Transmeta Corporation (NDAQ:TMTA) received a letter from its largest shareholder today expressing concern over yesterday’s staggering option grants and other recent developments that have bought serious questions to light regarding the company’s strategic direction. Riley Investment Management (RIM), which owns 6.4% of Transmeta, demanded several changes to protect shareholders.

The board of directors is tasked with prudently placing the interests of shareholders above their own and those of insiders. However, last night’s option grant totaling 725,000 shares to the company’s top four executives diluted shareholders by over 5% and almost doubled the company’s historical grants on a split-adjusted basis. The timing of the grant is also very disconcerting and ironic in that it was made at historically depressed levels – essentially giving executives $5 million of value at a great cost to shareholders. Obviously, RIM viewed this as a major issue and questioned the integrity of the board.

RIM also reiterated its belief that shareholders will be best rewarded through a distribution of cash and a monetization of the company’s intellectual property as opposed to management’s plan to fund business development and evaluating potential acquisitions. RIM believes that this strategy would result in proceeds in excess of $20 per share while management’s strategy would likely result in operating expenses that eat through the guaranteed $20 million per year revenue stream from Intel by lining the pockets of management and executives.

“In light of the failures of the management team and the Board, the company’s proposed strategy is especially disturbing,” said RIM in their letter. “Transmeta shareholders should ask a simple question –- would the current management team and board be able to raise $250 million from the public market to pursue a risky strategy with operating expenses of $25 million per year and no clear path to profitability? We believe the answer is unequivocally no.”

In the end, it will be interesting to see how the board responds to this letter as it makes several points that even average investors can identify with – most notably yesterday’s option grant. Combined, these factors make TMTA a stock worth watching!

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