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Article by DailyStocks_admin    (06-19-08 06:25 AM)

Filed with the SEC from Jun 5 to Jun 11:

Transmeta (TMTA)
Riley Investment Management said that it recently sent Transmeta a demand for a list of shareholders for the purpose of soliciting proxies and communicating with investors about the company's 2008 annual meeting.
In mid-May, Riley said it was nominating Bryant Riley and Melvin Keating for election to the company's board at the upcoming shareholders' meeting.
Riley previously expressed interest in acquiring the processor-technology company for $15.50 a share, but Transmeta said the offer undervalued the company. Riley has 1,113,133 shares (9.2%).
BUSINESS OVERVIEW

General

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. 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.

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.

In 2008, we will focus on developing and licensing our advanced technologies and intellectual property as our primary line of business.

Our Licensing Business

We began the commercial licensing of certain of our intellectual property and advanced computing and semiconductor technologies in 2003, and this now constitutes our core business.

We have derived most of our licensing revenue from licensing agreements relating to our proprietary LongRun2 technologies for advanced power management and transistor leakage control. Since March 2004, we have received more than $38 million in license revenues from four licenses of our LongRun2 technologies to NEC, Fujitsu, Sony and Toshiba. Those licensing agreements include deliverable-based technology transfer fees, maintenance and service fees, and subsequent royalties on products incorporating our licensed technologies. In 2007, as part of the Intel settlement agreement, we granted to Intel a license to our LongRun and LongRun2 technologies. We intend to continue our efforts to license our advanced power management technologies to other semiconductor companies.

Our LongRun2 technologies are a suite of advanced power management, leakage control and process compensation technologies that can reduce leakage power and process variations in semiconductor devices that are designed and manufactured in advanced submicron geometries. We believe that our proprietary LongRun2 technologies offer a unique and valuable solution to certain problems that result from continued process geometry scaling in the semiconductor industry. As semiconductor manufacturing geometries continue to shrink, the industry’s conventional approach to process scaling becomes increasingly complicated by two problems: increased process variation, which results in manufacturing yield loss and cost increases, and increased transistor leakage, which in turn increases power consumption in semiconductor devices. Our LongRun2 technologies address these problems by permitting post-manufacturing correction of process variation and optimal control of transistor leakage. Our LongRun2 technologies include advanced algorithms, innovative circuits, unique devices and structures, process techniques, software and manufacturing optimization methods. Advantages of our LongRun2 technologies include:


• post-manufacturing correction of process variation

• optimal control of transistor leakage

• reduction of active and standby power

• patented area-saving interconnect technology

More recently, we have also sought to license our advanced microprocessor and computing technologies and intellectual property to other companies. We currently hold more than 275 issued and pending U.S. patents covering diverse computing technologies. In 2007, as part of our settlement agreement with Intel, we granted to Intel a worldwide non-exclusive license to all of our patents and patent applications, including any patent rights later acquired by us, now existing or as may be filed during the next ten years. We are seeking to license our microprocessor technologies and patents to other companies for value, and we have recently granted some limited evaluation licenses to selected companies as a means of promoting some of our technologies for commercial licensure.

Our Services Business

We provide engineering and support services as an important element of our technology licensing business, but we discontinued pursuing engineering services as a separate line of business in 2007.

In 2005, 2006 and the first quarter of 2007, we derived substantial revenue from performing engineering services for Sony and Microsoft under contracts that we completed in the first quarter of 2007. In spite of our successful execution on our services work, the demand for such services was unpredictable and varied from quarter to quarter, and we determined that the high cost structure and low growth potential of our engineering services business was not consistent with our business model in 2007. In 2007, we restructured our operations to realign our headcount and expenses with our core business of licensing technology and intellectual property.

Our Product Business

In 2007, we restructured our operations and exited the business of selling microprocessor products. Historically, our product business focused on designing, developing and selling energy efficient x86-compatible microprocessor products, including products in both our Crusoe ® and Efficeon tm microprocessor families. We put most of our microprocessor products to end-of-life status in 2005, and we derived only minimal product revenue from sales of our Crusoe and Efficeon microprocessors in 2006. In June 2006, we entered into an agreement with AMD, providing for AMD to distribute, on an exclusive basis worldwide, a special version of our 90 nanometer Efficeon microprocessor designed for Microsoft’s FlexGo technology. 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 have not received any production orders for our special FlexGo-enabled Efficeon products. Accordingly, we recorded an inventory write down for our remaining 90 nanometer Efficeon products as of December 31, 2006.

Manufacturing

In 2007, we reduced our workforce and effectively ceased our operations relating to manufacturing support for our microprocessor products. Historically, we used Fujitsu, a third-party manufacturer for fabrication of wafers for our 90 nanometer Efficeon products. ASE performed the testing, assembly and packaging of our 90 nanometer Efficeon products.

Customers and Concentration

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 implementing our licensed technologies.

As of December 31, 2007, we have licensed our proprietary LongRun2 and advanced power management technologies to NEC, Fujitsu, Sony, Toshiba and Intel. In 2007, we received sample shipment royalties from NEC for products using Transmeta’s LongRun2 technologies that were sold up to September 30, 2007. We expect to recognize in the first quarter of 2008 royalty revenue from production shipments made by NEC in the fourth quarter of 2007.

In 2007, under our settlement agreement with Intel, we agreed to grant Intel a perpetual, worldwide non-exclusive license to all of our patents and patent applications, including any patent rights later acquired by us, now existing or as may be filed during the next ten years. The settlement agreement also provides for us to make a technology transfer of our now-existing LongRun and LongRun2 technologies to Intel.

In 2007, we derived services revenue from our performance of LongRun2 technology-related services for Toshiba. In addition, we completed our performance of engineering services under design services agreements with Sony and Microsoft.

In 2007, we derived $0.2 million of product revenue from our sales of previously fully-reserved microprocessor products in our Crusoe and Efficeon product lines.

For 2005, revenues from Sony, Fujitsu and HP each accounted for greater than 10% of our total revenues. For 2006, revenues from Sony, Microsoft and Toshiba each accounted for greater than 10% of our total revenues. For 2007, revenues from Sony and Toshiba each accounted for greater than 10% of our total revenues.

Competition

The development of power management and transistor leakage control technologies is an emerging field subject to rapid technological change, and our competition for the development and licensing of such technologies 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 offering or demonstrating 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. Our current and prospective licensees are larger, technologically sophisticated companies, which generally have internal efforts to develop their own technological solutions. We expect to compete against any emerging competition on the basis of several factors, including the following:


• technical innovation;

• performance of our technology;

• compatibility with other semiconductor design, materials and manufacturing choices by current and prospective licensees;

• sufficient technical personnel available to provide relevant services and technical support; and

• reputation and branding.

Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, product development and marketing resources, greater name recognition, significantly greater influence and leverage in the industry and much larger customer bases than we do. We may not be able to compete effectively against current and potential competitors, especially those with significantly greater resources and market leverage.

Intellectual Property

Our success depends upon our ability to secure and maintain legal protection for the proprietary aspects of our technology and to operate without infringing the proprietary rights of others. We rely on a combination of patents, copyrights, trademarks, trade secret laws and contractual restrictions on disclosure to protect our intellectual property rights. Our intellectual property rights include numerous issued U.S. patents, with expiration dates ranging from 2011 to 2026. We also have a number of patent applications pending in the United States and in other countries. It is possible that no more patents will be issued from patent applications that we have filed. Our existing patents and any additional patents that may be issued may not provide sufficiently broad protection to protect our proprietary rights. We hold a number of trademarks, including Transmeta, LongRun, LongRun2, Code Morphing software, Crusoe, Efficeon, and AntiVirusNX.

Legal protections afford only limited protection for our technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may not be able to prevent misappropriation of our technology or deter others from developing similar technology. Furthermore, policing the unauthorized use of our products or technology is difficult. Leading companies in the semiconductor industry have extensive intellectual property portfolios relating to semiconductor technology. From time to time, third parties, including these leading companies, may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies and related methods that are important to us. We have received, and may in the future receive, communications from third parties asserting patent or other intellectual property rights covering our products. There are currently no such third party claims that we believe to be material. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to defend against claims of infringement or invalidity, or to determine the validity and scope of the proprietary rights of others

In October 2006, we filed a lawsuit against Intel in the United States District Court for the District of Delaware for infringement of ten of our U.S. patents covering computer architecture and power efficiency technologies. Our complaint, as amended, charged Intel with infringing 11 Transmeta patents by making and selling a variety of microprocessor products, and requested an injunction against Intel’s sales of infringing products as well as monetary damages. Intel filed its answer in January 2007, denying infringement of any of the Transmeta patents and asserting that all of our patents in suit are invalid and unenforceable for inequitable conduct. Intel’s answer also included counterclaims alleging that we infringed seven Intel patents by making and selling our Crusoe and Efficeon family of processors. Intel requested an injunction against our sales of infringing products as well as monetary damages. In February 2007, we filed our reply to Intel’s counterclaims, denying infringement of any of the Intel patents and contending that all of the Intel patents are invalid and that three of the Intel patents are unenforceable for inequitable conduct. Intel also filed requests with the Patent and Trademark Office (PTO) for reexamination of all 11 of our patents in suit. In October 2007, we entered into and announced a binding term sheet with Intel to settle all claims between Transmeta and Intel. On December 31, 2007, we and Intel entered into a settlement, release and license agreement and a LongRun and LongRun2 technology license agreement to effectuate that settlement. The settlement, release and license agreement provides for Intel to make an initial $150 million payment to us within 30 days of December 31, 2007, as well as annual payments of $20 million on January 31 of each of the next five years, 2009 through 2013, for total payments of $250 million. The agreement grants Intel a perpetual non-exclusive license to all of our patents and patent applications, including any patent rights later acquired by us, now existing or as may be filed during the next ten years. We also agreed to transfer technology and to grant to Intel a non-exclusive license to our LongRun and LongRun2 technologies and future improvements. Intel granted us a covenant not to sue us for development and licensing to third parties of our LongRun and LongRun2 technologies. Finally, we agreed to dismiss our patent litigation with prejudice and for a mutual general release of all claims between the parties, with each party to bear its own costs. On January 28, 2008, Intel made and we received the initial payment of $150 million. On January 31, 2008, we and Intel jointly filed a stipulation of dismissal with the United States District Court in Delaware dismissing this case with prejudice.

Employees

At December 31, 2007, we employed 35 people in the United States. Of these employees, 24 were engaged in research and development and 11 were engaged in sales, general and administrative functions. We believe that our employee relations are good. None of our employees is subject to any collective bargaining agreements. We believe that our future success depends in part upon our continued ability to retain and hire qualified personnel.

CEO BACKGROUND

R. Hugh Barnes has served as Chairman of our Board of Directors since May 2007, as a director of Transmeta since November 1998, and as President and Chief Operating Officer of Transmeta from October 2001 to April 2002. Mr. Barnes served as a business advisor to Transmeta from March 1997 to November 1998. From April 1984 to January 1997, Mr. Barnes was employed at Compaq Computer Corporation, a computer manufacturer, where he held a variety of positions, most recently as Vice President and Chief Technical Officer. Mr. Barnes also serves on the Board of Directors of several privately held companies. Mr. Barnes holds a B.S. in electrical engineering from Iowa State University.

Murray A. Goldman has served as a director of Transmeta since November 1998, as Chairman of our Board of Directors from November 1998 to May 2007, and as Chief Executive Officer from October 2001 to April 2002. Dr. Goldman served as a business advisor to Transmeta from March 1997 to November 1998. From July 1969 to January 1997, Dr. Goldman was employed at Motorola, a provider of integrated communications solutions and embedded electronic solutions, where he held a variety of positions, most recently as Executive Vice President and Assistant General Manager of the Semiconductor Products Sector. Dr. Goldman holds a B.S. in electrical engineering from the University of Pittsburgh and an M.S. and a Ph.D. in electrical engineering from New York University.

Lester M. Crudele has served as a director of Transmeta since June 2005 and was appointed as President and Chief Executive Officer of Transmeta in February 2007. From February 2006 to June 2006, Mr. Crudele served on an acting basis as President and Chief Operating Officer of Quickfilter Technologies, Inc., a privately held fabless semiconductor company and developer of mixed signal integrated circuits. From November 2000 to May 2004, Mr. Crudele served on the Board of Directors of Banderacom, a privately held InfiniBand semiconductor company, for which he also served as President and Chief Executive Officer from November 2000 to October 2002. From December 1999 to November 2000, Mr. Crudele served on the Board of Directors and as a management consultant for Quantum Effect Devices, or QED, a developer of high-performance embedded microprocessors, until QED was acquired by PMC-Sierra in 2000. From 1997 to 1999, Mr. Crudele was employed by Compaq Computer Corporation, a computer manufacturer, where he served as vice president and general manager of Compaq’s Workstation Products Division. Mr. Crudele began his career in 1972 at Motorola, Inc., a provider of integrated communications solutions and embedded electronic solutions, where he later served as chief architect for several Motorola MC 68000-series microprocessors and also served in a variety of management positions, most recently returning to Motorola in 1990 and serving as Vice President and General Manager of its RISC Microprocessor Division from 1991 to 1997. Mr. Crudele holds a B.S. in electrical engineering from Florida Atlantic University.

Robert V. Dickinson has served as a director of Transmeta since May 2005. Mr. Dickinson has served as President, Chief Executive Officer, and a member of the Board of Directors of California Micro Devices Corporation, a supplier of application specific analog semiconductor products for the mobile handset, personal computer and digital consumer electronics markets, since April 2001. From August 1999 to April 2001, he was Vice President and General Manager of the Optical Storage Division of Cirrus Logic, Inc., a semiconductor manufacturer, where previously, starting in 1992, he served in several other senior executive roles, including President of its Japanese subsidiary. From 1988 to 1992, Mr. Dickinson held senior management positions at Western Digital Corporation, a semiconductor and disk drive manufacturer, following its acquisition of Verticom, Inc., where he served as President and Chief Executive Officer from 1987 to 1988. Mr. Dickinson holds an A.B. from University of California at Berkeley and an M.S. from the University of Washington, both in physics. He was also a Sloan Fellow at the Stanford Graduate School of Business.

William P. Tai has served as a director of Transmeta since December 1995. Since June 2002, Mr. Tai has served as a general partner of Charles River Ventures, a venture capital firm. Since July 1997, Mr. Tai has also served as a general partner and managing director of Institutional Venture Management, a venture capital firm. Mr. Tai also serves on the Board of Directors of Microtune, a provider of broadband wireless components, as well as the boards of directors of several privately held companies. Mr. Tai holds a B.S. in electrical engineering from the University of Illinois and an M.B.A. from the Harvard Graduate School of Business.

T. Peter Thomas has served as a director of Transmeta since December 1995. Mr. Thomas has served as Managing Director of ATA Ventures Management LLP since April 2004 and has been a General Partner of Institutional Venture Management since November 1985. Mr. Thomas also serves on the Board of Directors of Atmel Corp., a manufacturer of a broad range of high performance non-volatile memory and logic integrated circuits, as well as several privately held companies. Mr. Thomas holds a B.S. in electrical engineering from Utah State University and an M.S. in computer science from Santa Clara University.

Rick Timmins has served as a director of Transmeta since May 2003. From January 1996 until his retirement in April 2007, Mr. Timmins was employed at Cisco Systems, Inc., a computer networking products company, where he held a series of financial management positions, most recently as Vice President of Finance. From January 1974 until December 1995, Mr. Timmins was employed at Motorola, a provider of integrated communications solutions and embedded electronic solutions, where he held a series of financial management positions, most recently as Vice President and Controller of the Microprocessor, Memory and Microcontroller Group. Mr. Timmins also serves on the Board of Directors of Ultratech Stepper, Inc., a developer and manufacturer of photolithography equipment used in the fabrication of semiconductor and nanotechnology components. He holds a B.S. in Accounting and Finance from the University of Arizona and an M.B.A. from St. Edward’s University in Austin, Texas. Mr. Timmins is a Certified Public Accountant.

MANAGEMENT DISCUSSION FROM LATEST 10K

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. 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.

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.

In 2008, we will focus on developing and licensing our advanced technologies and intellectual property as our primary line of business.

2007 Results

As a result of our 2007 operations, we reported total revenue of $2.5 million, a $46.1 million decrease compared to $48.6 million in revenue for the 2006 year. Our total revenue decreased primarily due to decreases in service revenue of $34.7 million, license revenue of $9.9 million, and product revenue of $1.5 million.

As a percentage of total revenue, our overall gross margin was 31.8% in fiscal 2007, compared to 50.1% in fiscal 2006. The reduced gross margin was due primarily to fiscal 2007’s decrease in license revenues, partially offset by fiscal 2007’s decrease in impairment charges of $1.4 million.

Our product revenue decreased to $0.2 million in 2007 from $1.7 million in 2006, with gross margins of 52.1% and 81.9%, respectively. Our license revenue decreased to $0.1 million in 2007 from $10.0 million in 2006, with gross margin nearly 100% for both years. The decrease in license revenue reflects a one-time non LongRun2 technology license of $0.1 million in 2007 and $3,000 in royalties, compared with one new LongRun2 license in 2006. Our service revenues decreased to $2.2 million in 2007 from $36.9 million in 2006, with gross margins of 43.6% and 40.2%, respectively. The decrease in service revenue is primarily related to completion of Sony and Microsoft engineering service contracts in the first quarter of 2007. Our total operating expenses were $61.9 million in fiscal 2007, compared to $50.1 million of expense in fiscal 2006, an increase of $11.8 million. These consisted primarily of an $8.0 million increase in restructuring charges, $13.6 million increase in selling, general and administrative costs mostly related to Intel litigation and settlement, a decrease of $9.3 million in research and development expenses primarily related to fiscal 2007 reductions in the engineering workforce, and $0.5 million of impairment decreases.

In fiscal 2007, we incurred a net loss attributable to common shareholders of $66.8 million while generating negative cash flows from operations of $43.5 million. This compares to fiscal 2006 in which we incurred a net loss of $23.5 million and negative cash flows from operations of $19.9 million.

Our cash and cash equivalents and short-term investment balances were $18.6 million at December 31, 2007, as compared to $41.6 million at December 31, 2006.

Operating Gain on Intel Litigation Settlement

On December 31, 2007, we entered into a settlement with Intel resolving our patent litigation and licensing to Intel our patents and our LongRun and LongRun2 technologies. The Intel settlement agreements provide for Intel to make an initial $150 million payment to us within 30 days after December 31, 2007, as well as annual payments of $20 million each on January 31st of years 2009 to 2013, for total payments of $250 million.

We applied Accounting Principles Board Opinion No. 21 “Interest on Receivables and Payables” in recording the present value of $234.6 million for both the receivables and the deferred operating gain in fiscal 2007. 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 the years 2008 to 2013.

We expect 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 us during the ten-year capture period cannot be determined. We 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 we expect to recognize the entire present value of $234.6 million as a ratable ten-year operating gain from litigation settlement of $23.46 million per year in the years 2008 through 2017.

Results of Operations

Total Revenue

Revenues are generated from three types of activities: Product, License and Service. Product revenues consist of sale 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 decreased by $46.1 million to $2.5 million in fiscal 2007 from $48.6 million in fiscal 2006. Total revenue decreased by $24.1 million to $48.6 million in fiscal 2006 from $72.7 million in fiscal 2005.

Product Revenues. Product revenue declined $1.5 million to $0.2 million in fiscal 2007 from $1.7 million in fiscal 2006. The decline was primarily attributable to final production runs of our 90 nanometer Efficeon microprocessors in fiscal 2006, with modest sales of previously reserved inventory in fiscal 2007. Product revenue declined $22.9 million to $1.7 million in fiscal 2006 from $24.6 million in fiscal 2005. The decline was primarily attributable to the end-of-life status announced January 2005 for the Crusoe and 130 nanometer Efficeon product families, with final production runs in the fourth quarter of 2005. We have exited the business of selling microprocessor products and expect no product revenues in fiscal 2008.

License Revenue. License revenue decreased $9.9 million to $0.1 million in fiscal 2007 from $10.0 million in fiscal 2006. License revenue in 2007 consisted of $0.1 million of one-time non LongRun2 technology fees and $3,000 in royalties. The fiscal 2006 license revenue of $10.0 million reflected technology transfers made to our fourth customer under a LongRun2 technology license agreement. License revenue decreased $9.6 million to $10.0 million in fiscal 2006 from $19.6 million in fiscal 2005, as fiscal 2006 had a single LongRun2 license customer and fiscal 2005 had two LongRun2 license customers.

We expect that our license revenue will vary from period to period and 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 our licensees.

In 2008, we expect to receive royalty revenue on production shipments from our first LongRun2 licensee. As we announced on Feb 6, 2008, we expect to recognize approximately $215,000 in royalty revenue in the first quarter of 2008 from our first licensee. 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.

Service Revenue. Service revenue is comprised of three sub-types: (i) maintenance and technical support services revenue; (ii) fixed fee development services revenue; and (iii) time and materials based design services revenue. Service revenues decreased by $34.7 million to $2.2 million in fiscal 2007 from $36.9 million in fiscal 2006. This decrease reflects the completion of Sony and Microsoft engineering service contracts in first quarter of 2007. Service revenues increased by $8.4 million to $36.9 million in fiscal 2006 from $28.5 million in fiscal 2005, primarily as the result of recognition of $9.8 million of fixed fee development service revenues in the first quarter of fiscal 2006. 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.

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 containing our microprocessors. Revenues are highly concentrated among those customers each comprising more than 10% of annual revenue. For fiscal years 2007, 2006, and 2005 there were two, three and three such customers that accounted for 89%, 96% and 83% of total revenues, respectively.

Customer accounts receivable are highly concentrated among those customers each comprising more than 10% of current receivables. For the balances as of December 31, 2007 and 2006, a single customer each year accounted for almost 100% of customer receivables.

Cost of Product Revenue

The $0.2 million decrease in our cost of product revenue in fiscal 2007 versus fiscal 2006 was primarily due to cessation of our operations relating to microprocessor production support and exiting the business of selling microprocessor products in 2007. Also the product sales in both fiscal 2007 and 2006 were related to shipment of previously written-down and fully reserved Efficeon 90 nanometer inventory, resulting in gross margin for the products business of 52.1% and 81.9% for fiscal 2007 and 2006, respectively.

The $12.0 million decrease in our cost of product revenue in fiscal 2006 versus fiscal 2005 reflects the curtailment of major production that occurred with end-of-life status for certain microprocessors at the end of 2005. Gross margin for the products business was 81.9% and 50.2% for fiscal 2006 and 2005, respectively.

Cost of License Revenue

The fairly minimal cost of license revenue represents an allocation of compensation cost of engineering support from the LongRun2 group dedicated to completing the transfer of the licensing technology.

Cost of Service Revenue

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

The decrease in costs of service revenue of fiscal 2007 as compared to fiscal 2006 was $20.8 million as a result of a $15.7 million decrease in fiscal 2007 headcount related costs due to a decline in billable contractual design and engineering services and $5.1 million decrease due to a one-time occurrence of fixed fee development service costs during fiscal 2006.

The increase in cost of service revenue of fiscal 2006 as compared to fiscal 2005 was $6.1 million as a result of a first-time occurrence of $5.1 million of fiscal 2006 fixed fee development service costs and $1.8 million of stock based compensation applicable to headcount associated with design and engineering design revenues, partially offset by a $0.6 million decrease in fiscal 2006 headcount cost due to a decline in billable contractual design and engineering services and a first-time occurrence of $0.2 million in fiscal 2005 license related maintenance and support service cost.

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 an $1.8 million inventory impairment for our remaining 90 nanometer Efficeon products as of December 31, 2006. In the first quarter of 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.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

As Transmeta has negligible revenues for third quarter and nine months-to-date in fiscal 2007, compared to the prior year periods, percentage to sales comparisons are not meaningful below the level of gross profit, with current year revenues insignificant compared to operating expenses.

Total Revenue

Revenues are generated from three types of activities: product, license and services. Product revenues consist of sale of x86-compatible software-based microprocessors. License revenues consist of deliverable-based technology transfer fees from licensing advanced power management and other proprietary technologies. Services 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.
Product Revenues. Product revenue in the three and nine months ended September 30, 2007 decreased by $0.5 million and $1.3 million, respectively, over the comparable periods in fiscal 2006. The decrease was due to the decline in our sales of end-of-life microprocessor products.
As a result of our recent operational streamlining and restructuring activities, we have ceased our operations relating to microprocessor production support and exited the business of selling microprocessor products.
License Revenue. We recognized license revenue of approximately $1,000 in fiscal 2007 and $10.0 million in fiscal 2006 during both the three month and the nine month periods, respectively. The $10.0 million revenue recorded in September 2006 represents a LongRun2 license sold to Toshiba. We are focused on developing and licensing our advanced technologies and intellectual property as our primary line of business in 2007.
Services Revenue. Services revenue is comprised of three sub-types: (i) maintenance and technical support services revenue; (ii) fixed fee development services revenue; and (iii) time-and-materials-based design services revenue.

Services revenues in the three and nine months ended September 30, 2007 decreased by $6.8 million and $32.5 million, respectively, over the three and nine months ended September 30, 2006. The 2007 decrease in services revenue was partly attributable to the lack of any Sony Group revenue for engineering support under its time-and-materials-based design services contract after $1.8 million for the first quarter of 2007 (which contributed decreases of $6.7 million and $22.9 million for the three and nine months ended September 30, 2007 vs. corresponding periods in 2006). There was no revenue for fixed fee development services business from Microsoft after June 2006 (which provided zero and $9.8 million for the three and nine months ended September 30, 2006). Added to these effects were a $0.1 million decrease and $0.2 million increase for the three and nine months ended September 30, 2007, respectively, under a time & materials contract for an existing LongRun2 licensing customer.
Deferred income related to services was zero and $47,000 at September 30, 2007 and September 30, 2006 respectively.
Maintenance and Technical Support Services Revenue. We offer maintenance and technical support services to our LongRun2 licensees. We recognize revenue from maintenance agreements based on the fair value of such agreements over the period in which such services are rendered. Technical support services are provided based on engineering time and the fees are based on mutually agreed billing rates. There was no maintenance and technical support services revenue nor cost of revenue for the three and nine months ended September 30, 2007 and 2006, respectively.
Fixed Fee Development Service Revenue . Beginning from the second quarter of fiscal 2005, we entered into a series of related fixed-fee agreements for providing engineering and development services. Certain portions of the fixed fees are paid to us upon achieving certain defined technical milestones. We generally have deferred the recognition of revenue and the associated costs until the project has been completed and we have met all of our obligations in connection with the engineering and development services and have obtained customer acceptance for such completed deliverables. Under the criteria set forth in SOP 81-1, we have elected to segment our fixed fee revenue and related costs into a recognized portion and a deferred portion. Accordingly, in the three and nine months ended September 30, 2006, we recognized zero and $9.8 million of fixed fee revenue, respectively. In the three and nine months ended September 30, 2007, there was no earned nor deferred fixed fee revenue nor cost of revenue reflected in our Statement of Operations and Balance Sheet.
Time and Materials Based Design Service Revenue. Beginning from the second quarter of fiscal 2005, we began providing design and engineering services under a significant design services agreement to work on advanced technical projects for Sony. We recognize the services revenue and related direct cost of services, the latter consisting primarily of assigned staff compensation related costs using the time and materials method, as work was performed. The Sony time and materials based contract expired on March 31, 2007. As a result of our recent operational streamlining activities, we have ceased to pursue delivery of engineering services under time and materials based revenue contracts as a separate line of business. For the three and nine months ended September 30, 2007, the Sony time and materials contract included no revenue and $1.8 million revenue, respectively and a time and materials contract for an existing LongRun2 licensee included $43,000 and $0.4 million revenue, respectively.
Costs of Revenues
Costs of revenues consist of cost of product revenue, cost of license revenue and cost of services revenue.

For the three months ended September 30, 2007 and 2006, there was neither significant cost of product revenue nor any impairment charges. For the nine months ended September 30, 2007 compared to the same period in 2006, there was a net increase of $0.3 million due primarily to the impairment charge on inventory cost incurred in the first quarter of 2007 for our previously written-down and fully reserved Efficeon 90 nanometer inventory.
Product gross margins were impacted by the aforementioned management’s decision to end-of-life the microprocessor business, and the decrease in revenues and the impact of selling reserved inventory.
Licenses . Because there were negligible licensing sales for the three and nine months ended September 30, 2007, there is no associated cost of license revenue incurred for these respective periods. The $10.0 million sale of a LongRun2 license recorded in September 2006 had $39,000 of associated cost of revenue.
Services . The cost of services 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 contracts, including separate Sony design services and follow-on services performed for LongRun2 customers. Our cost of services revenue for the three and nine months ended September 30, 2007 and 2006 is summarized in the table below:

Cost of services revenue is comprised mainly of compensation and benefits of engineers assigned directly to the projects, hardware and software, and other computer support. The $3.9 million and $19.4 million decreases in cost of services revenue in the three and nine months ended September 30, 2007 compared to the same periods in fiscal 2006 reflects decreases in work for both Sony and Microsoft. Decreases in the Sony time and materials design contract revenue resulted in $3.9 million and $14.3 million decreases in cost of revenues for the three month and nine month periods, respectively. The end of Microsoft fixed fee development revenue after June 2006 accounts for the other $5.1 million decrease in cost of service revenue for the nine month period.

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