Transmeta's Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as other information contained in this prospectus, before deciding to invest in shares of our common stock. If any of the following risks actually occurs, our business, financial condition and results of operations would suffer. In this case, the trading price of our common stock could decline and you might lose all or part of your investment in our common stock.

  We have a history of substantial losses, expect to incur further significant losses, and do not expect to achieve profitability in the near future. We incurred net losses of $10.1 million in 1998, $41.1 million in 1999 and $43.4 million in the first half of 2000. As of June 30, 2000, we had an accumulated deficit of approximately $119.4 million. We intend to significantly increase our product development, sales and marketing, and administrative expenses. We also expect to incur substantial non-cash charges relating to the amortization of deferred compensation, which will serve to increase our net losses further. We cannot assure you that our revenue will grow and we may never achieve or maintain profitability. Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or an annual basis.

2. OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE RECOGNIZED OUR FIRST PRODUCT REVENUE IN THE FIRST HALF OF 2000.

We introduced our first Crusoe microprocessors in January 2000 and recognized our first product revenue from these products in the first half of 2000. We have manufactured limited quantities of our products to date, but have not shipped any products in volume. Thus, we have only a very limited operating history with all of our products. This limited history makes it difficult to evaluate our business. We derived substantially all of our revenue for 1997, 1998 and 1999 from license fees, but do not expect any license fee revenue in the foreseeable future. As a result, we need to generate substantial future revenue from product sales, but our ability to manufacture our products in production quantities and the revenue and income potential of our products and business are unproven. You should consider our chances of financial and operational success in light of the risks, uncertainties, expenses, delays and difficulties associated with new businesses in highly competitive technology fields, many of which may be beyond our control. If we fail to address these risks, uncertainties, expenses, delays and difficulties, the value of your investment would decline.

3. WE DEPEND ON INCREASING DEMAND FOR OUR CRUSOE MICROPROCESSORS.

We expect to derive virtually all of our revenue from the sale of our Crusoe microprocessors for the foreseeable future. We have not shipped any of these products in volume. Therefore, our future operating results will depend on the demand for Crusoe by future customers. If Crusoe is not widely accepted by the market due to performance, price, compatibility or for any other reason, or if, following acceptance, we fail to enhance Crusoe in a timely manner, demand for our products may fail to increase. If demand for our Crusoe products does not increase, our revenue will not increase.

Our success depends upon our ability to sell our Crusoe microprocessors in volume to makers of notebook computers. Due to our software-based approach to microprocessor design, we have been required, and expect to continue to be required, to devote substantial resources to educate prospective customers in the notebook computer market about the benefits of our Crusoe products and to assist potential customers with their designs. In addition, most notebook computer companies have made significant investments in designing their systems for other microprocessor technology and might incur significant costs if they were to switch to our products. Our target customers may not choose our products for technical, cost or other reasons. If our Crusoe products fail to achieve widespread acceptance in the notebook computer market, our substantial marketing and development expenditures may not be offset by increased revenue.

The growth of our business depends in part on the increased acceptance and use of Internet appliances. We depend on the ability of our target customers to develop new products and enhance existing products for the Internet appliance market that incorporate our products and to introduce and promote these products successfully. The market for Internet appliances depends in part upon the deployment of wireless technologies that enable the delivery of Internet content at a speed comparable to that of a desktop computer. The wireless technologies currently under development might not fully address the needs of mobile Internet users. If the use of Internet appliances does not grow as we anticipate, or our targeted customers do not incorporate our products into theirs, our operating results would be materially adversely affected. In addition, the market for Internet appliances is new and evolving. Internet appliance manufacturers are likely to have varying requirements. To meet the requirements of different Internet appliance manufacturers, we may be required to change our product design or features, sales methods or pricing policies. The costs of addressing these requirements could be substantial and could harm our operating results.