1 PILLSBURY WINTHROP LLP WALTER J. ROBINSON III #40632 2 2550 Hanover Street Palo Alto, CA 94304 3 Telephone: (650) 233-4500 Facsimile: (650) 233-4545 4 PILLSBURY WINTHROP LLP 5 CHARLES R. RAGAN #72319 WILLIAM O. FISHER #70841 6 MARCI A. REICHBACH #215545 50 Fremont Street 7 Post Office Box 7880 San Francisco, CA 94120-7880 8 Telephone: (415) 983-1000 Facsimile: (415) 983-1200 9 FENWICK & WEST LLP 10 TIMOTHY K. ROAKE #99539 Two Palo Alto Square 11 Palo Alto, CA 94306 Telephone: (650) 494-0600 12 Facsimile: (650) 494-1417

13 Attorneys for Defendants

14 UNITED STATES DISTRICT COURT

15 NORTHERN DISTRICT OF CALIFORNIA

16 ) 17 IN RE TRANSMETA CORPORATION ) No. C 01-02450 WHA SECURITIES LITIGATION, ) 18 ) ) Date: May 16, 2002 19 This Document Relates To: ) Time: 8:00 a.m. ) Crtm: 9, 19th Floor 20 ALL ACTIONS ) Judge: The Honorable William H. ) Alsup 21 )

22 23 DEFENDANTS’ REPLY BRIEF IN SUPPORT OF 24 MOTION TO DISMISS SECOND AMENDED COMPLAINT 25 26 27

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1 TABLE OF CONTENTS 2 Page 3 INTRODUCTION ...... 1 4 I. PLAINTIFFS PLEAD NO SECTION 11 CASE...... 1 5 A. Plaintiffs’ section 11 “performance” claim fails because it depends upon a fundamental misreading of the Prospectus...... 2 6 1. Plaintiffs do not contest that the Prospectus defined “high 7 performance” to refer to a class of processors distinguished from “low performance” processors, and plaintiffs do not 8 contend that the facts they allege suggest that Crusoe processors fell outside that defined class...... 2 9 2. Plaintiffs do not answer the text-based analysis 10 demonstrating that the phrase “highest possible performance” was not used to compare the Crusoe 11 processor to Intel chips or any other microprocessors produced by any other competitors...... 4 12 B. Plaintiffs’ opposition itself illustrates why “high performance” 13 could not be material when stripped of the context the Prospectus provides...... 5 14 C. Plaintiffs’ battery life claim argues the falsity of a statement the 15 Prospectus did not make and confuses battery life allegations with “performance” allegations...... 6 16 D. Plaintiffs’ opposition fails to demonstrate that any new 17 allegations save the remaining section 11 claims, which the Court previously dismissed...... 7 18 II. PLAINTIFFS ALLEGE NO 10b-5 CASE...... 9 19 III. PLAINTIFFS’ CONTROL PERSON ARGUMENT ADDS 20 NOTHING...... 15 21 IV. CONCLUSION...... 15 22 23 24 25 26 27

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1 TABLE OF AUTHORITIES 2 Page(s)

3 Cases 4 Baisten v. Peters, 1993 WL 39724 (N.D. Ill. Feb. 12, 1993) ...... 2 5 Brody v. Transitional Hospitals Corp., 6 280 F.3d 997 (9th Cir. 2002)...... 11 7 City of Philadelphia v. Fleming Cos., Inc., 264 F.3d 1245 ...... 11 8 Commerce Oil Refining Corp. v. Miner, 9 303 F.2d 125 (1st Cir. 1962) ...... 2 10 DeMarco v. DepoTech Corp., 149 F. Supp. 2d 1212 (S.D. Cal. 2001)...... 3 11 Fisher v. Acuson Corp., 12 No. C93-20477 RMW (EAI), 1995 WL 261439 (N.D. Cal. Apr. 26, 1995) ...... 5 13 Heliotrope Gen., Inc. v. Ford Motor Co., 14 189 F.3d 971 (9th Cir. 1999)...... 12 15 In re AgriBioTech Sec. Litig., No. CV-99-144-PMP (LRL), 16 2000 WL 1277603 (D. Nev. Mar. 2, 2000)...... 6 17 In re Convergent Tech. Sec. Litig., 948 F.2d 507 (9th Cir. 1991)...... 9, 13 18 In re Keegan Mgmt. Co. Sec. Litig., 19 794 F. Supp. 939 (N.D. Cal. 1992)...... 8 20 In re NorthPoint Communications Group, Inc., 184 F. Supp. 2d 991 (N.D. Cal. 2001)...... 5, 10 21 In re Pacific Gateway Exchange, Inc., Sec. Litig., 22 169 F. Supp. 2d 1160 (N.D. Cal. 2001)...... 15 23 In re PeopleSoft, Inc. Sec. Litig., No. C 99-00472 WHA, 2000 WL 1737936 24 (N.D. Cal. May 25, 2000)...... 14 25 In re Software Publishing Sec. Litig., No. C 93-20246 RMW (PVT), 26 1994 WL 261365 (N.D. Cal. Feb. 2, 1994) ...... 4 27 In re Splash Tech. Holdings Inc., 160 F. Supp. 2d 1059 (N.D. Cal. 2001)...... 12 28

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1 In re Stac Electronics Sec. Litig., 89 F.3d 1399 (9th Cir. 1996), 2 cert. denied, 520 U.S. 1103 (1997)...... 8, 9, 13 3 In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994)...... 15 4 Kriendler v. Chemical Waste Mgmt., Inc., 5 877 F. Supp. 1140 (N.D. Ill. 1995)...... 15 6 Sidebotham v. Robison, 216 F.2d 816 (9th Cir. 1954)...... 2 7 Steckman v. Hart Brewing, Inc., 8 Civil No. 96-1077-K, 1996 WL 881659 (S.D. Cal. Dec. 24, 1996), 9 aff’d, 143 F.3d 1293 (9th Cir. 1998)...... 8 10 Tabankin v. Kemper Short-Term Global Income Fund, No. 93 C 5231, 1994 WL 30541 11 (N.D. Ill. Feb. 1, 1994)...... 3 12 Statutes and Codes 13 Securities Act Section 15 ...... 15 14 Securities and Exchange Act 15 Section 20(a)...... 15 16 Rules and Regulations 17 Federal Rules of Civil Procedure Rule 9(b)...... 8 18 Rule 12(e) ...... 2 19 20 Other Authorities 21 5A Charles Wright, Arthur R. Miller, Federal Practice and Procedure § 1388 (1990)...... 2 22

23 24 25 26 27

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1 INTRODUCTION 2 Plaintiffs attempt to contrive a “performance” claim by extracting phrases from the 3 Prospectus and asserting that those phrases have a meaning that they do not have—indeed could 4 not have—in the context of the Prospectus. Plaintiffs then say that, when interpreted their way, the 5 phrases are false. But the law requires that the words in the Prospectus be interpreted in the 6 context of that document. As a matter of law, plaintiffs cannot fashion a case by ignoring the 7 definition of “high performance” that the Prospectus provides and asserting that, if it meant 8 something different, it would be wrong. As a matter of law, plaintiffs cannot rip the phrase 9 “highest possible performance” from its context (describing how Code Morphing software enables 10 Crusoe processors to achieve their best performance), claim that it means something completely 11 different (that Crusoe would defeat all other processors, on all tests, at all times), then sue on the 12 basis that the phrase would be wrong if misread in this manner that is contradicted by the context 13 the Prospectus provides. Plaintiffs’ “performance” claim fails because it rests on the false premise 14 that, if Transmeta had said something different than it did, the Prospectus might have been false. 15 As to the rest of their case, plaintiffs add nothing of consequence to the claims that the 16 Court dismissed on the last motion. None of the new magazine articles, and none of the 17 confidential witness allegations, supply scienter for plaintiffs’ 10b-5 claim, or provide any of the 18 facts the Court found wanting on the Intel, IBM or NEC portions of their section 11 count. 19 I. PLAINTIFFS PLEAD NO SECTION 11 CASE. 20 Plaintiffs correctly assert that their section 11 performance claim includes “additional” 21 statements from Transmeta’s Prospectus that were never included in their First Amended 22 Complaint (“FAC”). Lead Plfs’ Opp. to Defs’ Mot. to Dismiss Second Amended Complaint 23 (“LPO”) 3:9. Plaintiffs do not dispute that both the statements from the Prospectus that they 24 challenge and the reasons why those statements are allegedly false are different in the Second 25 Amended Complaint (“SAC”) than in the FAC.1 Plaintiffs argue, however, that their new pleading 26

27 1 Defendants set out the history of this transformation in their motion to dismiss the SAC (“MTD”) at 4:19-28. Plaintiffs do not contest that history. 28

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1 is immune to challenge on the theory that the Court’s order denying defendants’ motion to dismiss 2 the earlier performance claim “is binding law of this case.” LPO 1:21. Plaintiffs are wrong. 3 “A ruling denying a motion to dismiss is not the law of the case, and is not final even in the 4 district court.” Commerce Oil Refining Corp. v. Miner, 303 F.2d 125, 128 (1st Cir. 1962). See 5 also Baisten v. Peters, No. 91 C 7673, 1993 WL 39724 at *2 (N.D. Ill. Feb. 12, 1993) (“the court’s 6 previous denial of defendants’ dismissal motion does not prevent defendants from asserting the 7 defense of failure to state a claim”). Where, as here, plaintiffs amend their complaint in a manner 8 that raises new grounds, defendants may properly move to dismiss, even though the Court denied 9 an earlier motion to dismiss. Sidebotham v. Robison, 216 F.2d 816, 823 (9th Cir. 1954) (“on filing 10 a third amended complaint which carried over the causes of action of the second amended 11 complaint [as to which a motion to dismiss had been denied], the appellees were free to challenge 12 the entire new complaint”).2 13 A. Plaintiffs’ section 11 “performance” claim fails because it depends upon a 14 fundamental misreading of the Prospectus. 15 1. Plaintiffs do not contest that the Prospectus defined “high performance” to refer to a 16 class of processors distinguished from “low performance” processors, and plaintiffs 17 do not contend that the facts they allege suggest that Crusoe processors fell outside 18 that defined class. 19 Plaintiffs do not dispute that the Prospectus defined “high performance” to refer to a class 20 of processors “typically used in a mobile or desktop PC” in contrast to a class of “low 21 performance” microprocessors that did not have sufficient power “to run modern multimedia 22 applications such as MPEG–4 video movies.” Transmeta Prospectus (“TP”), Ex. A to Request For

23 2 Defendants are not asking the Court to “reconsider” the motion that they made against the 24 section 11 performance claim in the FAC. LPO 1:26-28; 3:26-28. Defendants are instead moving to dismiss the different section 11 performance claim in the SAC. See 5A Charles Wright, 25 Arthur R. Miller, Federal Practice and Procedure § 1388 at 736 (1990) (“if plaintiff voluntarily serves an amended complaint or is ordered by the court under Rule 12(e) to submit a more definite 26 statement of the claim, the revised pleading may contain new information making it subject to a defense or objection that was not previously apparent to the movant. In that case, a party may 27 move to dismiss on the newly discovered ground, even though he had filed a prior Rule 12 motion.”). 28

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1 Judicial Notice (“RFJN”) 35-36. In the context of the Prospectus, “high performance” processors 2 were those capable of running mobile Internet computers; “low performance” processors were not.3 3 MTD 5-7. 4 Plaintiffs do not claim that any of their allegations—whether based on magazine articles or 5 their unidentified confidential informant—raise any question that Crusoe processors were outside 6 that defined class of “high performance” microprocessors. Accordingly, plaintiffs fail to address 7 the central point: since the Prospectus defined what it meant by “high performance,” that 8 definition governs, and plaintiffs’ failure to allege facts to demonstrate that Crusoe was not a “high 9 performance” processor within that definition is fatal to their claim. 10 In DeMarco v. DepoTech Corp., 149 F. Supp. 2d 1212 (S.D. Cal. 2001), a biotechnology 11 company reported in a 10-K and a press release that its drug delivery product had achieved a 12 dramatically higher “response” rate than a standard chemotherapeutic agent among patients in a 13 clinical trial. The press release and the 10-K defined patient “response” and reported “response 14 rates” that were true within that definition. Plaintiffs claimed that the press release and 10-K were 15 false because far fewer patients exhibited a “response” as defined by the original protocol for the 16 clinical study. But DepoTech had never published that different definition. The court therefore 17 dismissed the securities complaint with prejudice, holding that “Plaintiffs’ attempt to manufacture 18 falsity by relying on a response definition never publicly disclosed or relied upon by DepoTech is 19 not well-taken.” 149 F. Supp. 2d at 1228. Accord Tabankin v. Kemper Short-Term Global Income 20 Fund, No. 93 C 5231, 1994 WL 30541 at *7 n.4 (N.D. Ill. Feb. 1, 1994) (granting motion to 21 dismiss; while plaintiffs contended that the fund had not invested in “high-quality” securities, the 22 prospectus had defined that term and plaintiffs had “not alleged that the investments made did not 23 meet this definition”). 24 Ignoring this basic issue, plaintiffs simply assert that “high performance” should be 25 interpreted, not by its express definition in the Prospectus, but instead “in the context of

26 3 This definition was important, as it advised investors that Transmeta was not targeting the 27 large and growing market for low power processors suited for such low-end applications as running simple address book and calendar programs in portable devices such as Palm Pilots. 28

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1 competition between Transmeta’s Crusoe chips and Intel’s Pentium chips.” LPO 5:12-13. But the 2 Prospectus simply did not use the words “high performance” to compare Crusoe processors with 3 Intel chips, and speculation that investors might have formed such an “impression” independent of 4 the Prospectus (LPO 5:16-17) cannot create a section 11 claim.4 5 2. Plaintiffs do not answer the text-based analysis demonstrating that the phrase 6 “highest possible performance” was not used to compare the Crusoe processor to 7 Intel chips or any other microprocessors produced by any other competitors. 8 To supply context, the motion to dismiss quoted the portion of the Prospectus containing 9 the sentence using the phrase “highest possible performance.” MTD 8. That context shows that 10 the Prospectus used the phrase in a section describing how Crusoe processors work and in a 11 paragraph describing the function that Code Morphing software serves in that processor. In this 12 context, the Prospectus said simply that Code Morphing software enables the Transmeta processor 13 to run an application at the “highest possible performance” and with the “lowest possible power 14 usage” that the Crusoe processor could deliver. 15 Plaintiffs do not challenge that text-based analysis. Nor do plaintiffs argue that any of their 16 magazine articles or their confidential informant allegations contain facts suggesting that Code 17 Morphing did not perform that role. 18 Instead, plaintiffs speculate that, because the Prospectus “describes Intel as a significant 19 competitor,” an investor could have formed the “overall impression” that “highest possible 20 performance” was intended to compare Crusoe processors with Intel processors. LPO 5:21-25; 21 6:23-25. But the sentence on which plaintiffs focus appears only in two related sections dedicated 22 to describing how Crusoe works. TP 36-37, 38-39. Neither of those sections contains the name 23 “Intel.” Neither of those sections refers to any rival processor. 24

25 4 Plaintiffs cite no authority from this circuit that a complaint can survive on the mere 26 surmise that an investor might have formed an “impression” contrary to a definition in an offering document. To the contrary, plaintiffs cannot divorce their analysis from specific statements and 27 rely on some “overall misleading impression.” In re Software Publishing Sec. Litig., No. C 93-20246 RMW (PVT), 1994 WL 261365, at *3 (N.D. Cal. Feb. 2, 1994). 28

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1 Moreover, other sections of the Prospectus simply preclude plaintiffs’ distorted reading of 2 the sentence they isolate. Where the Prospectus described the difficulties of penetrating the 3 notebook computer market, it warned that “target customers may not choose our products for 4 technical, performance, packaging, novelty, design, cost or other reasons.” TP 8; emphasis added. 5 Where it discussed competitors, the Prospectus cautioned that companies such as Intel “may be 6 able to develop products comparable or superior to those we offer.” TP 9; emphasis added. Where 7 it discussed the rapid pace of technological change, the Prospectus advised that the industry is 8 characterized by “ongoing customer demands for greater performance” and that “our products may 9 not be competitive” if Transmeta failed to keep pace with such demands. TP 11; emphasis added. 10 It makes no sense to read the Prospectus as saying at one point that Crusoe processors would 11 outperform all others at all times on every imaginable performance criterion when it expressly 12 cautioned on earlier pages that potential customers might choose other processors for 13 “performance” reasons, that competitors might produce “superior” products and that Transmeta 14 would not be able to successfully compete if it failed to satisfy customer demands for “greater 15 performance.” 16 B. Plaintiffs’ opposition itself illustrates why “high performance” could not be material 17 when stripped of the context the Prospectus provides. 18 Plaintiffs do not contest that a statement cannot support section 11 liability unless it is 19 material. They offer no meaningful response to the obvious point that, in the high technology 20 marketplace, virtually every product or service is described as “high” something. Such self- 21 complimentary descriptions are so commonplace as to be immaterial, and no reasonable investor 22 would rely upon them. Fisher v. Acuson Corp., No. C93-20477 RMW (EAI), 1995 WL 261439, 23 at *3 (N.D. Cal. Apr. 26, 1995) (statement that product was the “gold standard” was too vague to 24 be material). Accordingly, references in Transmeta’s Prospectus to “high performance”—if taken 25 to mean anything other than what the Prospectus defined that phrase to mean—were immaterial.5 26 5 See also In re NorthPoint Communications Group, Inc., 184 F. Supp. 2d 991, 1006 (N.D. 27 Cal. 2001) (“NorthPoint”) (“No reasonable investor would rush out to buy NorthPoint stock upon reading Fetter’s comment that NorthPoint ‘continues to be successful among the most formidable 28 names in leading companies this century,’ and that the company was nearing the end of a (continued…) DEF’S REPLY BRIEF IN SUP. OF MOT. TO 10613541v4 - 5 - DISMISS 2ND AMEND COMPL.

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1 Plaintiffs’ response that the phrase “had concrete meaning” because later magazine articles 2 referred to “low performance” (LPO 7:14-19) is a non sequitur. Plaintiffs cite no case holding that, 3 where a Prospectus defines a term, the term must be given a contrary meaning based on later 4 magazine articles that the issuer did not write. Moreover, plaintiffs’ argument simply proves 5 Transmeta’s point. The idea of relative performance is meaningful only in context. The magazine 6 articles referred to “low performance” in the context provided by those articles themselves— 7 including references to specific tests performed on particular notebook computers, none of which 8 tests purported to determine whether a processor within those notebook computers fit within the 9 “high performance” definition in the Prospectus. RFJN Exs. G, P. Given the references to these 10 specific test results, the phrase “low performance” had meaning in those articles. But the 11 Transmeta Prospectus never referenced such test results and accordingly does not supply a context 12 relating “high performance” to those tests.6 13 C. Plaintiffs’ battery life claim argues the falsity of a statement the Prospectus did not 14 make and confuses battery life allegations with “performance” allegations. 15 In the SAC, plaintiffs added a new, distinct allegation that the references to “long battery 16 life” in the Prospectus (SAC ¶¶ 30, 32-33, 38, 40) were false because “[a]ny battery savings were

17 18 (…continued) ‘landmark year.’”). It is no response to say that materiality is a factual question that should not be 19 decided on a motion to dismiss. LPO 8:17-18. Where the statement plaintiffs challenge is simply too general to support a securities lawsuit, courts regularly grant motions to dismiss. See the Gupta 20 and Acuson cases cited at MTD 10:28-11:6; In re AgriBioTech Sec. Litig., No. CV-99-144-PMP (LRL), 2000 WL 1277603, at *7 (D. Nev. Mar. 2, 2000) (“Contrary to Plaintiffs’ assertions, 21 judgments as to the materiality of disputed statements are routinely made at the motion to dismiss stage of a securities suit.”). Nor do plaintiffs create a “factual issue” by contending that their 22 allegations show the falsity of statements that, in the context of the Prospectus, Transmeta did not make. See sections I.A.1 and 2, above. 23 6 Plaintiffs do not support the materiality of the naked phrase “high performance” by a stock decline after publication of a Business Week column. LPO 8:27-9:4. The sentence plaintiffs quote 24 from that article (SAC ¶ 54) concerns battery life, not “performance” as plaintiffs have used that term elsewhere to reference scores on “benchmark” tests. Moreover, the column (reproduced in 25 full at RFJN Ex. E) does not focus on the IBM decision, let alone the reason for that decision. The focus is on financial ratios computed from publicly available information. The column says 26 outright that Transmeta’s stock is overpriced because its market capitalization to revenues ratio is too high. To whatever extent the column hurt Transmeta’s stock, it did so not by the one sentence 27 on IBM but by saying in plain language that this financial analysis showed that Transmeta was overpriced. 28

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1 minimal—only 20 to 45 minutes.” SAC ¶ 43. In their motion to dismiss, defendants pointed out 2 that the Prospectus never said how much longer notebooks containing a Crusoe processor would 3 operate on their batteries than notebooks powered by other processors; explained that Transmeta 4 could not have made any such statement because different notebooks have different batteries and 5 contain many components other than processors that draw power; and demonstrated that plaintiffs’ 6 own articles show that, although by different amounts for different computers, Crusoe processors 7 do indeed increase battery operating time. MTD 11-12. In their opposition, plaintiffs do not 8 contest any of this. Nor do they point to any allegations that call into question the specific battery 9 life statements that the Prospectus did make: that “Crusoe microprocessors consume less power 10 than other x86 microprocessors—around 1 watt or less in typical applications” (SAC ¶ 38) and that 11 Crusoe uses “less power than other x86 microprocessors” (¶ 39). 12 Instead, plaintiffs manufacture an argument by relying on a magazine report that an IBM 13 notebook with a Crusoe processor “did not live up to expectations that Crusoe would extend 14 battery life to 8 hours” (LPO 8:8-9). But the magazine article is not the Prospectus at issue on the 15 section 11 claim. The Prospectus did not say that a notebook computer equipped with Crusoe 16 would operate on a battery for “8 hours” or any other specified time period. Plaintiffs’ further 17 argument that “Crusoe chips could only increase battery length by sacrificing performance” (LPO 18 8:15-16) simply converts the battery life claim to the performance claim, which fails because it 19 ignores the rule that the Prospectus defines the context for the statements about performance that 20 the Prospectus employs. 21 D. Plaintiffs’ opposition fails to demonstrate that any new allegations save the 22 remaining section 11 claims, which the Court previously dismissed. 23 NEC Recall. The Court dismissed this claim in the FAC in part because there was 24 “nothing in the complaint to the effect that any defects were known, knowable or even in existence 25 at the time of the IPO.” Order Granting in Part and Denying in Part Defendants’ Motion To 26 Dismiss (“Order”) 11:25-12:1. Plaintiffs argue they have filled this gap by alleging that a former 27 Transmeta employee told them that, “after Crusoe chips were received from third party silicon

28 wafer manufacturers, the Company internally performed three different tests for thermal capability,

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1 chip speed, and software performance.” SAC ¶ 50; quoted at LPO 11:10-16. But none of this 2 alleges that the particular Crusoe processors used in the NEC notebooks that were recalled had 3 been subjected to any of these tests prior to the effective date of the registration statement, which is 4 the critical date for section 11. 15 U.S.C. § 77k. In re Keegan Mgmt. Co. Sec. Litig., 794 F. Supp. 5 939, 946 (N.D. Cal. 1992). Nor do plaintiffs allege that any of the three tests would have even 6 found whatever Crusoe manufacturing “defect” supposedly contributed to the NEC recall.7 7 Competition from Intel. The FAC charged that Transmeta’s express identification of Intel 8 as a significant competitor was somehow misleading because the Prospectus did not also name a 9 particular product that Intel would produce and sell in the future—an ultra-low voltage mobile 10 Pentium III—and predict that it would operate at less than one volt and at twice the speed of a 11 Transmeta processor. FAC ¶ 34c. The Court rejected this claim. Order 12-13. Plaintiffs repeat 12 this allegation in their SAC and say that it is now sufficient because “the SAC alleges that in 13 October 2000, before the [Transmeta] IPO, Intel had announced its plans to release the Mobile 14 Pentium III chip.” LPO 10:15-16. But, if the news about this new Intel chip was already in the 15 market, Transmeta could not have committed a securities violation by failing to repeat that 16 information in the Prospectus. MTD 14:12-17. Plaintiffs respond that the “general public was not 17 aware of the severity” of the risk this product posed to Transmeta. LPO 10:20-21. By the time of 18 Transmeta’s offering in early November, 2000, Intel was not in fact shipping its new processor.8 19

7 20 For the same reason, plaintiffs are wrong in contending that, since “the products were already known to be defective,” they have now answered the Court’s previous holding that 21 cautions Transmeta deliberately placed in its Prospectus “put investors on notice of the possibility of a defect affecting fewer than 300 computers.” Order 12. All the confidential informant asserts 22 is that Transmeta tested processors before shipping them. Nothing in the confidential informant allegations states that Transmeta had discovered before the IPO any “defect” in any Crusoe 23 processor that Transmeta then proceeded to ship. Plaintiffs’ failures here and elsewhere to allege facts to show that statements in the 24 Prospectus were false are particularly glaring deficiencies since plaintiffs do not contest that their section 11 claim is grounded in fraud, and Rule 9(b) accordingly applies. In re Stac Electronics 25 Sec. Litig., 89 F.3d 1399, 1405 (9th Cir. 1996), cert. denied, 520 U.S. 1103 (1997) (“Stac”); Order 7-8. Indeed, even if this were not the case, plaintiffs would still need to plead facts to make out a 26 section 11 claim. See Steckman v. Hart Brewing, Inc., Civil No. 96-1077-K, 1996 WL 881659, at *2 (S.D. Cal. Dec. 24, 1996), aff’d, 143 F.3d 1293 (9th Cir. 1998). 27 8 An October 2000 article in ZD Net News stated that an Intel vice president “said that a new 28 ultra-low-power Speedstep-based mobile Pentium III chip was in the works and should ship next (continued…) DEF’S REPLY BRIEF IN SUP. OF MOT. TO 10613541v4 - 8 - DISMISS 2ND AMEND COMPL.

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1 Transmeta was under no obligation to project in its own Prospectus whether Intel would, in fact, 2 bring this new chip through development and into production, and if so, how fast Intel’s chip 3 would operate and how much power it would use. Stac, 89 F.3d at 1402-03, 1406-07. Nor was 4 Transmeta obligated to speculate as to the “severity” of the risk posed by this yet-to-be-produced 5 competitive product. In re Convergent Tech. Sec. Litig., 948 F.2d 507, 515-16 (9th Cir. 1991) 6 (“Convergent”) (where prospectus warned of technical risks and aggressive product cost 7 objectives, issuer was not liable for failing to include internal projections of “the magnitude of 8 those risks”). 9 IBM’s “true reason” for declining to use Crusoe. The Court previously ruled that 10 Transmeta had fully discharged its disclosure obligation by stating in the Prospectus that IBM had 11 decided not to use Crusoe in its ThinkPad 240; that plaintiffs had not alleged that IBM’s “true 12 reason” for its decision was “ever communicated to anyone inside Transmeta;” and that Transmeta 13 could not be faulted for declining to include in its Prospectus any “guesswork” about IBM’s 14 reasons. Order 12-13. Plaintiffs contend that the SAC includes “new allegations regarding IBM” 15 which they set out at page 9 of their opposition. Nothing in these new allegations pleads any pre- 16 IPO communication from IBM to Transmeta setting out any “true reason” for IBM’s decision.9 17 II. PLAINTIFFS ALLEGE NO 10b-5 CASE. 18 The Court dismissed all of plaintiffs’ 10b-5 case from the FAC. Plaintiffs have recycled 19 most of the same allegations in the SAC, adding a few additional magazine articles and, 20 principally, information plaintiffs purport to have obtained from a former Transmeta employee 21 holding an unidentified position in “the product marketing department” (SAC ¶ 43). See LPO

22 23 (…continued) year.” Ex. A to the Supplemental Request for Judicial Notice, filed with this Reply (“SRFJN”). 24 Intel did not formally announce the product until late January 2001. Ex. B to SRFJN. 9 Plaintiffs offer only rhetoric—not facts—when they claim that the “reason for IBM’s 25 rejection of Crusoe chips was knowable to Defendants, both by communicating with IBM and by testing their own Crusoe products.” LPO 10:2-3. There could have been many factors—including 26 market pressure from Intel—behind IBM’s decision, and, even inside IBM, different individuals and organizational subdivisions might have evaluated those factors differently. Just as “another 27 company’s plans cannot be known to a certainty” (Stac, 89 F.3d at 1407), neither can its “true reason” for internal decisions. 28

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1 13:14 (collecting allegations referencing plaintiffs’ confidential informant). While defendants 2 address the sufficiency of plaintiffs’ 10b-5 case on a statement-by-statement basis (as did the 3 Order), it is worth noting at the outset that courts do not uphold 10-5 claims simply because 4 plaintiffs include confidential informant allegations. NorthPoint, 184 F. Supp 2d at 1000-1001. 5 Prospectus. Plaintiffs incorporate into the 10b-5 case all of the supposed 6 misrepresentations and omissions in the Prospectus. All of those allegations fail under 10b-5 for 7 the same reasons that they fail under section 11. 8 The only Prospectus issue plaintiffs separately argue under 10b-5 is their performance 9 claim. After quoting allegations that the confidential informant told them Transmeta conducted 10 tests for “thermal capability, chip speed, and software performance” (SAC ¶ 50, quoted at LPO 11 13:15-17), plaintiffs allege that “Defendants knew from their internal testing of Crusoe chips and 12 Crusoe-based products that the claims made in the Prospectus about the Crusoe products were 13 materially false and misleading” (LPO 14:7-9). 14 First, and fundamentally, all of this proceeds from plaintiffs’ mistaken premise about what 15 the Prospectus said. The Prospectus defined “high performance” processors (TP 35-36) as those 16 offering “sufficient performance for highly computational multimedia tasks such as software 17 decoding a DVD movie” (TP 36), as opposed to “low performance” processors offering 18 “performance [that] is often not sufficient to run modern multimedia applications such as MPEG-4 19 video movies.” TP 35. None of plaintiffs’ confidential informant allegations provides any fact 20 suggesting that Crusoe processors were not “high performance” processors as the Prospectus 21 defined that phrase. 22 Similarly, the Prospectus used the phrase “highest possible performance” in a paragraph 23 describing Code Morphing software’s function in the Crusoe processor, in a section describing how 24 the various hardware and software components of a Crusoe processor performed their work. None 25 of plaintiffs’ confidential informant allegations provides any fact suggesting that the description of 26 Code Morphing software’s function in the Crusoe processor was wrong or that Code Morphing 27 software failed to enable the Crusoe processor to run applications with the “highest possible

28

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1 performance” and the “lowest possible power consumption” that could be achieved using the 2 Transmeta microprocessor. 3 In short, plaintiffs’ new allegations are irrelevant. They attempt to establish the falsity of 4 statements that Transmeta did not make. 5 But even if this were not the case, the new allegations could not support a PSLRA claim. 6 The Court rejected the 10b-5 “performance claim” in the FAC in part because plaintiffs failed “to 7 plead any corroborating facts” regarding the “internal benchmark tests” that Transmeta supposedly 8 ran. Order 17:3-5. The new informant allegations are deficient for the same reason. They do not 9 say what “benchmark” tests Transmeta performed, what configurations Transmeta tested 10 (important because these tests are applied to notebook computers with many components, not just 11 processors), or what scores they received. More importantly, none of the informant allegations 12 includes facts providing a strong inference that defendants believed these tests to meaningfully 13 measure the degree to which Crusoe achieved the goals Transmeta pursued. City of Philadelphia v. 14 Fleming Cos., Inc., 264 F.3d 1245, 1265 (10th Cir. 2001) (where plaintiffs allege an omission, they 15 must plead facts to raise a strong inference that defendants knew the omitted fact was material). 16 December 4, 2000 SG Cowen Analyst Report. The Court rejected this claim in the FAC 17 because plaintiffs failed to allege specifically who at Transmeta said what to the analyst before he 18 published the report. Order 17. Plaintiffs do not contend that the SAC adds any of these missing 19 facts. With no new facts, plaintiffs’ allegations on this analyst report must fail again. 20 January 18, 2001 press release. Plaintiffs attack Mr. Ditzel’s statement that “Transmeta is 21 pleased to offer Crusoe solutions that can extend battery life in mobile computing devices” as 22 misleading because he did not add that improvements in battery life were achieved by “sacrificing 23 high performance.” LPO 17:4-14. First, even if true, Transmeta could still be “pleased” that 24 Crusoe extended battery life. Second, a statement about one characteristic of a product is not false 25 just because it does not go on to discuss another characteristic. Brody v. Transitional Hospitals 26 Corp., 280 F.3d 997, 1006 (9th Cir. 2002) (“Often, a statement will not mislead even if it is 27 incomplete or does not include all relevant facts”). Third, while plaintiffs contend that this

28 statement was misleading because “the Company had received numerous complaints about the

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1 slow performance of Crusoe-based products” (LPO 17:7-9), the SAC never identifies who 2 complained, how many complaints there were or what effect the complaints had on Transmeta’s 3 sales. See In re Splash Tech. Holdings Inc., 160 F. Supp. 2d 1059, 1070 (N.D. Cal. 2001) (“[w]hile 4 the SAC does allege that Fuji Xerox and Xerox [defendants’ sole customers for several years (id. 5 at 1063)] provided Splash with certain reports and/or forecasts, it does not plead specific facts 6 concerning the identity of the recipients, the manner in which the reports were provided, the dates 7 on which they were transmitted, or the content of those reports.”). Fourth, plaintiffs do not address 8 defendants’ argument that the SAC itself pleads that what they see as Crusoe’s “problems” had 9 been published for investors to read before this January 18, 2001 press release. MTD 19:6-12. 10 The March 7, 2001 10-K. Plaintiffs attack the same performance and battery life language 11 in the 10-K as they attack in the Prospectus. LPO 17:21-22 (the statements in the two documents 12 “are substantially the same”). All such claims fail here for the same reasons they fail in plaintiffs’ 13 section 11 and 10b-5 attacks on the Prospectus. Moreover, plaintiffs’ performance and battery life 14 claims fail for a second and independent reason: The SAC (¶¶ 54, 56, 58) demonstrates that, by 15 this time, the product issues plaintiffs allege had already been publicized. Heliotrope Gen., Inc. v. 16 Ford Motor Co., 189 F.3d 971, 980-81 (9th Cir. 1999); Order 17; MTD 19-20. Plaintiffs fail to 17 even address this separate, dispositive issue. 18 April 19, 2001 press release and first Quarter 10-Q inventory figures. Plaintiffs 19 suggest that the timing and magnitude of Transmeta’s inventory write off establish scienter. LPO 20 23:1-2. Plaintiffs’ timing argument—that the Q3 write-down is suspicious because it came “three 21 months after” the Q2 figures (LPO 23:2)—is bizarre. Companies report inventory quarterly. A 22 quarter is three months long. Accordingly, an inventory write-off will always be three months after 23 a previously reported inventory figure. As to magnitude, plaintiffs choose a deceptive percentage 24 when they say that the write-down affected “90%” of Transmeta’s inventory. LPO 23:2. 25 Transmeta was in the early stages of product sales (having only begun volume shipments in 26 September 2000) and therefore was not an inventory-heavy company. At the end of Q1, the total 27 inventory constituted only about $24 million out of a total of $400 million in assets—about 6%.

28 RFJN Ex. L.

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1 More important, plaintiffs ignore that Transmeta had disclosed in the Prospectus and its 2 later 10-K the very fact that plaintiffs allege (SAC ¶ 67) to have caused the write-down—that 3 Transmeta was transitioning to a new manufacturing process using 0.13 micron technology. 4 TP 43; RFJN Ex. K at 10. Transmeta had disclosed the risk of possible inventory write-downs in 5 both documents. TP 13; RFJN Ex. K at 29. And investors are presumed to be aware that 6 customers of high technology companies may decrease purchases of older products in anticipation 7 of newer ones. Stac, 89 F.3d at 1410; Convergent, 948 F.2d at 513. 8 April 19, 2001 press release and first quarter 10-Q revenue projection. The Court 9 previously held that plaintiffs had not alleged facts to show that the April 19 revenue projection 10 was deliberately false or misleading. “Defendants could have honestly believed that 11 notwithstanding poor reviews and competitive threats, their product’s other perceived benefits 12 would produce increased sales.” Order 19:19-21. The SAC alleges no new facts that were known 13 to defendants on April 19. The Court should therefore dismiss this 10b-5 claim again. 14 The April 19 press release claim fails for the second and additional reason that the 15 projection falls within the Reform Act’s “safe harbor” for forward-looking statements accompanied 16 by meaningful cautionary language. See MTD 22-23. Plaintiffs’ argument that the cautions were 17 “only boilerplate” (LPO 19:19) is a conclusion without analysis. They do not explain how the list 18 of specific factors in the April 19 press release or the 12 pages of detailed risk factors in the 10-K 19 (which the April 19 press release urged investors to review) could possibly be “boilerplate.” 20 Mr. Ditzel’s June 14, 2001 statement. Plaintiffs wrongly assert that Mr. Ditzel’s June 14 21 statement was a “confirmation” of the April 19 Q2 revenue estimate10 and say, without supporting 22 facts, that it was made “well after it was apparent to Company insiders that the revenue estimates 23 would not be met.” LPO 18:7-9. But their opposition points to no allegations in the SAC to even 24 suggest that, before June 14, Mr. Ditzel received any report that sales were slowing down, knew of

25 10 Mr. Ditzel referenced a “lack of visibility” and “shorter lead times in terms of orders.” RFJN Ex. N. He said only that “we can’t give any guidance that’s better or worse” than that 26 provided before and that on June 14 “we can’t advise otherwise.” Id. Plaintiffs disserve the Court by quoting passages from the oral argument on the first motion to dismiss in which the Court 27 vigorously tested how to view Mr. Ditzel’s comments. LPO 18:7-16. The Order (21:3) characterized Mr. Ditzel’s words as an “alleged ‘confirmation.’” 28

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1 any projection that revenues would be lower than projected, or understood that any customer had 2 cancelled or reduced a significant order.11 3 Instead, plaintiffs argue that the timing of the June 14 statements was suggestive given that 4 Transmeta revised its Q2 revenue forecast on June 20 (LPO 20:12-21:9) and that insiders sold 5 stock (LPO 21:10- 22:4). But the Court has already reviewed the June 14/June 20 timing and 6 concluded that the June 20 “revision is consistent with an honest reaction to changes in a business 7 environment in which a firm with modest revenues is, as the complaint alleges, heavily dependent 8 on sales to a small number of customers.” Order 21:11-13. Moreover, the circumstance that 9 Transmeta voluntarily came forward with its revision—before Q2 ended—means the timing cuts 10 against plaintiffs. Order 21:13-15 (“It is far less damning than a post hoc revision or restatement 11 that could more plausibly be regarded as forced upon the company by auditors, or compelled by a 12 desire to limit liability.”). 13 Plaintiffs fail completely to explain how stock sales that all occurred before June 14 (SAC 14 ¶ 101) could supply scienter for the later statement which, as a matter of chronology, could not 15 have affected the stock sale prices. In any event, the Court has already examined the insider sales 16 and found that they do not support scienter. Order 20:3-9. 17 June 20, 2001 conference call. Plaintiffs contend that Transmeta’s explanation for 18 revising its Q2 revenue estimate on June 20, 2001 was fraudulent because “product-specific 19 problems” really caused the downturn, rather than “macro-economic factors.” LPO 21:1-2. 20 But neither the SAC nor the opposition identifies any customer that reduced orders in Q2 because 21 of “product problems.” Nor do plaintiffs allege any study or analysis that ever told any of the 22 defendants that the downward revision was caused by any “product problem.” MTD 24:12-17.

23 11 While plaintiffs cite In re PeopleSoft, Inc. Sec. Litig., No. C 99-00472 WHA, 2000 WL 24 1737936, *2-3 (N.D. Cal. May 25, 2000) (LPO 22:5-11), the PeopleSoft plaintiffs pled: that the company admitted that it had released versions 7.0 and 7.5 with too many bugs; that government 25 customers threatened to sue over the bugs as early as 1997; that bugs in the university module surfaced in 1997 and continued to be reported to management in 1998; that Coca Cola refused to 26 buy the manufacturing module in April 1998; that field representatives told management in “highly confrontational” terms that quotas could not be met; that the company fired the naysayers; and that 27 the co-founder/president/CEO admitted that that (by mid-1998) he did not have the skill set to manage the company. Id. It is just such specific facts that plaintiffs fail to provide here. 28

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1 Plaintiffs assert that defendants must have known macro-economic trends before June 20, but do 2 not identify when such information was in fact available, much less when or how defendants 3 analyzed its impact on Transmeta. This is not sufficient. Kriendler v. Chemical Waste Mgmt., 4 Inc., 877 F. Supp. 1140, 1152 (N.D. Ill. 1995) (“there are no allegations linking Rooney’s general 5 knowledge of industry trends with the ultimately adverse financial impact of these trends on 6 CHW”). 7 III. PLAINTIFFS’ CONTROL PERSON ARGUMENT ADDS NOTHING. 8 Plaintiffs devote an entire section of their opposition to control person liability. LPO 9 23:11-24:1. Since all of plaintiffs’ underlying claims fail, however, there is no control person 10 liability. In re Pacific Gateway Exchange, Inc., Sec. Litig., 169 F. Supp. 2d 1160, 1168 (N.D. Cal. 11 2001) (section 20(a) of the Securities Exchange Act); In re Worlds of Wonder Sec. Litig., 35 F.3d 12 1407, 1428 n.9 (9th Cir. 1994) (section 15 of the Securities Act). 13 IV. CONCLUSION. 14 For all the foregoing reasons, defendants ask the Court to dismiss the SAC. 15 Dated: May 2, 2002 16 Respectfully submitted,

17 FENWICK & WEST LLP PILLSBURY WINTHROP LLP TIMOTHY K. ROAKE WALTER J. ROBINSON III 18 Two Palo Alto Square 2550 Hanover Street Palo Alto, CA 94306 Palo Alto, CA 94304 19 PILLSBURY WINTHROP LLP 20 CHARLES R. RAGAN WILLIAM O. FISHER 21 MARCI A. REICHBACH 50 Fremont Street 22 Post Office Box 7880 San Francisco, CA 94120-7880 23 By 24 William O. Fisher

25 Attorneys for Defendants 26 27

28

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