TMTA Transmeta (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended September 30, 2008

OR

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

For the Transition Period from       to

Commission File Number 000-31803

TRANSMETA CORPORATION

(Exact name of Registrant as specified in its charter)

Delaware		77-0402448
(State or other jurisdiction of		(I.R.S. 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 12,204,671 shares of the Registrant’s common stock, par value $0.00001 per share, outstanding on October 15, 2008.

 

 

TRANSMETA CORPORATION
FORM 10-Q
Quarterly Period Ended September 30, 2008

TABLE OF CONTENTS

		Page
Caution Regarding Forward-Looking Statements			3
PART I. FINANCIAL INFORMATION			4
Item 1. Financial Statements			4
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007			4
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2008 and 2007			5
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 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			20
Item 3. Quantitative and Qualitative Disclosures about Market Risk			28
Item 4. Controls and Procedures			28
PART II. OTHER INFORMATION			29
Item 1. Legal Proceedings			29
Item 1A. Risk Factors			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 4. Submissions of Matters to a Vote of Security Holders			37
Item 6. Exhibits			37
Signatures			38
INDEX TO EXHIBITS			39
EXHIBIT 10.40
EXHIBIT 10.41
EXHIBIT 10.42
EXHIBIT 31.01
EXHIBIT 31.02
EXHIBIT 32.01
EXHIBIT 32.02

Caution Regarding Forward-Looking Statements

     The following condensed consolidated financial statements, related notes, and management discussion and analysis contained in this report should be read in conjunction 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
Novafora, Inc.		Novafora
NVIDIA Corporation		NVIDIA
Seiko Epson Corporation		Epson
Sony Corporation		Sony
Toshiba Corporation		Toshiba

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

TRANSMETA CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
		2008				2007(1)
		(unaudited)
		(In thousands, except for share data)
ASSETS
Current assets:
Cash and cash equivalents		$	205,271			$	15,607
Short-term investments			49,969				2,968
Accounts receivable			2				163
Other receivables, current			—				149,400
Prepaid expenses and other current assets			1,963				2,476
Total current assets			257,205				170,614
Other receivables, long-term			—				85,200
Property and equipment, net			194				284
Patents and patent rights, net			—				2,388
Other assets			200				800
Total assets		$	257,599			$	259,286
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,029			$	341
Accrued compensation			774				15,351
Income tax payable			15				3,306
Accrued restructuring costs			352				1,592
Other accrued liabilities			473				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			26,903				45,745
Long-term deferred income from settlement and licensing, net of current portion			193,545				211,140
Long-term payables, net of current portion			200				800
Total liabilities			220,648				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 September 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 — 12,204,088 shares at September 30, 2008 and 12,021,388 at December 31, 2007			743,641				739,268
Treasury stock — 39,843 shares at September 30, 2008 and December 31, 2007			(2,439	)			(2,439	)
Accumulated other comprehensive income			190				29
Accumulated deficit			(711,407	)			(742,223	)
Total stockholders’ equity			36,951				1,601
Total liabilities and stockholders’ equity		$	257,599			$	259,286

(See Notes to Unaudited Condensed Consolidated Financial Statements)

TRANSMETA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

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

(See Notes to Unaudited Condensed Consolidated Financial Statements)

TRANSMETA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

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

(See Notes to Unaudited Condensed Consolidated Financial Statements)

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.

Recent Developments

     On November 17, 2008, the Company announced that the Company had entered into an Agreement and Plan of Merger (“Merger Agreement”) to be acquired by Novafora for $255.6 million in cash, subject to working capital and other adjustments, in a transaction where Transmeta would be merged with and into a wholly-owned subsidiary of Novafora. The Merger Agreement provides, among other things, that Transmeta may not enter into any future licensing transaction prior to closing of the merger without Novafora’s consent.

     The foregoing description of the Merger Agreement and other references to the Merger Agreement in this Form 10-Q do not purport to be complete and are qualified in their entirety by reference to the full text of the Merger Agreement, a copy of which will be filed with the SEC, and the terms of which are incorporated herein by reference.

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 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 condensed consolidated balance sheet as of December 31, 2007 was derived from the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, 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 the Company’s 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 nine months ended September 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 FASB issued SFAS No. 159, “ The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 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, SFAS 159 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 on or after January 1, 2009. Earlier adoption is prohibited.

     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 September 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 FSP FAS 157-2, “ Effective FAS Date of FASB Statement No. 157 ” (“FSP FAS 157-2”), to partially defer SFAS No. 157, “ Fair Value Measurements ” (“SFAS 157”). FSP FAS 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 FAS 157-2.

     On April 25, 2008, the FASB issued FSP FAS142-3, “ Determination of the Useful Life of Intangible Asset” (“FSP FAS142-3”). FSP FAS 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 FAS 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 FAS 142-3 is effective for the Company beginning January 1, 2009. As of September 30, 2008, the Company did not have any intangible assets, so it anticipates no impact from adopting FSP FAS 142-3. The Company’s adoption of FSP FAS 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.

     On October 10, 2008, the FASB issued FSP FAS 157-3, “ Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” (“FSP FAS 157-3”), to clarify the application of SFAS 157 in a market that is not active, providing an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurement in accordance with SFAS 157 and is effective upon issuance. The Company has determined there is no impact from adopting the provisions of FSP FAS 157-3 for this current Quarterly Report on Form 10-Q.

     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 nine months ended September 30, 2008 and 2007, was as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)		2008				2007				2008				2007
Net income (loss)		$	30,643			$	(9,073	)		$	30,816			$	(39,257	)
Net change in unrealized gain on investments			137				15				151				44
Net change in foreign currency translation adjustments			(4	)			7				10				51
Net comprehensive income (loss)		$	30,776			$	(9,051	)		$	30,977			$	(39,162	)

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

		September 30,				December 31,
(In thousands)		2008				2007
Net unrealized gain (loss) on investments		$	147			$	(4	)
Cumulative foreign currency translation adjustments			43				33
Accumulated other comprehensive income		$	190			$	29

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 original terms of the agreement, the Company received from Intel an initial payment of $150 million in January 2008, and was scheduled to receive from Intel annual payments of $20 million for each of the next five years, for total additional payments of $100 million.

     Under the December 31, 2007 agreement, the Company granted 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 the Company’s LongRun and LongRun2 technologies and future improvements. Intel granted the Company a covenant not to sue for the Company’s development and licensing to third parties of its LongRun and LongRun2 technologies.

     In September 2008, the Company entered into an amendment to the December 31, 2007 settlement, release and license agreement to accelerate all future payment obligations under that agreement and a computing technology license agreement. The Company received a cash payment of $91.5 million in September 2008 which was applied to the carrying cost of $88.6 million of other receivable from Intel. The excess of the cash received over the receivable from Intel of $2.9 million was reported as operating income from license and receivable since the separate fair values of the license and payment acceleration elements cannot be determined. Under the September 2008 license agreement, the Company granted Intel a fully paid-up non-exclusive license to use and exploit certain proprietary computing technologies.

     The Company expects to recognize the fair value of the proceeds from Intel under the December 31, 2007 agreement 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 APB Opinion No. 21 “Interest on Receivables and Payables” in recording the present value of $234.6 million. Of the $15.4 million original difference between the settlement amount of $250 million and the present value of Intel payments scheduled to be recognized over the years 2008 to 2013, $4.0 million was recognized as imputed interest income through September 30, 2008. As of September 30, 2008, no future imputed interest income will be recognized as the Intel other receivables were fully paid on September 30, 2008.

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

(In thousands)		September 30, 2008				December 31, 2007
Non-interest bearing note, consisting of Payments of 5 x $20 million (due Jan 2009-Jan 2013), plus the initial $150 million payment (due Jan 2008) as of December 31, 2007		$	100,000			$	250,000
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			(11,355	)			(14,800	)
Less unamortized discount based on imputed interest rates			(11,355	)			(15,400	)
Less payment acceleration per September 2008 agreement			(88,645	)			—
Present value of other receivables from Intel		$	—			$	234,600
Other receivables, current			—				149,400
Other receivables, long-term			—				85,200
Present value of other receivables from Intel		$	—			$	234,600

     As of September 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.

5. Financial Statement Components

Property and Equipment

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

		September 30,				December 31,
(In thousands)		2008				2007
Property and equipment, net
Leasehold improvements		$	2,325			$	2,325
Computer equipment			3,599				3,519
Furniture and fixtures			395				395
Computer software			719				775
			7,038				7,014
Less accumulated depreciation and amortization			(6,844	)			(6,730	)
Total		$	194			$	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 September 30, 2008 and December 31, 2007, which were classified as available-for-sale, are summarized below:

										Gross				Gross
(In thousands)		Fair Value				Book Value				Unrealized Gain				Unrealized (Loss)
As of September 30, 2008
Money market funds		$	887			$	887			$	—			$	—
Federal agency paper			252,920				252,773				164				(17	)
Commercial paper											—				—
Total marketable securities: available for sale			253,807				253,660				164				(17	)
Cash			1,433				1,433				—				—
Total cash, cash equivalents and short term investments		$	255,240			$	255,093			$	164			$	(17	)
As of December 31, 2007
Money market funds		$	14,627			$	14,627			$	—			$	—
Federal agency paper			—				—				—				—
Commercial paper			2,968				2,972				—				(4	)
Total marketable securities: available for sale			17,595				17,599				—				(4	)
Cash			980				980				—				—
Total cash, cash equivalents and short term investments		$	18,575			$	18,579			$	—			$	(4	)

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

(In thousands)		September 30, 2008				December 31, 2007
Cash		$	1,433			$	980
Cash equivalents			203,838				14,627
Short term investments			49,969				2,968
Total cash, cash equivalents and short term investments		$	255,240			$	18,575

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

										Gross				Gross
(In thousands)		Fair Value				Book Value				Unrealized Gain				Unrealized (Loss)
As of September 30, 2008:
Amounts maturing within one year		$	253,807			$	253,660			$	164			$	(17	)
Amounts maturing after one year, within five years			—				—				—				—
Total marketable securities: available for sale		$	253,807			$	253,660			$	164			$	(17	)
As of December 31, 2007:
Amounts maturing within one year		$	17,595			$	17,599			$	—			$	(4	)
Amounts maturing after one year, within five years			—				—				—				—
Total marketable securities: available for sale		$	17,595			$	17,599			$	—			$	(4	)

          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 September 30, 2008 and 2007, the Company had no gross realized gains or losses on sales of its available-for-sale securities. For the nine months ended September 30, 2008 and 2007, the gross realized gain on sales was $14,000 and zero, respectively. There were no gross realized losses for the nine months ended September 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 September 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 $147,000 is comprised of gross unrealized gains of approximately $164,000 and of gross unrealized loss of approximately $17,000 as of September 30, 2008. The gross unrealized loss relates to securities with a fair value of $43.0 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).

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

(Level 1)

Quoted Prices in Active

(Level 2)

Balance as of

Markets of Identical

Significant Other

(In thousands)

September 30, 2008

Assets

Observable Inputs

Available-for-sale securities

$

253,807

$

887

$

252,920

          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 September 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 SFAS 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, restricted stock awards and employee stock purchase grants under SFAS 123(R) for the three and nine months ended September 30, 2008 and 2007:

		Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands, except for per share data)		2008				2007				2008				2007
Stock-based compensation expense by type of award:
Employee stock options		$	809			$	373			$	3,576			$	1,716
Restricted stock awards			12				—				12				—
Employee stock purchase plan			66			$	(399	)			140				(746	)
Total stock-based compensation			887				(26	)			3,728				970
Tax effect on stock-based compensation			—				—				—				—
Net effect of stock-based compensation on results of operations		$	887			$	(26	)		$	3,728			$	970

           Stock Options and Employee Stock Purchase Plan (“ESPP”): Net cash proceeds from the sales of common stock under employee stock purchase and incentive stock option plans were $0.3 million and $0.2 million for the three months ended September 30, 2008 and 2007, respectively, and $0.4 million and $1.8 million for the nine months ended September 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 nine months ended September 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.

          For the three months ended September 30, 2008 and 2007, the Company recorded $66,000 and a credit of $(0.4) million, respectively, of stock-based compensation expense (credit) related to ESPP. For the nine months ended September 30, 2008 and 2007, the Company recorded $0.1 million and $(0.7) million of stock-based compensation expense (credit) related to ESPP, respectively. The $(0.7) million ESPP credit recorded for the nine months ended September 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 new grant offering. There were zero and $30,000 modification charges recorded during the three months ended September 30, 2008 and 2007, respectively. In the nine months ended September 30, 2008 and 2007, the Company recorded modification charges of zero and $50,000, 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 No. 123, “Share-Based Payment”. 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								Nine Months Ended
		September 30,								September 30,
Employee Stock Option Plans		2008				2007				2008				2007
Risk-free interest rate			2.8	%			4.5	%			2.9	%			4.6	%
Expected life in years			4.3				4.0				4.3				4.0
Expected stock price volatility			102	%			91	%			104	%		87% to 90%
Weighted-average fair value of stock options granted		$	10.36			$	7.09			$	10.50			$	7.62

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
Employee Stock Purchase Plan (ESPP)		2008				2007				2008				2007
Risk-free interest rate			2.3	%			5.1	%			2.1	%			5.1	%
Expected life in years			1.3				1.3				1.3				1.3
Expected stock price volatility			102	%			86	%		102% to 151%				71% to 86%
Weighted-average fair value of purchase rights granted under the purchase plan		$	7.66			$	5.07			$	9.19			$	5.88

          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 21.0% and 8.0% for its employees’ options and directors’ and officers’ options, respectively. The Company also has assumed an annualized forfeiture rate of 55.0% and 67% for its employee stock purchases for the three months ended September 30, 2008 and 2007, respectively. Accordingly, as of September 30, 2008, the Company estimated that the stock-based compensation for the options not expected to vest was approximately $4.1 million. Therefore, the unrecorded deferred stock-based compensation balance related to stock options was adjusted to approximately $10.1 million after including estimated forfeitures. This will be recognized over a weighted-average period of approximately 2.9 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.

Restricted Stock Awards

          On September 16, 2008, the Company’s Board of Directors approved the issuance of restricted stock awards to employees. A total of 25,900 restricted shares were granted and will vest with respect to 100% of the shares on August 24, 2009. The restricted stock awards were valued at fair market value at the date of grant and the Company assumed an annualized forfeiture rate of 21.0% for these awards.

          As of September 30, 2008, the Company estimated that the stock-based compensation for the awards not expected to vest was approximately $69,000. Therefore, the unrecorded deferred stock-based compensation balance related to restricted stock was adjusted to approximately $0.3 million after including estimated forfeitures. This will be recognized over a weighted-average period of approximately 0.9 years and will be adjusted for subsequent changes in estimated forfeitures on a quarterly basis.

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 on 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 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 and restricted stock activity under its equity incentive plans, and related information for the nine months ended September 30, 2008:

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

          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 third 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 September 30, 2008. This amount changes based on the fair market value of the Company’s stock. Total intrinsic value of options exercised was $18,000 and $33,000 for the three months ended September 30, 2008 and 2007, respectively, and $1.6 million and $0.1 million for the nine months ended September 30, 2008 and 2007, respectively.

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

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

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 immediately exercisable 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 the Company’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, vested with respect to 100% of the shares on August 22, 2008. In the nine months ended September 30, 2008, a total of 28,400 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 Purchase Plan in November 2000. The 2000 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 2000 Purchase Plan. In addition, the aggregate number of shares reserved for issuance under the 2000 Purchase Plan increases automatically on January 1 of each year starting by an amount equal to 1% of the total outstanding shares of the Company on the immediately preceding December 31. A total of 14,760 and 6,527 shares were purchased under the 2000 Purchase Plan during the three months ended September 30, 2008 and 2007, respectively, and a total of 28,382 and 84,093 shares were purchased during the nine months ended September 30, 2008 and 2007, respectively. As of September 30, 2008, 885,405 shares had been issued under the 2000 Purchase Plan. As of September 30, 2008, the total compensation cost related to options to purchase the Company’s common stock under the 2000 Purchase Plan but not yet recognized was approximately $79,000  will be recognized on a straight-line basis over a weighted-average period of approximately 0.9 years.

9. Stockholders’ Equity

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

		Nine Months Ended September 30,
(In thousands)		2008				2007
Beginning balance:		$	1,601			$	42,683
Net income (loss)			30,816				(39,257	)
Proceeds from stock option exercises and ESPP			441				1,826
Proceeds from exercise of warrants			204				—
Stock-based compensation expense			3,728				970
Net proceeds from direct placement offering of common stock and warrants			—				11,600
Net proceeds from issuance of preferred stock			—				6,966
Beneficial conversion feature of preferred stock			—				3,630
Deemed dividend for preferred stock’s beneficial conversion feature			—				(3,630	)
Other comprehensive income			161				95
Ending balance:		$	36,951			$	24,883

          The corresponding changes in shares of the Company’s common stock outstanding, adjusted for the August 2007 one-for-20 reverse split, during the nine months ended September 30, 2008 and 2007, are summarized below:

		Nine Months Ended September 30,
		2008				2007
Beginning balance:			12,021,388				9,893,820
Shares issued from stock option exercises and ESPP			40,545				127,691
Shares issued from warrant exercises			22,655				—
Shares issued from stock option exercises of par value stock options			122,000				—
Shares issued of restricted stock			25,900				—
Stock repurchased and retired			(28,400	)			—
Shares from direct placement offering of common stock and warrants			—				2,000,000
Refund of fractional shares due to reverse stock split			—				(123	)
Ending balance:			12,204,088				12,021,388

Outstanding Warrants

          In September 2007, warrants to purchase an aggregate of one million shares of the Company’s common stock 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 September 30, 2008:

Issuance

Number of

Price per

Date

Shares

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 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, prior and in preference to the Company common stock, at a rate of $0.60 per calendar year when and if declared by the Company’s Board of Directors. 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.

Recent Developments

          On November 16, 2008, pursuant to the patent license agreement described below in Note 16, AMD agreed to transfer to the Company 700,000 shares of the Company’s Series B Preferred Stock held by AMD.

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. 

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

          For the three months ended September 30, 2008 and 2007, options, warrants and convertible preferred stock to purchase approximately 1.5 million and 2.5 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 nine months ended September 30, 2008 and 2007, options, warrants and convertible preferred stock to purchase approximately 1.6 million and 2.5 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 nine months ended September 30, 2008, the Company recorded a credit of $(0.1) million and an expense of $0.7 million of restructuring charges, respectively, compared to $0.2 million and $8.9 million over the comparable periods in 2007, respectively.

          The Company recorded termination and severance charges of $7.2 million related to a workforce reduction during the first nine 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 $1.7 million for the first nine months of 2007 for rented facilities, net of estimated sublease income.

          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. Reversal of $0.1 million as a change in estimate was recorded during the three months ended September 30, 2008. The accrued restructuring liabilities as of September 30, 2008 are expected to be paid during the current fiscal year.

          Accrued restructuring charges consist of the following at September 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			0				—				—
Cash drawdowns			(924	)			—				(924	)
Balance as of June 30, 2008		$	460			$	51			$	511
Restructuring charges			—				—				—
Change in estimates			(97	)			—				(97	)
Cash drawdowns			(11	)			(51	)			(62	)
Balance as of September 30, 2008		$	352			$	—			$	352

12. Business Segments and Major Customers

          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 nine months ended September 30, 2008 and 2007:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Japan			*	%			97	%			*	%			93	%
North America			99	%			*	%			95	%			*	%
Other			*	%			*	%			*	%			*	%

          Revenues are highly concentrated among those customers that account for more than 10% of revenues for a particular period. For the three months ended September 30, 2008 and 2007 there was one such customer, respectively, that accounted for 99% and 97% respectively, of total revenues. For the nine months ended September 30, 2008 and 2007 there were one and two such customers, respectively, that accounted for 95% and 93%, respectively, of total revenues.

          Long lived assets of $0.4 million and $3.5 million as of September 30, 2008 and December 31, 2007, respectively, were located entirely within the United States.

13. Commitments and Contingencies

          The Company’s lease of 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 facility and certain equipment under non-cancelable operating leases expiring through 2009.

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

		Future Minimum Payments Due by Period
						Remainder of
(In thousands)		Total				2008			2009
Operating leases(1)		$	270			$	68			$	202
Unconditional contractual obligations(2)			1,000				200				800
Total		$	1,270			$	268			$	1,002

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 ,” 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 nine months ended September 30, 2008 and 2007, no interest related to unrecognized tax benefits was recorded.

          At September 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.

      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 alleged 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.

16. Subsequent Events

Patent License Agreement with AMD

          On November 16, 2008, the Company entered into a patent license agreement with AMD. The agreement grants a non-exclusive license under Transmeta’s patent to AMD, and includes FoundryCo, which AMD recently announced as part of its Asset Smart strategy. Under the terms of the agreement, AMD will transfer to Transmeta 700,000 shares of Transmeta’s Series B Preferred Stock held by AMD.

Merger Agreement with Novafora

          On November 17, 2008, the Company announced that the Company had entered into a Merger Agreement to be acquired by Novafora for $255.6 million in cash, subject to working capital and other adjustments, in a transaction where Transmeta would be merged with and into a wholly-owned subsidiary of Novafora. The Merger Agreement provides, among other things, that Transmeta may not enter into any future licensing transaction prior to closing of the merger without Novafora’s consent.

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.

          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 September 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.

          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.

Patent License Agreement with AMD

          On November 16, 2008, we entered into a patent license agreement with AMD. The agreement grants a non-exclusive license under Transmeta’s patent to AMD, and includes FoundryCo, which AMD recently announced as part of its Asset Smart strategy. Under the terms of the agreement, AMD will transfer to Transmeta 700,000 shares of Transmeta’s Series B Preferred Stock held by AMD.

Merger Agreement with Novafora

          On November 17, 2008, we announced that we had entered into a Merger Agreement to be acquired by Novafora for $255.6 million in cash, subject to working capital and other adjustments, in a transaction where Transmeta would be merged with and into a wholly-owned subsidiary of Novafora. The Merger Agreement provides, among other things, that Transmeta may not enter into any future licensing transaction prior to closing of the merger without Novafora’s consent.

Results of Operations

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

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