30, 2008, 870,645 shares had been issued under the Purchase Plan. As of June 30, 2008, the total compensation cost related to options to purchase the Company’s common stock under the Purchase Plan but not yet recognized was approximately $0.1 million and will be recognized on a straight-line basis over a weighted-average period of approximately 1.3 years.

9. Stockholders’ Equity

The following table summarizes the changes in stockholders’ equity during the six months ended June 30, 2008 and 2007:


	Six Months Ended June 30,
(In thousands)	2008		2007
Beginning balance	$	1,601	$	42,683
Net income (loss)		173		(30,184	)
Proceeds from stock option exercises and ESPP		128		1,598
Proceeds from exercise of warrants		204		—
Stock-based compensation expense		2,841		996
Other comprehensive income		28		73

Ending balance	$	4,975	$	15,166

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The corresponding changes in common shares outstanding, adjusted for the August 2007 one-for-20 reverse split, during the six months ended June 30, 2008 and 2007, are summarized below:


	Six Months Ended June 30,
	2008			2007
Beginning balance		12,021,388			9,893,820
Shares issued from stock option exercises and ESPP		13,622			110,344
Shares issued to employees as par value stock options		122,000			—
Shares issued from warrant exercises		22,655			—
Stock repurchased and retired		(27,600	)		—

Ending balance		12,152,065			10,004,164

Outstanding Warrants

In September 2007, one million warrants with a five-year term and $9.00 exercise price per share were issued as part of a direct placement of registered common stock and warrants. The following warrants to purchase common stock remain outstanding as of June 30, 2008:


	Number of		Exercise Price
Issuance Date	Shares		per Share		Expiration Date
September 2007		977,345	$	9.00	September 2012

Series B Preferred Stock

In July 2007, the Company sold 1,000,000 shares of the Company’s Series B Preferred Stock, par value $0.00001 per share (the “Series B Preferred Stock”) to AMD in consideration for $7.5 million cash, with net proceeds of approximately $7.0 million after issuance costs. The Series B Preferred Stock is convertible, at any time at the option of AMD, into 713,470 shares of the Company’s common stock. Concurrently with this stock purchase agreement, the Company also entered into a voting agreement with AMD and a registration rights agreement relating to the Company’s Series B Preferred Stock. Each share of the Series B Preferred Stock is entitled to vote on all matters and is entitled to the number of votes per share of the Series B Preferred Stock equal to the number of shares of the Company common stock into which each share of Series B Preferred Stock is convertible.

Each share of the Series B Preferred Stock is entitled to receive dividends at a rate of $0.60 per calendar year if the the Company’s Board of Directors declares any dividends on the Company common stock, prior and in preference to the Company common stock. Each share of the Series B Preferred Stock is also entitled to certain preferences in the event of any Liquidation of the Company. A “Liquidation” includes (i) the liquidation, dissolution or winding up of the Company; (ii) the merger or consolidation of the Company by means of any transaction or series of related transactions, provided that the applicable transaction will not be deemed a Liquidation unless the Company’s stockholders constituted immediately prior to such transaction hold less than 50% of the voting power of the surviving or acquiring entity immediately after such transaction; or (iii) a sale of all or substantially all of the Company’s assets requiring approval of the Company’s stockholders. In the event of a Liquidation, the holders of the Series B Preferred Stock will be entitled to receive, out of the Company assets that may be legally distributed to the Company’s stockholders, before any payment or distribution of assets to the holders of the Company common stock, a liquidation preference consisting of (i) $7.50 per share of the Series B Preferred Stock, plus (ii) declared but unpaid dividends on such share, minus (iii) the amount of any cash dividends received by the holders of Series B Preferred Stock, minus (iv) the amount of any payment received by the holders of Series B Preferred Stock respecting a merger or asset sale consummated prior to such Liquidation.

Warrants issued in September 2007

In September 2007 the Company issued warrants with a five year term to purchase an aggregate of one million shares of the Company’s common stock at an exercise price of $9.00 per share as part of a $12.8 million direct placement offering of registered common stock and warrants. These warrants contain specific terms for a Fundamental Transaction.

A “Fundamental Transaction” occurs if, while the warrant is outstanding, (1) the Company pays a dividend in, or makes a distribution of, shares of its capital stock, (2) consolidates or merges with or into another corporation, or (3) sells, transfers or disposes of its property, assets or business, resulting in distribution to the Company’s common stockholders of cash, of the successor’s or acquirer’s common stock, or of any other kind of securities or property.

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In these cases, the warrant holder will receive, upon exercise, the same amount and kind of cash, securities or property from such Fundamental Transaction, as if the warrant exercise occurred immediately prior to such transaction. The successor or acquirer Company has the obligation to provide the warrant holders this consideration.

Certain limited “Fundamental Transactions” permit the holder of a warrant to receive cash consideration in lieu of Company common stock, at the warrant holder’s option. These transactions must be a consolidation or merger (with loss of majority voting power) or sale of all or substantially all of the Company’s assets. Additionally, such select transactions must be for either all cash, a Rule 13-3e transaction, or for equity of a non-traded entity. In these cases, warrant holders may choose between exercise for Company common stock (as above) or receipt of cash determined by the Black-Scholes-Merton option value of the remaining term of the unexercised warrants. The Black-Scholes-Merton pricing model to be used has specific terms for average common share price, risk-free interest rate and historical price volatility.

10. Earning (Loss) per Share

Earnings (loss) per share is calculated in accordance with SFAS 128, “Earnings Per Share”. Basic earnings (loss) per share is calculated by dividing the earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing the earnings (loss) by the weighted average number of common shares and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of incremental common shares issuable upon exercise of stock options, warrants, convertible preferred stock and employee stock purchases. The dilutive effect of the convertible preferred stock is calculated under the if-converted method, giving income recognition for the add back of any deemed dividend for the beneficial conversion feature at issuance of the preferred stock. The dilutive effect of other outstanding potential shares is reflected in diluted earnings per share by application of the treasury stock method. This method includes consideration of the amounts to be paid by the employees, the amount of excess tax benefits that would be recognized in equity if the instruments were exercised and the amount of unrecognized stock-based compensation related to future services. No potential dilutive common shares are included in the computation of any diluted per share amount when a loss is reported.


	Three Months Ended June 30,					Six Months Ended June 30,
(In thousands, except per share amounts)	2008		2007			2008		2007
Basic and diluted:
Net income (loss)	$	214	$	(11,450	)	$	173	$	(30,184	)


Shares used to compute basic net income (loss) per share		12,152		9,997			12,133		9,979

Effect of potentially dilutive securities
Series B Preferred Stock		713		—			713		—
Warrants issued in direct placement offering		364		—			337		—
Employee stock options and ESPP		13		—			14		—

Shares used to compute diluted net income (loss) per share		13,242		9,997			13,197		9,979


Net income (loss) per share — basic	$	0.02	$	(1.15	)	$	0.01	$	(3.02	)


Net income (loss) per share — diluted	$	0.02	$	(1.15	)	$	0.01	$	(3.02	)

For the three months ended June 30, 2008 and 2007, options, warrants and convertible preferred stock to purchase approximately 1.5 million and 0.9 million shares, respectively were excluded from the calculation of diluted net income per share because they were anti-dilutive after considering proceeds from exercise, taxes and related unrecognized stock-based compensation expense. For the six months ended June 30, 2008 and 2007, options, warrants and convertible preferred stock to purchase approximately 1.6 million and 0.9 million shares, respectively were excluded from the calculation of diluted net income per share because they were anti-dilutive after considering proceeds from exercise, taxes and related unrecognized stock-based compensation expense.

11. Restructuring Charges

For the three and six months ended June 30, 2008, the Company recorded $0.5 million and $0.8 million of restructuring charges, respectively, compared to $2.0 million and $8.7 million over the comparable periods in 2007, respectively.

The Company recorded termination and severance charges of $7.1 million related to a workforce reduction during the first six months of 2007 as a result of the Company’s strategic restructuring to focus its ongoing efforts on licensing the Company’s technologies and intellectual property. Additionally, the Company recorded $1.6 million for the first six months of 2007 for rented facilities, net of estimated sublease income.

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In the first three months of 2008 the Company recorded additional charges and changed estimates of $0.3 million related to reduced potential for sublease income in the last six months of the lease. During the three months ended June 30, 2008, the Company recorded an additional $0.5 million in restructuring charge for restoration costs on leases that expired in June 2008. The accrued restructuring liabilities as of June 30, 2008 are expected to be paid during the current fiscal year.

Accrued restructuring charges consist of the following at June 30, 2008:


	Excess			Workforce
(In thousands)	Facilities			Reduction			Total
Balance as of December 31, 2007	$	1,537		$	55		$	1,592

Restructuring charges		131			—			131
Change in estimates		212			(1	)		211
Cash drawdowns		(951	)		(3	)		(954	)

Balance as of March 31, 2008	$	929		$	51		$	980


Restructuring charges		455			—			455
Change in estimates		—			—			—
Cash drawdowns		(924	)		—			(924	)

Balance as of June 30, 2008	$	460		$	51		$	511

12. Business Segments and Major Customers

The Company has determined that, in accordance with FASB’s SFAS 131, “Disclosure About Segments of an Enterprise and Related Information,” it operates in one segment and is evaluated by management on a single segment basis: the development, licensing, marketing and sale of hardware and software technologies for the semiconductor and computing market.

Sales by geographic area are categorized based on the customer’s billing address. The following is a summary of the Company’s net revenue by major geographic area during the three and six months ended June 30, 2008 and 2007:


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Asia		100	%		85	%		73	%		92	%
North America		*	%		*	%		27	%		*	%
Europe		*	%		15	%		*	%		*	%
Other		*	%		*	%		*	%		*	%


*	% represents less than 10% of total revenue

Revenues are highly concentrated among those customers each comprising more than 10% of period revenue. For the three months ended June 30, 2008 and 2007 there were one and two such customers, respectively, that accounted for 99% and 100% respectively, of total revenues. For the six months ended June 30, 2008 and 2007 there were three and two such customers, respectively, that accounted for 97% and 92%, respectively, of total revenues.

Long lived assets of $0.6 million and $3.5 million as of June 30, 2008 and December 31, 2007, respectively, were located entirely within the United States.

13. Commitments and Contingencies

The Company’s lease for approximately 126,000 square feet of office space expired in June 2008 on the four buildings in Santa Clara, California that the Company occupied for the past 10 years. In June 2008, the Company vacated approximately 104,000 square feet of the original leased office space. Subsequently, in July 2008, the Company signed a one year extension to the original lease for the remaining 22,500 square feet of office space.

The Company leases its facilities and certain equipment under non-cancelable operating leases expiring through 2009.

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The Company’s contractual obligations at June 30, 2008 are summarized in the table below:


	Future Minimum Payments Due by Period
			Remainder of
(In thousands)	Total		2008		2009
Operating leases(1)	$	—	$	—	$	—
Unconditional contractual obligations(2)		1,200		400		800

Total	$	1,200	$	400	$	800


(1)		Operating leases include agreements on building facilities. The lease extension for approximately 22,500 square feet of office space in Santa Clara, California was signed in July 2008 and is therefore not included in the above table.

(2)		Contractual obligations include agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including, fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations also include agreements for design tools and software for use in product development.

Indemnifications and warranties

The Company generally sells its products and certain technology licenses with a limited indemnification of customers against intellectual property infringement claims related to those products or technologies. The Company’s policy is to accrue for known indemnification issues if a loss is probable and can be reasonably estimated and to accrue for estimated incurred but unidentified issues based on historical activity. To date, there have been no such accruals or related expenses.

As permitted under Delaware law, the Company has agreements whereby its officers and directors are indemnified for certain events or occurrences while the officer or director is or was serving, at the Company’s request, in such capacity. The term of the indemnification period is for the officer’s or director’s term in such capacity. The maximum potential amount of future payments that the Company could be required to make under these indemnification agreements is unlimited. The Company has a director and officer insurance policy that reduces its exposure and enables the Company to recover a portion of future amounts to be paid. To date, payments under these agreements have not been material.

14. Income Taxes

The Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 ” (“FIN 48”) on January 1, 2007. FIN 48 is an interpretation of FASB SFAS No. 109, “Accounting for Income Taxes ,” (“SFAS”) that is intended to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position that an entity takes or expects to take in a tax return. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. Under FIN 48, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. In accordance with its accounting policy, The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense

At January 1, 2007, the cumulative unrecognized tax benefit pursuant to FIN 48 was $7.7 million, which would have resulted in a decrease in retained earnings except the decrease was netted against deferred tax assets with a full valuation allowance or other fully reserved amounts, and if recognized there will be no effect on the Company’s effective tax rate. Upon adoption of FIN 48 the Company recognized no adjustment in the liability for unrecognized income tax benefits. At December 31, 2007, the Company had $8.2M of unrecognized tax benefits of which $22.9K impacted the effective tax rate. For the three and six months ended June 30, 2008 and 2007, no interest related to unrecognized tax benefits was recorded.

At June 30, 2008, there was no material increase in the liability for unrecognized tax benefits nor any accrued interest and penalties related to uncertain tax positions.

The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and state tax authorities for the years ending December 31, 1999 through 2007 due to carryforward of unutilized net operating losses and research development credits.

For FIN 48 purposes, the Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal, state, and foreign income taxes.

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15. Litigation and Asserted Claims

Litigation

The Company is subject to legal claims and litigation arising in the ordinary course of its business, such as employment or intellectual property claims, including but not limited to the matters described below. Although there are no legal claims or litigation matters pending that the Company expects to be material in relation to its business, consolidated financial condition, results of operations or cash flows, legal claims and litigation are subject to inherent uncertainties and an adverse result in one or more matters could negatively affect its results.

Beginning in September 2001, the Company, certain of its directors and former officers, and certain of the underwriters for its initial public offering were named as defendants in three putative shareholder class actions that were consolidated in and by the United States District Court for the Southern District of New York in In re Transmeta Corporation Initial Public Offering Securities Litigation, Case No. 01 CV 6492. The complaints allege that the prospectus issued in connection with the Company’s initial public offering on November 7, 2000 failed to disclose certain alleged actions by the underwriters for that offering, and alleges claims against the Company and several of its directors and former officers 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. Similar actions have been filed against more than 300 other companies that issued stock in connection with other initial public offerings during 1999-2000. Those cases have been coordinated for pretrial purposes as In re Initial Public Offering Securities Litigation, Master File No. 21 MC 92 (SAS). In July 2002, the Company joined in a coordinated motion to dismiss filed on behalf of multiple issuers and other defendants. In February 2003, the District Court granted in part and denied in part the coordinated motion to dismiss, and issued an order regarding the pleading of amended complaints. Plaintiffs subsequently proposed a settlement offer to all issuer defendants, which settlement would provide for payments by issuers’ insurance carriers if plaintiffs fail to recover a certain amount from underwriter defendants. Although the Company and the individual defendants believe that the complaints are without merit and deny any liability, but because they also wished to avoid the continuing waste of management time and expense of litigation, they accepted plaintiffs’ proposal to settle all claims that might have been brought in this action. The Company’s insurance carriers were part of the proposed settlement, and the Company and the individual Transmeta defendants expect that their share of any global settlement will be fully funded by their director and officer liability insurance. In April 2006, the District Court held a final settlement approval hearing on the proposed issuer settlement and took the matter under submission. Meanwhile the consolidated case against the underwriter defendants went forward, and in December 2006, the Court of Appeals for the Second Circuit held that a class could not be certified in that case. As a result of the Court of Appeals’ holding, the District Court suggested that the proposed issuer settlement could not be approved in its proposed form and should be modified. In June 2007, the District Court entered an order terminating the proposed settlement based upon a stipulation among the parties to the settlement. It is unclear what impact these developments will have on the Company’s case. The Company expects that the parties will likely seek to reformulate a settlement in light of the Court of Appeal’s ruling, and the Company believes that the likelihood that it would be required to pay any material amount is remote. It is possible that the parties may not reach a final written settlement agreement or that the District Court may decline to approve any settlement in whole or part. In the event that the parties do not reach agreement on a final settlement, the Company and the Transmeta defendants believe that they have meritorious defenses and intend to defend any remaining action vigorously.

In July 2007, the Company received a letter on behalf of a putative stockholder, Vanessa Simmonds, demanding that the Company investigate and prosecute a claim for alleged short-swing trading in violation of Section 16(b) of the Securities Exchange Act against the underwriters of the Company’s November 2000 initial public offering and unidentified directors, officers and stockholders of the Company. In October 2007, Simmonds filed a purported shareholder derivative action in the United States District Court for the Western District of Washington, captioned Simmonds v. Morgan Stanley, et al., Case No. C07-1636 RSM, against three of the underwriters of the Company’s initial public offering. In February 2008, Simmonds filed an amended complaint. None of the Company’s current or former directors or officers is named as a party in the action. The Company is named only as a nominal defendant in the action, and Simmonds does not seek any remedy or recovery from the Company. In March 2008, the court entered a stipulated order providing that the Company shall not be required to answer or otherwise respond to the amended complaint.

On January 31, 2008, the directors and certain officers of the Company were named as defendants in a purported shareholder derivative action in the Superior Court for Santa Clara County, California, captioned Riley Investment Partners Investment Fund, L.P., et al. v. Horsley, et al. (Transmeta Corp.), Case No. 1:08-CV-104667. The complaint alleges claims for breach of fiduciary duty, gross mismanagement, waste of corporate assets and abuse of control relating to the compensation of the Company’s management. Defendants filed a demurrer to the complaint in March 2008. In April 2008, plaintiffs filed a notice of intent to file an amended complaint. In July 2008, all parties entered into a settlement agreement and releases providing for, among other things, the dismissal with prejudice of this action, with each party to bear its own litigation fees and costs. The parties jointly filed a stipulation of dismissal with the Court and, on July 24, 2008, the Court entered an order dismissing this action with prejudice.

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16. Subsequent Events

On July 11, 2008, the Company entered into a settlement agreement and release with entities and persons affiliated with Riley Investment Management LLC (collectively, the “Riley Group”), resolving all proxy matters and other issues relating to the Company.

On July 31, 2008 the Company entered into an agreement with NVIDIA granting NVIDIA a non-exclusive and fully paid-up license to all of the Company’s patents and patent applications, and a non-exclusive license and transfer of certain Transmeta advanced power management and other computing technologies including LongRun and LongRun2 technologies. Under the agreement, NVIDIA agreed to pay the Company a one-time, non-refundable license fee of $25.0 million. The Company expects to receive the $25.0 million payment during the third quarter of 2008.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q . This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in Item 1A of this Quarterly Report on Form 10-Q .

Overview

Transmeta Corporation (“Transmeta”, the “Company” or “We”) develops and licenses innovative computing, microprocessor and semiconductor technologies and related intellectual property. Founded in 1995, we first became known for designing, developing and selling our highly efficient x86-compatible software-based microprocessors, which deliver a balance of low power consumption, high performance, low cost and small size suited for diverse computing platforms.

From our inception in 1995 through the fiscal year ended December 31, 2004, our business model was focused primarily on designing, developing and selling highly efficient x86-compatible software-based microprocessors. In 2003, we began diversifying our business model to establish a revenue stream based upon the licensing of certain of our intellectual property and advanced computing and semiconductor technologies. In January 2005, we put most of our microprocessor products to end-of-life status and began modifying our business model to further leverage our intellectual property rights and to increase our business focus on licensing our advanced power management and other proprietary technologies. In 2005, we also entered into strategic alliance agreements with Sony and Microsoft to leverage our microprocessor design and development capabilities by providing engineering services to those companies under contract. During 2005 and 2006, we pursued three lines of business: (1) licensing of intellectual property and technology, (2) engineering services, and (3) product sales.

In 2007, we streamlined and restructured our operations to focus on our core business of developing and licensing intellectual property and technology. During the first two quarters of 2007, we reduced our workforce by approximately 140 employees and initiated the closure of our offices in Taiwan and Japan. As a result of our operational streamlining activities in fiscal 2007, we have ceased pursuing engineering services as a separate line of business, ceased our operations relating to microprocessor production support and exited the business of selling microprocessor products.

We are presently focused on licensing to other companies our advanced power management technologies for controlling leakage and increasing power efficiency in semiconductor devices (licensed under our LongRun2 tm trademark) and our portfolio of intellectual property rights.

On December 31, 2007, we entered into a settlement agreement with Intel resolving our patent litigation and licensing to Intel our patents and our LongRun and LongRun2 technologies. As of June 30, 2008, we expect to recognize income from our settlement and licensing agreement with Intel within operations of $5.9 million per quarter through the fourth quarter of 2017.

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Results of Operations

The following table sets forth, for the periods indicated, certain financial data as a percentage of total revenue:


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Revenue
Product		—			15	%		25	%		7	%
License		100	%		—			59	%		—
Service		—			85	%		16	%		93	%

Total revenue		100	%		100	%		100	%		100	%

Costs of product		—			—			—			3	%
Costs of license		—			—			—			—
Costs of service(*)		—			47	%		16	%		53	%
Impairment charges on long-lived assets		—			—			—			16	%

Total cost of revenue		—			47	%		16	%		72	%

Gross profit		100	%		53	%		84	%		28	%

Operating expenses:
Income from settlement and licensing		(1602	)%		—			(1142	)%		—
Research and development(*)		633	%		1484	%		503	%		323	%
Selling, general and administrative(*)		1122	%		3300	%		823	%		509	%
Restructuring charges		124	%		1157	%		78	%		377	%
Amortization of patents and patent rights		248	%		1001	%		232	%		148	%

Impairment charge on long-lived and other assets		—			5	%		—			13	%

Total operating expenses		525	%		6947	%		494	%		1370	%


Operating income (loss)		(425	)%		(6894	)%		(410	)%		(1342	)%
Interest income and other, net		483	%		205	%		427	%		37	%
Interest expense		—			(16	)%		—			(2	)%

Income (loss) before income taxes		58	%		(6705	)%		17	%		(1307	)%

Provision for income taxes		—			(9	)%		—			—
Net income (loss)		58	%		(6696	)%		17	%		(1307	)%


(*) Includes stock-based compensation:
Cost of service revenue	—		8	%	8	%	1	%
Research and development	163	%	213	%	141	%	12	%
Selling, general and administrative	187	%	184	%	128	%	30	%

Total Revenue

Revenues have historically been generated from three types of activities: product, license and services. Product revenues consist of sales of x86-compatible software-based microprocessors. License revenues consist of deliverable-based technology transfer fees from licensing advanced power management and other proprietary technologies. Service revenues consist of design services and development services fees received for either fixed fee or time and materials based engineering services, as well as maintenance support fees. Total revenue for the three and six months ended June 30, 2008 and 2007 is summarized in the following table:


	Three Months Ended June 30,				Change in			Change in			Six Months Ended June 30,				Change in			Change in
(In thousands)	2008		2007		Dollars			Percent			2008		2007		Dollars			Percent
Product	$	—	$	25	$	(25	)		(100	)%	$	253	$	167	$	86			51	%
License		366		—		366			n/a			606		—		606			n/a
Service		—		146		(146	)		(100	)%		168		2,143		(1,975	)		(92	)%

Total revenue	$	366	$	171	$	195			114	%	$	1,027	$	2,310	$	(1,283	)		(56	)%

Total revenue in the three and six months ended June 30, 2008 increased by $0.2 million and decreased by $1.3 million over comparable periods in 2007, respectively.

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Product Revenue. Product revenue decreased by $25,000 and increased by $0.1 million for the three and six months ended June 30, 2008 over comparable periods in 2007, respectively. The decrease for the three months comparison was due to the sales of previously reserved inventory in the three months ending June 30, 2007. The increase for the six months comparison was due primarily due to an increase in sales of previously reserved inventory. We have exited the business of selling microprocessor products and expect no further product revenues in fiscal 2008.

License Revenue. License revenue increased by $0.4 million and $0.6 million for the three and six months ended June 30, 2008, over comparable periods in 2007, respectively. The increase for the three months comparison was due to $0.4 million in royalties received for our LongRun2 license. The increase for the six months comparison was due to $0.6 million in royalties received for our LongRun2 license. Our receipt of royalties from our LongRun2 licensees depends on our licensees’ incorporating our technology into their manufacturing products, bringing their products to market, and the success of their products. Our licensees are not contractually obligated to manufacture, distribute or sell products using our licensed technologies.

We expect that our license revenue will vary from period to period, depending in part on the adoption of our LongRun2 technology by our licensees and potential licensees, and the success of the products incorporating our technology sold by our licensees.

Service Revenue. Service revenue is comprised of three sub-types: (i) maintenance and technical support service revenue; (ii) fixed fee development service revenue; and (iii) time-and-materials-based design service revenue. Service revenues in the three and six months ended June 30, 2008 decreased by $0.1 million and $2.0 million over the comparable periods in 2007, respectively. The decrease in service revenue was primarily attributable to the completion of Sony and Toshiba engineering service contracts in the first quarter of 2007. Service revenue in the six months ended June 30, 2008 consisted of a $0.2 million time and materials service contract for an existing LongRun2 licensing customer. We have decided not to continue pursuing engineering services as a separate line of business; however, we intend to continue providing engineering and support services as an important element of our technology licensing business.

Deferred income related to services was zero as of June 30, 2008 and 2007.

Customer Concentration Information

We have derived the majority of our revenue from a limited number of customers. Additionally, we derive a significant portion of our revenue from customers located in Asia, which subjects us to economic cycles in that region as well as the geographic areas in which they sell their products. Revenues are highly concentrated among those customers each comprising more than 10% of annual revenue. For the three and six months ended June 30, 2008, one customer and three customers, respectively, accounted for more than 10% of total revenues each. For the three and six months ended June 30, 2007, two customers accounted for more than 10% of total revenues.

Costs of Revenues

Costs of revenues, consisting of cost of product revenue, cost of license revenue and cost of service revenue, are summarized for the three and six months ended June 30, 2008 and 2007 in the following table:


	Three Months Ended June 30,				Change in			Change in			Six Months Ended June 30,				Change in			Change in
(In thousands)	2008		2007		Dollars			Percent			2008		2007		Dollars			Percent
Product(*)	$	—	$	—	$	—			n/a		$	3	$	80	$	(77	)		(96	%)
License		—		—		—			n/a			—		—		—			n/a
Service(*)		—		80		(80	)		(100	%)		163		1,218		(1,055	)		(87	%)
Impairment charge on inventories		—		—		—			n/a			—		364		(364	)		(100	%)

Total cost of revenue	$	—	$	80	$	(80	)		(100	%)	$	166	$	1,662	$	(1,496	)		(90	%)


(*) Includes stock-based compensation:
Cost of product revenue	$	—	$	—	$	—	n/a		$	—	$	—	$	—	n/a
Cost of service revenue	$	82	$	3	$	79	2633	%	$	82	$	3	$	79	2633	%

Cost of Product Revenue

There was no associated cost of product revenue for the three months ended June 30, 2008 and 2007. The decrease of $77,000 in cost of product revenue for the six months ended June 30, 2008 over comparable period in 2007 was primarily due to the product sales of previously written-down and fully reserved inventory in the first quarter of fiscal 2008.

Cost of License Revenue

There was no associated cost of licensing revenue for the three and six months ended June 30, 2008 and 2007.

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Cost of Service Revenue

The cost of service revenue is comprised of three sub-types: (i) maintenance and technical support services pursuant to LongRun2 licenses; (ii) fixed fee development services; and (iii) time and materials based design services. Cost of service revenue is comprised mainly of compensation and benefits of engineers assigned directly to the projects, hardware and software, and other computer support.

For the three and six months ended June 30, 2008, the cost of service revenue decreased by $0.1 million and $1.1 million, respectively, over comparable periods in 2007, respectively. The decreases in cost of service revenue was a result of the decrease in headcount related costs due to completion of the design service contract for Sony and Microsoft in the first quarter of fiscal 2007.

Impairment Charges on Inventories

In 2006, we built our inventory of 90 nanometer Efficeon products in anticipation of a ramp in demand resulting from the Microsoft FlexGo program, but our sales of 90 nanometer Efficeon products were minimal during 2006 and we received no production orders for our special FlexGo-enabled Efficeon products. Accordingly, we recorded impairment for all our remaining 90 nanometer Efficeon products as of December 31, 2006. In the first quarter of fiscal 2007, we received an additional $0.4 million of new raw material for the FlexGo program of Fujitsu die, which we impaired as of March 31, 2007. In the three and six months ended June 30, 2008, we recognized zero and $0.3 million, respectively, in product revenue from sales of previously-reserved inventory. Most of the remaining reserved inventory was scrapped in the second quarter of fiscal 2008.

Income from Settlement and Licensing


	Three Months Ended June 30,				Change in		Change in		Six Months Ended June 30,				Change in		Change in
(In thousands)	2008		2007		Dollars		Percent		2008		2007		Dollars		Percent
Income from settlement and licensing	$	5,865	$	—	$	5,865		n/a	$	11,730	$	—	$	11,730		n/a

For the three and six months ended June 30, 2008, we recognized income from settlement and licensing of $5.9 million and $11.7 million, respectively, compared to zero for the three and six months ended June 30, 2007. We expect to recognize the entire present value of $234.6 million from the settlement, release and license agreement entered into with Intel on December 31, 2007 as income from settlement and licensing within operations, on a ten-year ratable basis, over the years 2008-2017. As of June 30, 2008, we expect to recognize income from settlement and licensing within operations of $5.9 million per quarter through the fourth quarter of 2017.

Research and Development

Total research and development expenses for the three and six months ended June 30, 2008 and 2007 are summarized in the following table:


	Three Months Ended June 30,				Change in			Change in			Six Months Ended June 30,				Change in			Change in
(In thousands)	2008		2007		Dollars			Percent			2008		2007		Dollars			Percent
Research and development expenses	$	1,719	$	2,173	$	(454	)		(21	%)	$	3,722	$	7,191	$	(3,469	)		(48	%)
Stock-based compensation		596		364		232			64	%		1,443		282		1,161			412	%

Total research and development expenses	$	2,315	$	2,537	$	(222	)		(9	%)	$	5,165	$	7,473	$	(2,308	)		(31	%)


	Three Months Ended June 30,				Change in			Change in			Six Months Ended June 30,				Change in			Change in
(In thousands)	2008		2007		Dollars			Percent			2008		2007		Dollars			Percent
Amount classified to costs of service revenue	$	—	$	110	$	(110	)		(100	%)	$	163	$	1,135	$	(972	)		(86	%)
Stock-based compensation for cost of service revenue		—		14		(14	)		(100	%)		82		17		65			382	%

Total amount classified to cost of service revenue	$	—	$	124	$	(124	)		(100	%)	$	245	$	1,152	$	(907	)		(79	%)

For the three and six months ended June 30, 2008, research and development expenses decreased by $0.2 million and $2.3 million over comparable periods in 2007, respectively. The decrease for the three months comparison was primarily due to $0.5 million decrease in compensation as a result of headcount reductions offset by an increase of $0.2 million in outside services and consultants. Stock-based compensation increased $0.2 million in the three months comparison primarily due to grant of stock options in the fourth quarter of 2007. The decrease for the six months comparison was primarily due to a $4.1 million decrease in compensation as a result of headcount reductions, $0.7 million decrease in facility and IT allocations, and $0.2 million decrease in software and hardware maintenance offset by $0.9 million increase due to a lower allocation-out for cost of revenue on the Sony contract, $0.5 million increase in outside services and consultants and $0.1 million increase in non-recurring engineering charges. Stock compensation increased $1.2 million in the six months comparison primarily due to grant of stock options in the fourth quarter of 2007.

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Selling, General and Administrative


	Three Months Ended June 30,				Change in			Change in			Six Months Ended June 30,				Change in			Change in
(In thousands)	2008		2007		Dollars			Percent			2008		2007		Dollars			Percent
Selling, general and administrative expenses	$	3,424	$	5,329	$	(1,905	)		(36	%)	$	7,134	$	11,053	$	(3,919	)		(35	%)
Stock-based compensation		684		315		369			117	%		1,316		697		619			89	%

Total selling, general and administrative expenses	$	4,108	$	5,644	$	(1,536	)		(27	%)	$	8,450	$	11,750	$	(3,300	)		(28	%)

For the three and six months ended June 30, 2008, selling, general and administrative expenses decreased by $1.5 million and $3.3 million over comparable periods in 2007, respectively. Selling, general and administrative expenses for the three months comparison decreased by $1.5 million primarily due to $1.3 million decrease in legal and outside services primarily related to the Intel settlement, $0.4 million decrease in compensation as a result of headcount reductions, $0.2 million decrease in accounting and audit fees, $0.1 million decrease in depreciation due to the impairment of restructured assets, $0.1 million decrease in rent expense due to the restructuring of one of our buildings in June 2007, $0.1 million decrease in corporate insurance offset by $0.2 million increase in building maintenance costs mainly due to the accrual of restoration costs on our current building and $0.2 million increase in facility and IT expenses due to a smaller charge out of related costs allocated to research and development. Stock-based compensation increased $0.4 million primarily due to grant of stock options in the fourth quarter of 2007. Selling, general and administrative expenses for the six months comparison decreased by $3.3 million primarily due to $1.7 million decrease in compensation as a result of headcount reduction, $1.7 million decrease in legal and outside services primarily related to the Intel settlement, $0.4 million decrease in rent expense due to the restructuring of our buildings, $0.4 million decrease in corporate insurance, $0.2 million decrease in depreciation due to the impairment of restructured assets and $0.1 million decrease in property taxes offset by a $0.2 million increase to outside consultants and $0.7 million increase in facility and IT expenses due to a smaller charge out of related costs allocated to research and development. Stock-based compensation increased $0.6 million primarily due to grant of stock options in the fourth quarter of 2007.

Restructuring Charges, Net


	Three Months Ended June 30,				Change in			Change in			Six Months Ended June 30,				Change in			Change in
(In thousands)	2008		2007		Dollars			Percent			2008		2007		Dollars			Percent
Restructuring charges	$	455	$	1,978	$	(1,523	)		(77	%)	$	797	$	8,701	$	(7,904	)		(91	%)

For the three and six months ended June 30, 2008, restructuring charges decreased by $1.5 million and $7.9 million over comparable periods in 2007, respectively. The decrease for the three months comparison was primarily due to $1.3 million decrease related to workforce cost reductions initiated in February 2007 and $0.7 million related to leased facility restructuring cost offset by $0.5 million increased expense due to restoration costs for the restructured buildings. The decrease for the six months comparison was primarily due to $7.1 million decrease related to workforce cost reductions initiated in February 2007 and $1.2 million decrease related to leased facility restructuring cost offset by $0.5 million increased expense due to restoration costs for the restructured buildings.

Amortization of Patents and Patent Rights


	Three Months Ended June 30,				Change in			Change in			Six Months Ended June 30,				Change in			Change in
(In thousands)	2008		2007		Dollars			Percent			2008		2007		Dollars			Percent
Amortization of patent and patent rights	$	908	$	1,711	$	(803	)		(47	%)	$	2,388	$	3,423	$	(1,035	)		(30	%)

For the three and six months ended June 30, 2008, amortization of patents and patent rights decreased by $0.8 million and $1.0 million over comparable periods in 2007, respectively. The decrease for both periods was primarily due to patent and patent rights that were fully amortized by the second quarter of 2008. Amortization charges relate to various patents and patent rights acquired from Epson and others during fiscal 2001. Also included in the amortization charges are accretion expenses associated with the liability recorded from the acquisition of these patents and patent rights.

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Impairment Charge on Long-Lived and Other Assets


	Three Months Ended June 30,				Change in			Change in			Six Months Ended June 30,				Change in			Change in
(In thousands)	2008		2007		Dollars			Percent			2008		2007		Dollars			Percent
Impairment charges	$	—	$	8	$	(8	)		(100	%)	$	—	$	302	$	(302	)		(100	%)

For the three and six months ended June 30, 2008, impairment charges on long-lived and other assets decreased by $8,000 and $0.3 million over comparable periods in 2007. The decrease of $0.3 million for the six months comparison was primarily due to prepaid software maintenance that was impaired in the first quarter of fiscal 2007 related to an end of life product.

Interest Income and Other, Net


	Three Months Ended June 30,				Change in		Change in			Six Months Ended June 30,				Change in		Change in
(In thousands)	2008		2007		Dollars		Percent			2008		2007		Dollars		Percent
Interest income and other, net	$	1,769	$	350	$	1,419		405	%	$	4,384	$	859	$	3,525		410	%

For the three and six months ended June 30, 2008, interest income and other, net increased by $1.4 million and $3.5 million, over comparable periods in 2007, respectively. The increase for the three months comparison was primarily due to $1.1 million of imputed interest income resulting from the Intel settlement, release and license agreement and $0.4 million of interest income generated from the increased cash and short-term investment position due to receipt of the $150 million payment from Intel in January 2008 offset by $0.1 million of gain on the disposal of long-lived assets. The increase for the six months comparison was primarily due to $2.9 million of imputed interest income resulting from the Intel settlement, release and license agreement and $0.8 million of interest income generated from the increased cash and short-term investment position due to receipt of the $150 million payment from Intel in January 2008. As of June 30, 2008, we expect to recognize imputed interest income of $12.5 million from the settlement, release and license agreement with Intel over the period extending from the third quarter 2008 through the first quarter 2013.

Provision for Income Taxes


	Three Months Ended June 30,					Change in		Change in			Six Months Ended June 30,				Change in			Change in
(In thousands)	2008		2007			Dollars		Percent			2008		2007		Dollars			Percent
Provision for income taxes	$	—	$	(15	)	$	15		(100	%)	$	—	$	4	$	(4	)		(100	%)

For fiscal 2008, reported income and accreted interest income from the Intel settlement, release and license agreement does not create tax expense as the entire $250 million settlement was recognized as income in the 2007 income tax returns.

Liquidity and Capital Resources

For the six months ended June 30, 2008, we had positive cash flows of $122.9 million from our operations, compared to negative cash flows of $28,000 from our operations for the comparable period in 2007.

The following comparison table summarizes our usage of cash and cash equivalents for the six months ended June 30, 2008 and 2007:


	Six Months Ended June 30,						Change in			Change in
(In thousands)	2008			2007			Dollars			Percent
Net cash provided by (used in) operating activities	$	122,903		$	(28,071	)	$	150,974			538	%
Net cash provided by (used in) investing activities		(41,923	)		19,139			(61,062	)		(319	%)
Net cash provided by financing activities		332			1,604			(1,272	)		(79	%)

Increase (decrease) in cash and cash equivalents	$	81,312		$	(7,328	)	$	88,640			1210	%

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Operating activities

For the six months ended June 30, 2008, net cash provided by operating activities was $122.9 million. Our net income of $173,000 was adjusted for non-cash charges consisting primarily of $2.8 million of stock compensation, $2.4 million of amortization of patents and patents rights, $0.8 million of non-cash restructuring accruals and $0.1 million of depreciation. The net changes in our operating assets at June 30, 2008 compared to December 31, 2007 included primarily of decreases of $147.1 million in other receivables due to the receipt of $150 million payment from Intel in January 2008 and $0.8 million in prepaid expenses and other current assets and other assets, partially offset by decreases of $14.6 million in accounts payable and accrued liabilities, $11.7 million due to recognition of deferred income from settlement and licensing, $3.3 million in income tax payable due to tax payments made related to the year ended December 31, 2007, and $1.9 million in accrued restructuring payments.

For the six months ended June 30, 2007, net cash used in operating activities was $28.1 million. Our net loss of $30.2 million was adjusted for non-cash charges consisting primarily of $8.7 million of non-cash restructuring accruals, $3.4 million of amortization of patents and patents rights, $1.0 million of stock compensation, $0.4 million for impairment of inventories, $0.4 million of depreciation and $0.3 million for impairment of long-lived assets. These charges were partially offset by $0.2 million gain on disposal of fixed assets. The net changes in our operating assets at June 30, 2007 compared to December 31, 2006 included primarily of decreases of $7.9 million in accrued restructuring payments, $2.9 million in accounts payable and accrued liabilities, and $1.3 million in advances from customers, and an increase of $0.4 million in inventories partially offset by decreases of $0.4 million in prepaid expenses and other current assets and $0.1 million in accounts receivable.

Investing activities

Net cash used in investing activities was $41.9 million for the six months ended June 30, 2008 compared to net cash provided in by investing activities of $19.1 million for the comparable period in fiscal 2007.

Net cash used in investing activities was $41.9 million for the six months ended June 30, 2008, primarily due to purchase of available-for-sale investments of $89.6 million, partially offset by $47.7 million in proceeds provided from the sale or maturity of available-for-sale investments.

Net cash provided by investing activities was $19.1 million for the six months ended June 30, 2007, primarily due to $19.0 million in proceeds provided from the maturity of available-for-sale investments and $0.2 million of disposal of fixed assets.

Financing activities

Net cash provided by financing activities was $0.3 million for the six months ended June 30, 2008 compared to $1.6 million for the comparable period in fiscal 2007.

For the six months ended June 30, 2008, net cash provided by financing activities included $0.2 million in net proceeds from exercises of warrants and $0.1 million from sales of common stock under our employee stock purchase and stock option plans. For the six months ended June 30, 2007, net cash provided by financing activities included $1.6 million in net proceeds from the sale of our common stock under our employee stock purchase and stock option plans.

Contractual Obligations

As of June 30, 2008, we had the following contractual obligations:


	Future Minimum Payments Due by Period
			Remainder of
(In thousands)	Total		2008		2009
Operating leases(1)	$	—	$	—	$	—
Unconditional contractual obligations(2)		1,200		400		800

Total	$	1,200	$	400	$	800


(1)		Operating leases include agreement son building facilities. The lease extension for approximately 22,500 square feet of office space in Santa Clara, California was signed in July 2008 and is therefore not included in the above table.

(2)		Contractual obligations include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including, fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations also include agreements for design tools and software for use in product development.

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Off-Balance Sheet Arrangements

As of June 30, 2008, we had no off balance sheet arrangements as defined in Item 303(a) (4) of Regulation S-K.

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, please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K, for the year ended December 31, 2007, which was filed with the Securities and Exchange Commission on March 17, 2008.

Critical accounting policies affecting us, the critical estimates made when applying them, and the judgments and uncertainties affecting their application have not changed materially since December 31, 2007.

Recent Accounting Pronouncements

See Note 2 “Recent Accounting Pronouncements” in the Notes to the Unaudited Condensed Consolidated Financial Statements for a full description of relevant recent accounting pronouncements including the respective expected dates of adoption.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk. As of June 30, 2008, we had cash, cash equivalents and short-term investments of $141.8 million. Our cash equivalents and short-term investments are exposed to financial market risk due to fluctuations in interest rates, which may affect our interest income. As of June 30, 2008, our cash equivalents and short-term investments included money market funds and short and medium term treasury bills and earned interest at an average rate of 1.7%. Due to the relative short-term nature of our investment portfolio, our interest income is extremely vulnerable to sudden changes in market interest rates. A hypothetical 1.0% decrease in interest rates would have resulted in a $1.4 million decrease in our annualized interest income. Actual results may differ materially from this sensitivity analysis. We do not use our investment portfolio for trading or other speculative purposes.

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

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective.

Inherent Limitations on Effectiveness of Controls

Our management, including our chief executive officer and our chief financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. Any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

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Changes in Internal Control over Financial Reporting

Internal control over financial reporting is a process designed by, or under the supervision of, our chief executive officer and our chief financial officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. There was no change in our internal control over financial reporting during the three months ended June 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to legal claims and litigation arising in the ordinary course of our business, such as employment or intellectual property claims, including but not limited to the matters described below. Although there are no legal claims or litigation matters pending that we expect to be material in relation to our business, consolidated financial condition, results of operations or cash flows, legal claims and litigation are subject to inherent uncertainties and an adverse result in one or more matters could negatively affect our results.

Beginning in September 2001, the Company, certain of our directors and former officers, and certain of the underwriters for our initial public offering were named as defendants in three putative shareholder class actions that were consolidated in and by the United States District Court for the Southern District of New York in In re Transmeta Corporation Initial Public Offering Securities Litigation , Case No. 01 CV 6492. The complaints allege that the prospectus issued in connection with our initial public offering on November 7, 2000 failed to disclose certain alleged actions by the underwriters for that offering, and alleges claims against us and several of our directors and former officers under Sections 11 and 15 of the Securities Act, and under Sections 10(b) and Section 20(a) of the Securities Exchange Act. Similar actions have been filed against more than 300 other companies that issued stock in connection with other initial public offerings during 1999-2000. Those cases have been coordinated for pretrial purposes as In re Initial Public Offering Securities Litigation , Master File No. 21 MC 92 (SAS). In July 2002, we joined in a coordinated motion to dismiss filed on behalf of multiple issuers and other defendants. In February 2003, the District Court granted in part and denied in part the coordinated motion to dismiss, and issued an order regarding the pleading of amended complaints. Plaintiffs subsequently proposed a settlement offer to all issuer defendants, which settlement would provide for payments by issuers’ insurance carriers if plaintiffs fail to recover a certain amount from underwriter defendants. Although we and the individual defendants believe that the complaints are without merit and deny any liability, but because we also wished to avoid the continuing waste of management time and expense of litigation, we accepted plaintiffs’ proposal to settle all claims that might have been brought in this action. Our insurance carriers are part of the proposed settlement, and we and the individual Transmeta defendants expect that our share of any global settlement will be fully funded by our director and officer liability insurance. In April 2006, the District Court held a final settlement approval hearing on the proposed issuer settlement and took the matter under submission. Meanwhile the consolidated case against the underwriter defendants went forward, and in December 2006, the Court of Appeals for the Second Circuit held that a class could not be certified in that case. As a result of the Court of Appeals’ holding, the District Court suggested that the proposed issuer settlement could not be approved in its proposed form and should be modified. In June 2007, the District Court entered an order terminating the proposed settlement based upon a stipulation among the parties to the settlement. It is unclear what impact these developments will have on our case. We expect that the parties will likely seek to reformulate a settlement in light of the Court of Appeal’s ruling, and we believe that the likelihood that we would be required to pay any material amount is remote. It is possible that the parties may not reach a final written settlement agreement or that the District Court may decline to approve any settlement in whole or part. In the event that the parties do not reach agreement on a final settlement, we and the Transmeta defendants believe that we have meritorious defenses and intend to defend any remaining action vigorously.

In July 2007, we received a letter on behalf of a putative stockholder, Vanessa Simmonds, demanding that we investigate and prosecute a claim for alleged short-swing trading in violation of Section 16(b) of the Securities Exchange Act against the underwriters of our November 2000 initial public offering and unidentified directors, officers and stockholders of Transmeta. In October 2007, Simmonds filed a purported shareholder derivative action in the United States District Court for the Western District of Washington, captioned Simmonds v. Morgan Stanley, et al. , Case No. C07-1636 RSM, against three of the underwriters of our initial public offering. In February 2008, Simmonds filed an amended complaint. None of our current or former directors or officers is named as a party in the action. Transmeta is named only as a nominal defendant in the action, and Simmonds does not seek any remedy or recovery from Transmeta. In March 2008, the court entered a stipulated order providing that we will not be required to answer or otherwise respond to the amended complaint.

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Item 1A. Risk Factors

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

We substantially restructured our operations and changed our business plan in 2007, and we might fail to operate successfully under our current business plan, which is unproven.

In 2007, after experiencing negative cash flows from our operations and incurring substantial operating losses for several years, we restructured our operations, ceased or exited several of our legacy lines of business, substantially reduced our workforce, and focused on developing and licensing our technology and intellectual property as our core business. We might not succeed in operating under our new business plan for many reasons, including the risks that we might not be able to continue developing viable technologies, might not achieve market acceptance for our technologies, might not earn adequate revenues from our licensing business, and might not achieve profitability. Employee concern about such risks or the effect of our restructuring and new business plan on their workloads or continued employment might cause our employees to seek or accept other employment, depriving us of the human and intellectual capital that we need in order to succeed. Because we necessarily lack historical operating and financial results for our current business plan, it will be difficult for us, as well as for investors, to predict or evaluate our business prospects and performance. Our business prospects must be considered in light of the uncertainties and difficulties frequently encountered by companies undergoing a business transition or in the early stages of development.

We might lose key technical or management personnel, on whose knowledge, leadership and technical expertise we rely. Such losses could prevent us from operating successfully under our current business plan.

Our success under our current business plan depends heavily upon the contributions of our key technical and management personnel, whose knowledge, leadership and technical expertise would be difficult to replace. Many of these individuals have developed specialized knowledge and skills relating to our technologies and business. Our restructuring plan resulted in substantial headcount reductions in 2007, and employee concern about the future of the business and their continued prospects for employment may cause our employees to seek employment elsewhere, depriving us of the human and intellectual capital we need to be successful. We have also had substantial turnover in our management team during 2007, including the February 2007 appointment of Lester M. Crudele as our president and chief executive officer, the August 2007 appointment of Sujan Jain as our chief financial officer, the December 2007 appointment of Daniel L. Hillman as our vice president of engineering, and the separation of several former officers from Transmeta during the first half of 2007. All of our executive officers and key personnel are employees at will. We have no individual employment contracts and do not maintain key person insurance on any of our personnel. We might not be able to execute on our business model if we were to lose the services of any of our key personnel. If any of these individuals were to leave our company 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.

Our recent restructuring and the evolution of our business could place significant strain on our management systems, infrastructure and other resources, and our business may not succeed if we fail to manage such changes effectively.

Our ability to succeed under our current business plan after restructuring our operations in 2007 requires effective planning and management process. Changes in our business plans could place significant strain on our management systems, infrastructure and other resources. In addition, we expect that we will continue to improve our financial and managerial controls and procedures. If we fail to manage these processes and resources effectively, our employee-related costs and employee turnover could increase and our business may not succeed.

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Our current business plan depends on increasing our LongRun2 licensing revenue, and we might be unsuccessful in our efforts to license our LongRun2 technology to other parties.

Our licensing business depends on our successful attraction of new licensees. Our ability to enter into new LongRun2 licensing agreements depends in part upon the adoption of our LongRun2 technology by our licensees and potential licensees, and the success of the products incorporating our technology sold by licensees. While we anticipate that we will continue our efforts to license our technology to licensees, we cannot predict the timing or the extent of any future licensing revenue, and past levels of license revenues may not be indicative of future periods.

We have limited visibility regarding when and to what extent our licensees will use our LongRun2 or other licensed technologies and we might be unsuccessful in our efforts to generate royalty revenue.

We have earned limited royalties from our LongRun2 licensees. Our receipt of royalties from our LongRun2 licenses depends on our licensees’ incorporating our technology into their manufacturing and products, bringing their products to market, and the success of their products. Our licensees are not contractually obligated to manufacture, distribute or sell products using our licensed technologies. Thus, our entry into and full performance of our obligations under our LongRun2 licensing agreements do not necessarily assure us of any future royalty revenue. Any royalties that we are eligible to receive are based upon our licensees’ use of our licensed technologies and, as a result, we do not have direct access to information that would enable us to forecast the timing and amount of any future royalties. Factors that negatively affect our licensees and their customers could adversely affect our future royalties. The success of our licensees is subject to a number of factors, including:

	•		the competition that our licensees face and the market acceptance of their products;

	•		the pricing policies of our licensees for their products incorporating our technology;

	•		the engineering, marketing and management capabilities of our licensees and technical challenges unrelated to our technology that they face in developing their products; and

	•		the financial and other resources of our licensees.

Because we do not control the business practices of our licensees and their customers, we have little influence or information regarding the extent to which our licensees promote or use our technology.

We face intense competition in the development of advanced technologies. Our customers and competitors are much larger than we are and have significantly greater resources. We may not be able to compete effectively.

The development of power management and transistor leakage control technologies is an emerging field subject to rapid technological change, and our competition for licensing such technologies, and providing related services, is unknown and could increase. Our LongRun2 technologies are highly proprietary and, though the subject of patents and patents pending, are marketed primarily as trade secrets subject to strict confidentiality protocols. Although we are not aware of any other company having developed, offered or demonstrated any comparable power management or leakage control technologies, we note that most semiconductor companies have internal efforts to reduce transistor leakage and power consumption in current and future semiconductor products. Indeed, all of our current and prospective licensees are larger, technologically sophisticated companies, which generally have significant resources and internal efforts to develop their own technological solutions.

We might be unable to keep pace with technological change in our industry, and our technology offerings might not be competitive.

The semiconductor industry is characterized by rapid technological change. Our technology offerings may not be competitive if we fail to develop and introduce new technology or technology enhancements that meet evolving customer demands. It may be difficult or costly for us, or we may not be able, to enhance existing technologies to fully meet customer demands, particularly in view of our recent restructuring of our operations.

We might experience payment disputes for amounts owed to us under our LongRun2 licensing agreements, and such a dispute may harm our business results.

The standard terms of our LongRun2 license agreements require our licensees to document the royalties owed to us from the sale of products that incorporate our technology and report this data to us on a quarterly basis. While standard license terms give us the right to audit books and records of our licensees to verify this information, audits can be expensive, time consuming, and potentially detrimental to our ongoing business relationship with our licensees. Our failure to audit our licensees’ books and records may result in us receiving more or less royalty revenues than we are entitled to under the terms of our license agreements. The result of such royalty audits could result in an increase, as a result of a licensee’s underpayment, or decrease, as a result of a licensee’s overpayment, to previously reported royalty revenues. Such adjustments would be recorded in the period they are determined. Any adverse material adjustments resulting from royalty audits or dispute resolutions may harm our business results and cause our stock price to decline. Royalty audits may also trigger disagreements over contract terms with our licensees and such disagreements could hamper customer relations, divert the efforts and attention of our management from normal operations and impact our business operations and financial condition.

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We might experience payment disputes for amounts owed to us under our settlement, release and license agreement with Intel, and such a dispute may harm our financial and operational outlook.

Our settlement, release and license agreement with Intel provides for Intel to make an initial $150 million payment to us as well as to make annual payments of $20 million for each of the next five years starting January 31, 2009. We received the initial $150 million payment in January 2008. If for any reason we do not receive all of the annual payments of $20 million for each of the next five years from Intel, our financial position and operational outlook would be adversely affected.

We currently derive a substantial portion of our revenue from a small number of customers and licensees, and our operating results would be adversely affected if any customer were to cancel, reduce or delay a transaction.

Our customer base is highly concentrated. For example, for the three months ended June 30, 2008 and 2007 there were one and two such customers respectively, that accounted for 99% and 100% respectively, of total revenues. For the six months ended June 30, 2008 and 2007 there were three and two such customers, respectively, that accounted for 97% and 92%, respectively, of total revenues. We expect that a small number of customers will continue to account for a significant portion of our revenue.

Our customers and licensees are significantly larger than we are and have bargaining power to demand changes in terms and conditions of our agreements. Changes or delays in performance under our agreements could adversely affect our operating results.

We may be unable to protect our proprietary technologies and defend our intellectual property rights. Our competitors might gain access to our technologies, and we might not compete successfully in our markets.

We believe that our success will depend in part upon our proprietary technologies and intellectual property. We rely on a combination of patents, copyrights, trademarks, trade secret laws and contractual obligations with employees and third parties to protect our proprietary technologies and intellectual property. 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 or potential licensees might gain access to our technology. As a result, our competitors might use or offer similar technologies, and we might not be able to compete successfully. Moreover, despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products and technologies, and obtain and use information that we regard as proprietary. Also, our competitors may independently develop similar, but not infringing, technologies, duplicate our technologies, 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, 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. We may initiate claims or litigation against third parties based on our proprietary rights. Any litigation surrounding our rights could force us to divert important financial and other resources from our business operations.

Our pending patent applications may not be approved, and our patents, including any patents that may issue as a result of our patent applications, may not provide us with any competitive advantage or may be challenged by third parties. For example, beginning in March 2007, several months after we brought action against Intel for infringing certain of our patents, Intel filed requests to have those of our patents in suit reexamined by the Patent and Trademark Office (“PTO”), and the PTO granted all of Intel’s requests for reexamination. Such proceedings can be expensive and time consuming, perhaps taking several years to complete, and the schedule for such proceedings is difficult to predict and could be delayed for many reasons, including the increasing popularity of such proceedings. For example, the PTO has yet to take an initial action in most of the patent reexamination proceedings requested by Intel, and the timing of such proceedings is uncertain and can be delayed by many factors, including PTO workload. Our patents might not be upheld, or their claims could be narrowed through amendment, as a result of such proceedings. For example, in three of the reexamination proceedings initiated by Intel, we have proposed to amend certain claims of our patents by adding limitations that we believe would improve those claims. Even the pendency of such proceedings may interfere with or impair our ability to enforce or license our patent rights.

Any dispute regarding our intellectual property may require us to indemnify certain licensees or third parties, the cost of which could severely hamper our business operations and financial condition.

In any potential dispute involving our patents or other intellectual property, our licensees could also become the target of litigation. Our LongRun2 license agreements and certain of our development services agreements provide limited indemnities. Our indemnification obligations could result in substantial expenses. In addition to the time and expense required for us to supply such indemnification to our licensees, a licensee’s development, marketing and sales of licensed products incorporating our LongRun2 technology could be severely disrupted or shut down as a result of litigation, which in turn could severely hamper our business operations and financial condition.

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We have significant international business relationships, which expose us to risk and uncertainties.

Most of our current licensees are based in Asia, and many prospective business growth opportunities in our industry are outside of United States. 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 servicing international customers;

	•		fluctuations in currency exchange rates;

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

	•		longer accounts receivable collection cycles;

	•		import or export licensing requirements;

	•		potentially adverse tax consequences;

	•		political and economic instability; and

	•		potentially reduced protection for intellectual property rights.

Our operating results are difficult to predict and fluctuate significantly. A failure to meet the expectations of investors could result in a substantial decline in our stock price.

Our operating results fluctuate significantly from quarter to quarter, and we expect that our operating results will fluctuate significantly in the future as a result of one or more of the risks described in this section or as a result of numerous other factors. Additionally, a large portion of our expenses, including rent and salaries, is fixed or difficult to reduce. You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. Our stock price has declined substantially since our stock began trading publicly. If our future operating results fail to meet or exceed the expectations of investors, our stock price could be adversely affected.

A sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.

Sales of a substantial number of shares of our common stock in the public market could adversely affect the market price of our common stock. Significant sales by an investor or combination of investors during a period of relatively thin trading would likely depress the stock price, at least temporarily, and increase the market’s perception of historic volatility.

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 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 customers; and

	•		changes in the estimates of our operating performance or changes in recommendations by securities analysts.

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In addition, the stock market generally and the market for semiconductor and other technology-related stocks in particular has experienced declines for extended periods historically, and could decline from current levels, 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 litigation is often brought against a company following a period of volatility in the market price of its securities, and we have been subject to such litigation in the past. Any such lawsuits in the future will divert management’s attention and resources from other matters, which could also adversely affect our business and the price of our stock.

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. For example, during third quarter of 2007 we sold preferred stock to AMD, and common stock and warrants to selected institutional investors. The exercise of such preferred rights or warrants by investors could have an adverse effect on the price of our stock.

We might need to raise additional financing, which might not be available or might be available only on terms unfavorable to us or our stockholders.

Although we believe that our existing cash and cash equivalents and short-term investment balances will be sufficient to fund our operations, planned capital and research and development expenditures for the next twelve months, it is possible that we may need to raise significant additional funds through public or private equity or debt. A variety of business contingencies could contribute to our need for funds in the future, including the need to:

	•		fund expansion;

	•		develop or enhance our products or technologies;

	•		enhance our operating infrastructure;

	•		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. For example, in order to raise equity financing, we may decide to sell our stock at a discount to our then current trading price, which may have an adverse effect on our future trading price. We might not be able to raise additional financing on terms favorable to us, or at all.

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;

	•		requiring super-majority voting to amend some provisions in our certificate of incorporation and bylaws;

	•		authorizing the issuance of “blank check” preferred stock that our board could issue to increase the number of shares outstanding and to discourage a takeover attempt;

	•		limiting the ability of our stockholders to call special meetings of stockholders;

	•		prohibiting stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; and

	•		establishing advance notice requirements for nominations for election to our board or for proposals that can be acted upon by stockholders at stockholder meetings.

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

Our business is subject to potential tax liabilities, which could change our effective tax rate.

We are subject to income taxes in the United States and other foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, we cannot assure you that the final determination of any tax audits and litigation will not be materially different from that which is reflected in historical income tax provisions and accruals. Should additional taxes be assessed as a result of an audit or litigation, there could be a material effect on our cash, income tax provision and net income in the period or periods for which that determination is made.

Additionally, a number of factors may impact our future effective tax rates including:

	•		the jurisdictions in which profits are determined to be earned and taxed;

	•		the resolution of issues arising from tax audits with various tax authorities;

	•		adjustments to deferred tax assets utilized in 2007 to reduce the tax effect of various tax returns;

	•		adjustments to estimated taxes upon finalization of various tax returns;

	•		increases in expenses not deductible for tax purposes;

	•		changes in available tax credits and available net operating loss carryovers;

	•		changes in the valuation of any deferred tax assets and liabilities;

	•		changes in share-based compensation; or

	•		changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles.

Our results of operations could vary as a result of the methods, estimates, and judgments we use in applying our accounting policies.

The methods, estimates, and judgments we use in applying our accounting policies have a significant impact on our results of operations. Such methods, estimates, and judgments are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise over time that lead us to change them. Changes in those methods, estimates, and judgments could significantly affect our results of operations. In particular, the calculation of share-based compensation under SFAS 123(R) requires us to use valuation methodologies and a number of assumptions, estimates, and conclusions regarding matters such as expected forfeitures, expected volatility of our share price, the expected dividend rate with respect to our common stock, and the expected exercise behavior of our employees. Under applicable accounting principles, we cannot compare and adjust our expense when we learn about additional information affecting our previous estimates, with the exception of changes in expected forfeitures of share-based awards. Factors may arise over time that leads us to change our estimates and assumptions with respect to future share-based compensation arrangements, resulting in variability in our share-based compensation expense over time. Changes in forecasted share-based compensation expense could affect our cost of revenues; research and development expenses; selling, general and administrative expenses; and our effective tax rate.

We may develop or identify material weaknesses in our internal control over financial reporting.

In compliance with the Sarbanes-Oxley Act of 2002, we test our system of internal control over financial reporting as of December 31 of the applicable fiscal year. In our evaluation as of December 31, 2004, we identified six material weaknesses. A material weakness is a deficiency, or a combination of deficiencies, those results in there being a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected. The material weaknesses that we had identified affected all of our significant accounts. Certain of those material weaknesses resulted in a restatement of our previously filed financial results for the second quarter of fiscal 2004 and affected the balances of our inventories, other accrued liabilities and cost of revenue accounts. We have remediated all of those material weaknesses in our system of internal control over financial reporting, but we cannot assure you that we will not in the future develop or identify material weaknesses or significant deficiencies in our internal control over financial reporting.

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		Page
Caution Regarding Forward-Looking Statements		3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements		4
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007		4
Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2008 and 2007		5
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2008 and 2007		6
Notes to Unaudited Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3. Quantitative and Qualitative Disclosures about Market Risk		28
Item 4. Controls and Procedures		28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		29
Item 1A. Risk Factors		30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		36
Item 6. Exhibits		37
Signatures		38
INDEX TO EXHIBITS		39
EXHIBIT 31.01
EXHIBIT 31.02
EXHIBIT 32.01
EXHIBIT 32.02

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							Total Number
							of Shares		Maximum Number of
	Total Number				Average		Purchased as Part		Shares that May Yet
	of Shares		Total		Price Paid		of Publicly Announced		Be Purchased Under
Period	Purchased		Paid		per Share		Plans or Programs		the Plans or Programs
04/01/08 - 04/30/08		3,000	$	—	$	0.00001		—		—
05/01/08 - 05/31/08		—		—		—		—		—
06/01/08 - 06/30/08		—		—		—		—		—

Total		3,000	$	—	$	0.00001		—		—


Exhibit
Number		Exhibit Title

31.01		Certification by Lester M. Crudele pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.

31.02		Certification by Sujan Jain pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.

32.01*		Certification by Lester M. Crudele pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.02*		Certification by Sujan Jain pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*		As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this quarterly report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of Transmeta Corporation under the Securities Act of 1933 or the Securities Exchange Act of 1934, including this quarterly report, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.


	TRANSMETA CORPORATION
	By	/s/ Sujan Jain
		Sujan Jain
Date: August 6, 2008		Executive Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)