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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 For the fiscal year ended June 30, 2005
    
    Commission file number 0-20784
 TRIDENT MICROSYSTEMS, INC.
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    77-0156584
(I.R.S. Employer
Identification No.)
 1090 East Arques Avenue
Sunnyvale, California
(Address of principal executive offices)
    
    94085
(Zip code)
    
 þ o
 þ
 o o
 þ o




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TABLE OF CONTENTS
 PagePART I
    
    
    3Item 1. Business
    
    
    3Item 2. Properties
    
    
    11Item 3. Legal Proceedings
    
    
    11Item 4. Submission of Matters to a Vote of Security Holders.
    
    
    11PART II
    
    
    13Item 5. Market for the Registrants Common Stock, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    13Item 6. Selected Financial Data
    
    
    14Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    15Item 7A. Quantitative and Qualitative Disclosures About Risk
    
    
    33Item 8. Financial Statements and Supplementary Data
    
    
    35Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    62Item 9A. Controls and Procedures
    
    
    62Item 9B. Other Information
    
    
    62PART III
    
    
    63Item 10. Directors and Executive Officers of the Registrant
    
    
    63Item 11. Executive Compensation
    
    
    63Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    63Item 13. Certain Relationships and Related Transactions
    
    
    64Item 14. Principal Accountant Fees and Services
    
    
    64PART IV
    
    
    66Item 15. Exhibits and Financial Statement Schedules
    
    
    66POWER OF ATTORNEY
    
    
    69SIGNATURES
    
    
    69INDEX TO EXHIBITS FILED TOGETHER WITH THIS ANNUAL REPORT
    
    
    70EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I
 
 Item 1. Business
       3




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Markets and Applications
   Product Family
    
    Description
    
    MarketsDPTV
    
    Integrated multi-standard
video decoding, format
conversion, and image
enhancement processors
    
    Advanced TV including CRT,
plasma, LCD,
rear-projection and
front-projection display
types, AV Notebook PC,
Multi-function LCD
Monitors.HiDTV
    
    Integrated ATSC/DVB
(MPEG2) decoding, format
conversion, and image
enhancement processors
    
    Digital TV including CRT,
plasma, LCD,
rear-projection and
front-projection display
types.
 Current Digital Media Products:
  DCRe TM .
 SVP TM PX. TM TM TM TM TM
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TM TM
 SVP-LX.
 SVP-EX. TM
 PANELTVSVP.
 DPTVSVP.
 TVX2.
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PANELPRO-MM.
 PANELTV3DPRO.
 DPTV3DPRO.
 DPTVMV.
 DPTV3D.
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Products in Development:
 TM TM
 Trident and TrueVideo are registered trademarks HiDTV,
DCRe, SVPPX, SVP-LX, PanelTV SVP, DPTV SVP,
PANELPRO-MM, PANELTV3DPRO, DPTV3DPRO, DPTVMV and DPTV3D and are trademarks of the Company as
of June 30, 2005. Other trademarks used in this report are the property of their respective owners
 Graphics Products:
  Sales, Marketing and Distribution
     7




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Manufacturing
     Research and Development
  8




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Competition
   International Operations
   Intellectual Property
   9




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Backlog
  Segments
  Employees
  10




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Available Information
   
 Item 2. Properties
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Securities Holders.
  11




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Executive Officers of the Registrant
  Name
    
    Age
    
    Position
    
    Employed SinceFrank C. Lin
    
    
    60
    
    
    President, Chief
Executive Officer and
Chairman of the Board
    
    
    1987Jung-Herng Chang, Ph.D.
    
    
    49
    
    
    President TTI
(primary operating
subsidiary)
    
    
    1992John Edmunds
    
    
    48
    
    
    Chief Financial Officer
    
    
    2004Peter Jen
    
    
    59
    
    
    Senior Vice President,
    
    
    1988Asia Operations and
Chief Accounting
Officer
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PART II
 
 Item 5. Market for the Registrants Common Stock, Related Stockholder Matters and Issuer Purchases
of Common Stock
  Year Ended June 30,
    
    High
    
    Low2004First Quarter
    
    
    9.68
    
    
    
    5.20Second Quarter
    
    
    19.00
    
    
    
    8.60Third Quarter
    
    
    21.25
    
    
    
    11.68Fourth Quarter
    
    
    17.35
    
    
    
    10.362005First Quarter
    
    
    15.08
    
    
    
    9.58Second Quarter
    
    
    17.19
    
    
    
    10.07Third Quarter
    
    
    19.00
    
    
    
    14.56Fourth Quarter
    
    
    23.35
    
    
    
    15.79
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Item 6. Selected and Supplementary Financial Data
  TRIDENT MICROSYSTEMS, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
 Year ended June 30,(in thousands, except per share data)
    
    2005
    
    2004
    
    2003 (2)
    
    2002 (2)
    
    2001 (2)Restated (1)CONSOLIDATED STATEMENT OF OPERATIONS DATA:Total revenues
    
    $
    69,011
    
    
    $
    52,551
    
    
    $
    52,752
    
    
    $
    105,766
    
    
    $
    128,226Income (loss) from operations
    
    
    (8,901
    )
    
    
    4,434
    
    
    
    (18,454
    )
    
    
    (13,006
    )
    
    
    2,394Net income (loss)
    
    
    (10,534
    )
    
    
    10,378
    
    
    
    (24,764
    )
    
    
    (35,651
    )
    
    
    (43,640
    )Basic net income (loss) per share
    
    
    (0.44
    )
    
    
    0.46
    
    
    
    (1.21
    )
    
    
    (1.77
    )
    
    
    (2.22
    )Diluted net income (loss) per share
    
    
    (0.44
    )
    
    
    0.41
    
    
    
    (1.21
    )
    
    
    (1.77
    )
    
    
    (2.22
    )
 June 30,(in thousands, except per share data)
    
    2005
    
    2004
    
    2003
    
    2002
    
    2001Restated (1)CONSOLIDATED BALANCE SHEET DATA:Cash, cash equivalents,
and short-term investments
    
    $
    92,153
    
    
    $
    84,331
    
    
    $
    49,867
    
    
    $
    84,018
    
    
    $
    79,385Working capital
    
    
    78,084
    
    
    
    72,960
    
    
    
    41,171
    
    
    
    73,802
    
    
    
    79,191Total assets
    
    
    134,884
    
    
    
    96,256
    
    
    
    70,123
    
    
    
    118,524
    
    
    
    147,419Long-term debt, less current portion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total stockholders equity
    
    
    109,435
    
    
    
    74,602
    
    
    
    52,160
    
    
    
    90,656
    
    
    
    105,366
 
  As of June 30, 2004As Reported
    
    As RestatedChanges to Consolidated Balance SheetAccrued Expenses
    
    $
    8,287
    
    
    $
    7,497Retained Earnings
    
    $
    24,159
    
    
    $
    24,949
 Changes to Consolidated Results of Operations
    
    Year Ended June 30, 2004As Reported
    
    As RestatedGain on investments, net
    
    $
    9,794
    
    
    $
    10,584Net Income
    
    $
    9,588
    
    
    $
    10,378Basic net income per share
    
    $
    0.43
    
    
    $
    0.46Diluted net income per share
    
    $
    0.38
    
    
    $
    0.41
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Special Note Regarding Forward-Looking Statements
  
    
    our prospects for success in the digital television market and its effect on our future financial results,
    
    the effects of our restructuring on our business and future financial results,
    
    future prospects for the digital television industry in general,
    
    allocation of resources and control of expenses related to the digital television market, new products and internal
business strategies,
    
    our plans and timeline for future product development in the digital television market,
    
    future gross margin levels and our strategy to maintain and improve gross margins,
    
    demand for and trends in revenue for our products,
    
    trends in average selling prices,
    
    expectations regarding the percentage of international sales,
    
    the sufficiency of our financial resources over the next twelve months,
    
    denomination of our international revenues and exposure to interest rate risk,
    
    the adequacy of our internal controls over financial reporting,
    
    future investments and/or acquisitions.
   Restatement of 2004 results
  Overview of Business
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Critical Accounting Policies, Judgments and Estimates
   Revenue recognition.
 Stock-based compensation .
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Allowance for doubtful accounts
 Product warranty.
 Inventories.
 Valuation of long-lived assets and intangible assets.
   18




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Valuation of equity investments.
 Income Taxes.
  Litigation and other contingencies.
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Results of Operations
  Year ended June 30,2005
    
    2004
    
    2003RestatedRevenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of revenues
    
    
    45
    
    
    
    45
    
    
    
    72Cost of revenues  amortization of intangible assets
    
    
    2
    
    
    
    
    
    
    
    Gross margin
    
    
    53
    
    
    
    55
    
    
    
    28Research and development expenses
    
    
    38
    
    
    
    22
    
    
    
    41Selling, general and administrative expenses
    
    
    21
    
    
    
    25
    
    
    
    22In-process research and development
    
    
    7
    
    
    
    
    
    
    
    Income (loss) from operations
    
    
    (13
    )
    
    
    8
    
    
    
    (35
    )Gain (loss) on investments, net
    
    
    1
    
    
    
    20
    
    
    
    (9
    )Interest and other income(expense), net
    
    
    1
    
    
    
    
    
    
    
    (1
    )Minority interests in subsidiaries
    
    
    (2
    )
    
    
    (3
    )
    
    
    Gain (loss) before income taxes
    
    
    (13
    )
    
    
    25
    
    
    
    (45
    )Provision for income taxes
    
    
    2
    
    
    
    5
    
    
    
    2Net income (loss)
    
    
    (15
    )
    
    
    20
    
    
    
    (47
    )
  Year Ended June 30,
    
    
    
    
    
    
    Year Ended June 30,2005
    
    
    2004
    
    
    % change
    
    
    2004
    
    
    2003
    
    
    % changeRevenues
    
    $
    69,011
    
    
    $
    52,551
    
    
    
    31.3
    %
    
    $
    52,551
    
    
    $
    52,752
    
    
    
    (0.4
    )%Cost of revenues
    
    $
    31,029
    
    
    $
    23,674
    
    
    
    31.1
    %
    
    $
    23,674
    
    
    $
    37,720
    
    
    
    (37.2
    )%Cost of revenues  amortization of
intangibles
    
    
    1,121
    
    
    
    
    
    
    
    100
    %
    
    
    
    
    
    
    
    
    
    
    Gross profit
    
    
    36,861
    
    
    
    28,877
    
    
    
    27.6
    %
    
    
    28,877
    
    
    
    15,032
    
    
    
    92.1
    %Research and development expenses
    
    
    26,088
    
    
    
    11,475
    
    
    
    127.3
    %
    
    
    11,475
    
    
    
    21,600
    
    
    
    (46.9
    )%Sales, general and administrative
expenses
    
    
    14,469
    
    
    
    12,968
    
    
    
    11.6
    %
    
    
    12,968
    
    
    
    11,886
    
    
    
    9.1
    %Amortization of intangibles
    
    
    34
    
    
    
    
    
    
    
    100.0
    %
    
    
    
    
    
    
    
    
    
    
    In-process research and development
    
    
    5,171
    
    
    
    
    
    
    
    100.0
    %
    
    
    
    
    
    
    
    
    
    
    Income (loss) from operations
    
    $
    (8,901
    )
    
    $
    4,434
    
    
    
    (300.7
    )%
    
    $
    4,434
    
    
    $
    (18,454
    )
    
    
    124.0
    %
 Revenues
  20




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Gross Margin
  Research and Development
   21




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Selling, General and Administrative
  In-process research and development expenses
   
    
    LX/PX/CX  next generation DPTV video processing products.
    
    TAFE  Trident Analog Front End (companion chip to HiDTV deployment)
    
    HiDTV Pro  2nd generation Integrated Video Processing and HD MPEG 2 Decode .
    
    HiDTV  1st Generation Integrated Video Processing and HD MPEG 2 Decode
   Interest and Other Income (Expense), Net
  22




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Minority Interests in subsidiaries
   Provision/benefit for Income Taxes
   Investment in UMC and Other Investments
   Gain on sale of TTI stock
    
    $
    694,000Gain on sale of ADSL Company stock
    
    
    22,000Broadband services company write-off
    
    
    (275,000
    )Circuit design company write-off
    
    
    (40,000
    )Venture capital funds write-down
    
    
    (70,000
    )Total
    
    $
    331,000
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Gain on sale of UMC stock (Note 4)
    
    $
    2,652Gain on sale of graphics division and interests in XGI
    
    
    6,627Gain on sale of 7% interest in TTI (restated)
    
    
    1,817Broadband networking company write-off
    
    
    (230
    )Software development company write-off
    
    
    (177
    )Optical applications company write-off
    
    
    (272
    )Gain on sale of investment in a communications company
    
    
    125Gain on sale of investment in a system design software company
    
    
    132Venture capital funds write-down
    
    
    (90
    )Total (restated)
    
    $
    10,584
   Optical applications company
    
    $
    (987
    )Fiber optic technology company
    
    
    (151
    )Circuit design company
    
    
    (500
    )Analog circuit design company
    
    
    (753
    )Optical networking company
    
    
    (831
    )Broadband networking company
    
    
    (1,370
    )Software development company
    
    
    (110
    )Venture capital funds write-down
    
    
    (460
    )System design software company
    
    
    167Total
    
    $
    (4,995
    )
    24




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Liquidity and Capital Resources
      Contractual Obligations
  25




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Payments due by periodLess than
    
    1 - 3
    
    3 - 5
    
    More thanContractual Obligations
    
    Total
    
    1 year
    
    years
    
    Years
    
    5 yearsOperating Leases
    
    
    3.6
    
    
    
    2.5
    
    
    
    1.1
    
    
    
    
    
    
    
    Purchase Obligations
    
    
    8.8
    
    
    
    8.5
    
    
    
    0.3
    
    
    
    
    
    
    
    Total
    
    
    12.4
    
    
    
    11.0
    
    
    
    1.4
    
    
    
    
    
    
    
    
 
 Off-Balance Sheet Arrangements
  26




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Factors That May Affect Our Results
 Our success depends upon the digital television market and we must continue to develop new products
and to enhance our existing products.
  We have had fluctuations in quarterly results in the past and may continue to do so in the future.
  
    
    uncertain demand in new markets in which we have limited experience;
    
    fluctuations in demand for our products, including seasonality;
    
    unexpected product returns or the cancellation or rescheduling of significant orders;
    
    our ability to develop, introduce, ship and support new products and product
enhancements and to manage product transitions;
    
    new product introductions by our competitors;
    
    seasonality, particularly in the third quarter of each fiscal year, due to the
extended holidays surrounding the Chinese New Year;
    
    our ability to achieve required cost reductions;
    
    our ability to attain and maintain production volumes and quality levels for our products;
    
    delayed new product introductions;
    
    unfavorable responses to new products;
    
    adverse economic conditions, particularly in Asia; and
    
    the mix of products sold and the mix of distribution channels through which they are sold.
  We incurred an operating loss in the fiscal year ended June 30, 2005 and may not achieve or
maintain profitability.
   Our products may be characterized by average selling prices that decline over relatively short
periods.
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Dilution of shareholders interest may occur as a result of acquisitions of new businesses or
technologies.
     We currently rely on certain international customers for a substantial portion of our revenue and
are subject to risks inherent in conducting business outside of the United States.
  
    
    exchange rate variations;
    
    difficulties in collecting accounts receivable;
    
    difficulties in managing distributors or representatives;
    
    political and economic instability, civil unrest, war or terrorist activities that
impact international commerce;
    
    potential adverse tax consequences;
    
    difficulties in protecting intellectual property rights, particularly in countries
where the laws and practices do not protect proprietary rights to as great an extent as
do the laws and practices of the United States; and
    
    unexpected changes in regulatory requirements.
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Our dependence on sales to distributors increases the risks of managing our supply chain and may
result in excess inventory or inventory shortages.
  We do not have long-term commitments from our customers, and plan purchases based upon our
estimates of customer demand, which may require us to contract for the manufacture of our products
based on inaccurate estimates.
  Intense competition exists in the market for digital media products.
   If we do not achieve additional design wins in the future, our ability to sell additional products
could be adversely affected.
  29




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We are vulnerable to undetected product problems.
  Our reliance upon independent foundries could make it difficult to obtain products and affect our
sales.
   If we have to qualify a new contract manufacturer or foundry for any of our products, we may
experience delays that result in lost revenues and damaged customer relationships.
  The market price of our common stock has been, and may continue to be volatile.
  30




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Our success depends to a significant degree on the continued employment of key personnel.
  Our success depends in part on our ability to protect our intellectual property rights, which may
be difficult.
  We have been involved in intellectual property infringement claims, and may be involved in others
in the future, which can be costly.
  31




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Natural disasters could limit our ability to supply products.
  Future terrorist attacks may affect our business.
  Changes in our business organization will affect our operations.
  The performance of our investment in UMC is uncertain.
  Changes in stock option accounting rules may adversely impact our reported operating results
prepared in accordance with generally accepted accounting principles, our stock price and our
competitiveness in the employee marketplace.
   32




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We are exposed to increased costs and risks associated with complying with increasing and new
regulation of corporate governance and disclosure standards.
  
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 Interest rate risk
  Exchange rate risk
   33




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Investment risk
   34




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Item 8. Financial Statements and Supplementary Data
 Page NumberManagements Report on Internal Control Over Financial Reporting
    
    36The following documents are filed as a part of this Report:1. Financial Statements:Report of Independent Registered Public Accounting Firm
    
    37Consolidated Balance Sheet  As of June 30, 2005 and 2004
    
    38Consolidated Statement of Operations  For the Three Years Ended June 30, 2005
    
    39Consolidated Statement of Changes in Stockholders Equity For the Three Years Ended June 30, 2005
    
    40Consolidated Statement of Cash Flows For the Three Years Ended June 30, 2005
    
    41Notes to Consolidated Financial Statements
    
    422. Financial Statement Schedules:II  Valuation and Qualifying Accounts for Each of the Three Years Ended June 30, 2005
    
    61
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Managements Report on Internal Control Over Financial Reporting
  Internal Control 
Integrated Framework
  36




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Report of Independent Registered Public Accounting Firm
   Consolidated financial statements
   Internal control over financial reporting
 Internal
Control  Integrated Framework Internal
Control  Integrated Framework
   
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Trident Microsystems, Inc.
 
 Consolidated Balance Sheet
 June 30,(in thousands, except per share data)
    
    2005
    
    
    2004Restated(see Note 2)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    37,598
    
    
    $
    32,488Short-term investment  UMC
    
    
    54,555
    
    
    
    51,843Accounts receivable, net
    
    
    6,317
    
    
    
    2,436Inventories
    
    
    2,735
    
    
    
    2,737Prepaid expenses and other current assets
    
    
    2,308
    
    
    
    1,087Total current assets
    
    
    103,513
    
    
    
    90,591Property and equipment, net
    
    
    2,154
    
    
    
    2,372Intangible assets, net
    
    
    24,620
    
    
    
    Investments  other
    
    
    3,200
    
    
    
    2,720Other assets
    
    
    1,397
    
    
    
    573Total assets
    
    $
    134,884
    
    
    $
    96,256LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,678
    
    
    $
    3,180Accrued expenses and other liabilities
    
    
    10,009
    
    
    
    7,497Deferred income taxes
    
    
    3,561
    
    
    
    2,694Income taxes payable
    
    
    5,181
    
    
    
    4,260Total current liabilities
    
    
    25,429
    
    
    
    17,631Minority interests in subsidiaries
    
    
    20
    
    
    
    4,023Total liabilities
    
    
    25,449
    
    
    
    21,654Commitments and contingencies (Notes 13 and 14)Stockholders equity:Common stock, $0.001 par value; 60,000
shares authorized;
25,920 and 22,881 shares issued and outstanding at
June 30, 2005 and 2004, respectively
    
    
    26
    
    
    
    23Additional paid-in capital
    
    
    125,933
    
    
    
    48,430Deferred stock-based compensation
    
    
    (36,280
    )
    
    
    (2,687
    )Retained earnings
    
    
    14,415
    
    
    
    24,949Accumulated other comprehensive income
    
    
    5,341
    
    
    
    3,887Total stockholders equity
    
    
    109,435
    
    
    
    74,602Total liabilities and stockholders equity
    
    $
    134,884
    
    
    $
    96,256
  38




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Trident Microsystems, Inc.
 
 Consolidated Statement of Operations
 Year Ended June 30,(in thousands, except per share data)
    
    2005
    
    
    2004
    
    
    2003RestatedRevenues
    
    $
    69,011
    
    
    $
    52,551
    
    
    $
    52,752Cost of revenues
    
    
    31,029
    
    
    
    23,674
    
    
    
    37,720Cost of revenues  amortization of intangible assets
    
    
    1,121
    
    
    
    
    
    
    
    Gross profit
    
    
    36,861
    
    
    
    28,877
    
    
    
    15,032Research and development expenses
    
    
    26,088
    
    
    
    11,475
    
    
    
    21,600Selling, general and administrative expenses
    
    
    14,503
    
    
    
    12,968
    
    
    
    11,886In-process research and development
    
    
    5,171
    
    
    
    
    
    
    
    Income (loss) from operations
    
    
    (8,901
    )
    
    
    4,434
    
    
    
    (18,454
    )Gain (loss) on investments, net
    
    
    331
    
    
    
    10,584
    
    
    
    (4,995
    )Interest and other income (expense), net
    
    
    641
    
    
    
    (104
    )
    
    
    (269
    )Minority interests in subsidiaries
    
    
    (1,179
    )
    
    
    (1,832
    )
    
    
    Income (loss) before income taxes
    
    
    (9,108
    )
    
    
    13,082
    
    
    
    (23,718
    )Provision for income taxes
    
    
    1,426
    
    
    
    2,704
    
    
    
    1,046Net income (loss)
    
    $
    (10,534
    )
    
    $
    10,378
    
    
    $
    (24,764
    )Basic net income (loss) per share
    
    $
    (0.44
    )
    
    $
    0.46
    
    
    $
    (1.21
    )Shares used in computing basic per share amounts
    
    
    23,709
    
    
    
    22,349
    
    
    
    20,525Diluted net income (loss) per share
    
    $
    (0.44
    )
    
    $
    0.41
    
    
    $
    (1.21
    )Shares used in computing diluted per share amounts
    
    
    23,709
    
    
    
    25,011
    
    
    
    20,525
  39




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##### Table of Contents



Trident Microsystems, Inc.
 
 Consolidated Statement
of Stockholders Equity
 AccumulatedCommon
    
    
    Additional
    
    
    Deferred
    
    
    
    
    
    
    Other
    
    
    TotalStock
    
    
    Paid-in
    
    
    Stock-based
    
    
    Retained
    
    
    Comprehensive
    
    
    Stockholders
    
    
    Comprehensive(in thousands)
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Equity
    
    
    Income(Loss)Restated
    
    
    
    
    
    
    Restated
    
    
    RestatedBalance at June 30, 2002
    
    
    20,396
    
    
    $
    20
    
    
    $
    38,347
    
    
    
    
    
    
    $
    39,345
    
    
    $
    12,944
    
    
    $
    90,656Issuance of common stock
    
    
    595
    
    
    
    1
    
    
    
    1,432
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,433Unrealized loss on short-term
investments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,165
    )
    
    
    (15,165
    )
    
    $
    (15,165
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,764
    )
    
    
    
    
    
    
    (24,764
    )
    
    
    (24,764
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (39,929
    )Balance at June 30, 2003
    
    
    20,991
    
    
    
    21
    
    
    
    39,779
    
    
    
    
    
    
    
    14,581
    
    
    
    (2,221
    )
    
    
    52,160Issuance of common stock, net
    
    
    1,890
    
    
    
    2
    
    
    
    5,358
    
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    5,350Deferred stock-based
compensation in connection
with options in subsidiarys common stock
    
    
    
    
    
    
    
    
    
    
    3,293
    
    
    
    (3,293
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred
stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    606
    
    
    
    
    
    
    
    
    
    
    
    606Unrealized gain on short-term
investments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,108
    
    
    
    6,108
    
    
    $
    6,108Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,378
    
    
    
    
    
    
    
    10,378
    
    
    
    10,378Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    16,486Balance at June 30, 2004
    
    
    22,881
    
    
    
    23
    
    
    
    48,430
    
    
    
    (2,687
    )
    
    
    24,949
    
    
    
    3,887
    
    
    
    74,602Issuance of common stock, net
    
    
    3,039
    
    
    
    3
    
    
    
    34,396
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,399Deferred stock-based
compensation in connection
with options in subsidiarys common stock
    
    
    
    
    
    
    
    
    
    
    43,107
    
    
    
    (43,107
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred
stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,514
    
    
    
    
    
    
    
    
    
    
    
    9,514Unrealized gain on short-term
investments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,454
    
    
    
    1,454
    
    
    $
    1,454Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,534
    )
    
    
    
    
    
    
    (10,534
    )
    
    
    (10,534
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (9,080
    )Balance at June 30, 2005
    
    
    25,920
    
    
    $
    26
    
    
    $
    125,933
    
    
    $
    (36,280
    )
    
    $
    14,415
    
    
    $
    5,341
    
    
    $
    109,435
  40




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##### Table of Contents



Trident Microsystems, Inc.
 
 Consolidated Statement of Cash Flows
 Year Ended June 30,(in thousands)
    
    2005
    
    
    2004
    
    
    2003RestatedCash flows from operating activities:Net income (loss)
    
    $
    (10,534
    )
    
    $
    10,378
    
    
    $
    (24,764
    )Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    1,010
    
    
    
    1,073
    
    
    
    1,320Loss on
disposal of property and equipment
    
    
    253
    
    
    
    460
    
    
    
    163Provision for doubtful accounts and sales returns
    
    
    113
    
    
    
    (309
    )
    
    
    (1,493
    )(Gain)loss on investments, net
    
    
    (331
    )
    
    
    (10,584
    )
    
    
    4,995Amortization of intangible assets
    
    
    1,155
    
    
    
    
    
    
    
    In-process research and development
    
    
    5,171
    
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    9,514
    
    
    
    606
    
    
    
    105Deferred income taxes, net
    
    
    
    
    
    
    
    
    
    
    3,642Changes in assets and liabilities, net of effects of
business combination:Accounts receivable
    
    
    (3,994
    )
    
    
    2,211
    
    
    
    1,439Inventories
    
    
    368
    
    
    
    (419
    )
    
    
    872Prepaid expenses and other current assets
    
    
    (1,221
    )
    
    
    (353
    )
    
    
    719Assets held for sale
    
    
    
    
    
    
    
    
    
    
    (1,800
    )Accounts payable
    
    
    3,213
    
    
    
    (4,794
    )
    
    
    1,265Accrued expenses
    
    
    2,580
    
    
    
    (45
    )
    
    
    (788
    )Income taxes payable
    
    
    818
    
    
    
    2,680
    
    
    
    (2,400
    )Minority interests in subsidiaries
    
    
    1,179
    
    
    
    2,223
    
    
    
    (563
    )Net cash provided by (used in) operating activities
    
    
    9,294
    
    
    
    3,127
    
    
    
    (17,288
    )Cash flows from investing activities:Proceeds from sale of graphics division, net of transaction cost
    
    
    
    
    
    
    8,427
    
    
    
    Proceeds from sale of minority interests in subsidiaries
    
    
    877
    
    
    
    2,750
    
    
    
    Proceeds from sale of other long-term investments
    
    
    22
    
    
    
    
    
    
    
    Proceeds from sale of short-term investments, net
of transaction cost
    
    
    
    
    
    
    9,195
    
    
    
    Other assets
    
    
    (824
    )
    
    
    (240
    )
    
    
    84Purchases of property and equipment
    
    
    (1,045
    )
    
    
    (1,116
    )
    
    
    (621
    )Purchases of investments
    
    
    (1,012
    )
    
    
    (90
    )
    
    
    (111
    )Purchase of minority interests in subsidiary
    
    
    (6,145
    )
    
    
    
    
    
    
    Repayment of other current assets
    
    
    
    
    
    
    
    
    
    
    500Net cash provided by (used in) investing activities
    
    
    (8,127
    )
    
    
    18,926
    
    
    
    (148
    )Cash flows from financing activities:Proceeds from exercise of TTI options
    
    
    690
    
    
    
    
    
    
    
    Issuance of common stock, net
    
    
    3,253
    
    
    
    5,350
    
    
    
    1,328Net cash provided by financing activities
    
    
    3,943
    
    
    
    5,350
    
    
    
    1,328Net increase (decrease) in cash and cash equivalents
    
    
    5,110
    
    
    
    27,403
    
    
    
    (16,108
    )Cash and cash equivalents at beginning of year
    
    
    32,488
    
    
    
    5,085
    
    
    
    21,193Cash and cash equivalents at end of year
    
    $
    37,598
    
    
    $
    32,488
    
    
    $
    5,085Supplemental disclosure of cash flow information:Trident Microsystems, Inc. common stock
issued in connection with the purchase of TTI minority interests
    
    $
    31,146
    
    
    $
    
    
    
    $
    Cash paid for income taxes
    
    $
    553
    
    
    $
    
    
    
    $
    
  41




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##### Table of Contents



Trident Microsystems, Inc.
 
 Notes to Consolidated Financial Statements
 1.
    
    The Company and Summary of Significant Accounting PoliciesThe Company
Trident Microsystems, Inc. and its subsidiaries (collectively the The Company) designs,
develops and markets integrated circuits for videographics, multimedia and digitally processed
television products for the desktop and notebook PC market and consumer television market. The
Companys digital media operations are primarily conducted by the Companys 99.9% subsidiary,
Trident Technologies, Inc. (TTI).During the fiscal year ended June 30, 2005, the Company acquired approximately all of the 20%
minority equity interest in its subsidiary, TTI, for approximately $6.1 million in cash and the
issuance of approximately 1.9 million Trident Microsystems, Inc. common shares. The average
value of the share consideration of $16.78 per share was based upon the average of the closing
market prices of the Companys common stock on the two trading days before and after the date of
acquisition of each minority interest.Summary of Significant Accounting PoliciesBasis of Presentation.The consolidated financial statements include the accounts of the
Company and its subsidiaries after elimination of all significant intercompany accounts and
transactions. The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts; actual results could differ from those estimates.Cash Equivalents and Short-Term Investments.Cash equivalents consist of highly liquid
investments in money market accounts and certificates of deposits purchased with an original
maturity of ninety days or less from the date of purchase. The Company classifies its
short-term investments as available-for-sale. Such investments are recorded at fair value based
on quoted market prices; unrealized gains and losses which are considered to be temporary are
recorded as other comprehensive income or loss. The Company reviews its investments on a
regular basis and considers factors including the operating results, available evidence of the
market value and economic outlook of the relevant industry sector. When the Company concludes
that an investment has suffered impairment that is other-than-temporary, the impairment is
written off against earnings.Accounts Receivable.The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of the Companys customers to make required payments. If
the financial condition of the Companys customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be required.Inventories.Inventories are stated at the lower of cost or market, with cost determined on a
first-in, first-out basis. Finished goods are reported as inventories until the point of title
transfer to the customer. The Company writes down its inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and the estimated
market value based upon assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by management, additional inventory
write-downs may be required.Property and Equipment. Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives which range from three to seven
years. Amortization of leasehold improvements is computed using the straight-line method over
the shorter of the estimated life of the assets or the extended lease term.Impairment of Long-lived Assets.The Company is currently evaluating its long-lived assets,
including property and equipment, intangibles and other long-lived assets, for impairment in
accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets, whenever events or changes in
circumstances indicate that the carrying value of such assets may not be recoverable.
Recoverability is measured by a comparison of the assets carrying amount to their expected
future undiscounted net cash flows. If such assets are considered to be impaired, the
impairment to be recognized is measured based on the amount by which the carrying amount of the
asset exceeds its fair value.
 42




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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements
  Investments.
 Goodwill and other intangible assets.
 Revenue Recognition.
 Software Development Costs.
 Income Taxes.
 43




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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements
 Net Income/Loss per Share.
 Foreign Currency Transactions.
 Stock-based Compensation.
 44




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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements
 Had compensation cost for the Companys stock-based compensation awards been determined based on
the fair value method consistent with the method prescribed SFAS No. 123, the Companys net
income (loss) and net income (loss) per share would have been adjusted as follows:
 Year Ended June 30,(in thousands, except per share data)
    
    2005
    
    
    2004
    
    
    2003RestatedNet income (loss):Net income (loss) as reported
    
    $
    (10,534
    )
    
    $
    10,378
    
    
    $
    (24,764
    )Add: stock-based employee compensation
included in reported net income (loss)
    
    
    9,514
    
    
    
    606
    
    
    
    105Less: stock-based employee compensation determined
under the fair value based method for all rewards
    
    
    (4,089
    )
    
    
    (2,472
    )
    
    
    (2,171
    )Pro forma net income (loss)
    
    $
    (5,109
    )
    
    $
    8,512
    
    
    $
    (26,830
    )Basic net income (loss) per share:As reported:
    
    $
    (0.44
    )
    
    $
    0.46
    
    
    $
    (1.21
    )Pro forma:
    
    $
    (0.22
    )
    
    $
    0.38
    
    
    $
    (1.31
    )Diluted net income (loss) per share:As reported:
    
    $
    (0.44
    )
    
    $
    0.41
    
    
    $
    (1.21
    )Pro forma:
    
    $
    (0.22
    )
    
    $
    0.34
    
    
    $
    (1.31
    )
 
     Year Ended June 30,2005
    
    2004
    
    2003Stock Options PlansExpected dividend yield
    
    
    
    
    
    Expected stock price volatility
    
    48%
    
    69%
    
    88%Risk-free interest rate
    
    3.25% to 4.33%
    
    2.46% to 4.10%
    
    2.34% - 2.92%Expected life (years)
    
    5
    
    5
    
    5Stock Purchase PlanExpected dividend yield
    
    
    
    
    
    Expected stock price volatility
    
    39% to 64%
    
    59% - 71%
    
    78% - 90%Risk-free interest rate
    
    1.17% to 3.19%
    
    1.57% to 9.83%
    
    2.24% - 2.67%Expected life (years)
    
    0.5
    
    0.5
    
    0.5
 Comprehensive income/loss.
 Comparative amounts.
 45




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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements
 Recent Accounting Pronouncements
     46




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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements
 2.
    
    Restatement of 2004 resultsIn connection with the acquisition of the minority interest of TTI during fiscal 2005, the
Company discovered that it had previously understated the gain on the original sale of TTI
securities to a third party by approximately $0.8 million in the first quarter of fiscal 2004
which ended September 30, 2003. This error related to the incorrect determination of the net
carrying value of the Companys investment in TTI at the time of disposal and the corresponding
impact on the gain from the disposal. The Company restated its consolidated financial statements
for the year ended June 30, 2004 to reflect the adjusted gain.
This restatement had no impact on previously reported operating cash
flows of the Company.The following table shows the effect of the restatement:
 As of June 30, 2004As Reported
    
    
    As RestatedChanges to Consolidated Balance SheetAccrued Expenses
    
    $
    8,287
    
    
    $
    7,497Retained Earnings
    
    $
    24,159
    
    
    $
    24,949
 Year Ended June 30, 2004As Reported
    
    
    As RestatedChanges to Consolidated Results of OperationsGain on investments, net
    
    $
    9,794
    
    
    $
    10,584Net Income
    
    $
    9,588
    
    
    $
    10,378Basic net income per share
    
    $
    0.43
    
    
    $
    0.46Diluted net income per share
    
    $
    0.38
    
    
    $
    0.41
 47




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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements
 3. Balance Sheet Components
 June 30,(in thousands)
    
    2005
    
    
    2004Accounts receivable, net:Trade accounts receivable
    
    $
    6,730
    
    
    $
    2,736Less: allowance for doubtful accounts and sales returns
    
    
    (413
    )
    
    
    (300
    )$
    6,317
    
    
    $
    2,436Inventories:Work in process
    
    $
    1,569
    
    
    $
    1,113Finished goods
    
    
    1,166
    
    
    
    1,624$
    2,735
    
    
    $
    2,737Property and equipment, net:Machinery and equipment
    
    $
    6,574
    
    
    $
    9,778Furniture and fixtures
    
    
    1,723
    
    
    
    1,583Leasehold improvements
    
    
    1,057
    
    
    
    8829,354
    
    
    
    12,243Less: accumulated depreciation and amortization
    
    
    (7,200
    )
    
    
    (9,871
    )$
    2,154
    
    
    $
    2,372Accrued expenses:RestatedCompensation
    
    $
    3,752
    
    
    $
    1,286Professional fee
    
    
    1,016
    
    
    
    1,679Sales rebate
    
    
    1,040
    
    
    
    383Nonrecurring engineering charges
    
    
    464
    
    
    
    127Dealer commission
    
    
    586
    
    
    
    292Deferred margin
    
    
    871
    
    
    
    314Other
    
    
    2,280
    
    
    
    3,416$
    10,009
    
    
    $
    7,497
 4.
    
    Net Income (Loss) Per ShareReconciliations of the numerators and denominators of the basic and diluted net loss per share
calculations are as follows:
 Year Ended June 30,(in thousands, except per share data)
    
    2005
    
    
    2004
    
    
    2003RestatedNet income (loss)
    
    $
    (10,534
    )
    
    $
    10,378
    
    
    $
    (24,764
    )Adjustments related to outstanding options in TTI
    
    
    
    
    
    
    (136
    )
    
    
    Net income (loss) used in computing diluted net
income (loss) per share
    
    $
    (10,534
    )
    
    $
    10,242
    
    
    $
    (24,764
    )Shares used in computing basic per share amounts
    
    
    23,709
    
    
    
    22,349
    
    
    
    20,525Dilutive potential common shares
    
    
    
    
    
    
    2,662
    
    
    
    Shares used in computing diluted per share amounts
    
    
    23,709
    
    
    
    25,011
    
    
    
    1  20,525Basic net income (loss) per share
    
    $
    (0.44
    )
    
    $
    0.46
    
    
    $
    (1.21
    )Diluted net income (loss) per share
    
    $
    (0.44
    )
    
    $
    0.41
    
    
    $
    (1.21
    )Dilutive potential common shares not included in the
calculation because they are antidilutive
    
    
    6,405
    
    
    
    54
    
    
    
    6,699
 48




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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements
 5.
    
    Investment in UMCIn August 1995, the Company made an investment of $49.3 million in United Integrated Circuits
Corporation (UICC). On January 3, 2000, United Microelectronics Corporation (UMC) acquired
UICC and, as a result of this merger, the Company received approximately 46.5 million shares of
UMC, and has subsequently received approximately 35.8 million additional shares as a result of
stock dividends. The last time the Company sold shares was in the year ended June 30, 2004 when
the Company sold 7.3 million shares for cash of $7.4 million, resulting in a gain of $2.7
million. As of June 30, 2005, the Company owned approximately 75.1 million shares of UMC, which
represents about 0.5% of the outstanding stock of UMC. Shares of the Companys UMC investment
are listed on the Taiwan Stock Exchange. In accordance with SFAS No. 115, as of June 30, 2005,
the UMC shares are treated as available-for-sale securities and are classified as short-term
investments.Due to an increase in the market price of UMCs stock price from July 1, 2004 to June 30, 2005,
an increase in accumulated other comprehensive income of $1.5 million was recorded in equity as
accumulated other comprehensive income in accordance with SFAS No. 130, Reporting
Comprehensive Income. The $1.5 million is equal to a $2.4 million increase in the market value
of the Companys short-term investment in UMC from July 1, 2004 to June 30, 2005, less deferred
income taxes of $0.9 million relating to the unrealized gain.6.
    
    Gain (loss) on investments, netDuring the fiscal year ended June 30, 2005, the Company recognized a net gain on investments
totaling $331,000 as follows:
 Gain on sale of TTI stock
    
    $
    694,000Gain on sale of ADSL Company stock
    
    
    22,000Broadband services company write-off
    
    
    (275,000
    )Circuit design company write-off
    
    
    (40,000
    )Venture capital funds write-down
    
    
    (70,000
    )Total
    
    $
    331,000
 During the quarter ended September 30, 2004 the Company sold 330,000 shares of its subsidiary
Trident Technology, Inc. (TTI) for cash of $877,000 resulting in a gain of $694,000. Due to a
subsequent change in capital financing strategy, the Company reacquired these shares in fiscal
2005. (see Note 10 Purchase of minority interest in subsidiaries for more information)In March 2000, the Company invested $550,000 in a private company engaged in broadband server
technology. In the quarter ended June 30, 2002, the Company determined that the product outlook
and future cash position for this company was unfavorable. Therefore, the Company assessed the
estimated fair value of the investment held and concluded that the estimated shortfall was an
other-than-temporary impairment. Accordingly, $275,000 of the investment was written off
against earnings in accordance with APB No. 18. In the year ended June 30, 2005, the Company
determined that the product outlook and future cash position for this company had deteriorated
further, and the remaining $275,000 investment was written off against earnings in accordance
with APB No. 18.In January 2004, the Company invested $40,000 in a private company engaged in integrated circuit
design. In the quarter ended September 30, 2004, the Company determined that the prospects for
recovery of the investment were unfavorable given the deteriorating cash position of the company
and the companys operating losses. Accordingly, all of the investment was written off against
earnings in accordance with APB No. 18.From December 1999 to November 2001, the Company invested a total of $3.4 million in several
venture capital funds. In the year ended June 30, 2005, losses were recorded by the funds.
Accordingly, the Company recorded an other-than-temporary impairment of $70,000 based on the
latest financial statements of the funds.
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Trident Microsystems, Inc.
Notes to Consolidated Financial Statements
 During the fiscal year ended June 30, 2004 the Company recognized a net gain on investments
totaling $10.6 million as follows (in thousands):
 Gain on sale of UMC stock (Note 4)
    
    $
    2,652Gain on sale of graphics division and interests in XGI
    
    
    6,627Gain on sale of 7% interest in TTI (restated)
    
    
    1,817Broadband networking company write-off
    
    
    (230
    )Software development company write-off
    
    
    (177
    )Optical applications company write-off
    
    
    (272
    )Gain on sale of investment in a communications company
    
    
    125Gain on sale of investment in a system design software company
    
    
    132Venture capital funds write-down
    
    
    (90
    )Total (restated)
    
    $
    10,584
 On June 12, 2003, the Company announced that it would transfer its Graphics Division in
Sunnyvale, California to XGI Technology, Inc. (XGI), a newly formed company incorporated in
Taiwan, in exchange for stock in XGI. Silicon Integrated Systems Corporation (SIS), a company
incorporated in Taiwan and unrelated to the Company, also transferred its graphics business to
XGI. The transactions were structured to simultaneously close, with the Company receiving cash
for the assets of the Graphics Division in one transaction, and simultaneously using the cash to
acquire a 30% equity interest in XGI.The above transactions closed on July 25, 2003. In addition, on September 30, 2003, the Company
sold one third of its investment in XGI to a third party for cash of $7.5 million. The above
transactions resulted in a gain of approximately $6.6 million being recognized in the first
quarter of 2004. Because XGI was a new company that merged two businesses with an uncertain
future and its equity securities were not traded on a quoted exchange, the Company recognized a
gain on the above transactions based on the actual cash received and retained by the Company,
and no value was attributed to the Companys remaining 20%
equity interest in XGI. As of June 30, 2005, the Company owned approximately 12.07% of the equity interest in XGI.See Note 2 for the details of the restatement.During the fiscal year ended June 30, 2003 the Company recognized a net loss on investments
totaling $5.0 million as follows (in thousands):
 Optical applications company
    
    $
    (987
    )Fiber optic technology company
    
    
    (151
    )Circuit design company
    
    
    (500
    )Analog circuit design company
    
    
    (753
    )Optical networking company
    
    
    (831
    )Broadband networking company
    
    
    (1,370
    )Software development company
    
    
    (110
    )Venture capital funds write-down
    
    
    (460
    )System design software company
    
    
    167Total
    
    $
    (4,995
    )
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Trident Microsystems, Inc.
Notes to Consolidated Financial Statements
 7.
    
    Comprehensive Income (Loss)Under SFAS No. 130, Reporting Comprehensive Income any unrealized gains or losses on the
short-term investments which are classified as available-for-sale equity securities are to be
reported as a separate adjustment to equity. The components of accumulated other comprehensive
income as of June 30, 2005 and June 30, 2004 related to unrealized loss and unrealized gain, net
of tax of $3.6 million and $2.6 million as of June 30,
2005 and 2004, respectively, on the Companys investment in UMC. $5.3 million and $3.9 million of unrealized gain on
the Companys UMC investment was recorded in fiscal years ending 2005 and 2004, respectively.
 8.
    
    Income TaxesThe components of loss before income taxes are as
follows:
 Year Ended June 30,(in thousands)
    
    2005
    
    
    2004
    
    
    2003RestatedIncome (loss) subject to domestic income taxes
only
    
    $
    (6,857
    )
    
    $
    (879
    )
    
    $
    (4,643
    )Income (loss) subject to foreign income taxes,
and in
certain cases, domestic income taxes
    
    
    (2,251
    )
    
    
    13,961
    
    
    
    (19,075
    )$
    (9,108
    )
    
    $
    13,082
    
    
    $
    (23,718
    )
 The provision (benefit) for income taxes
is comprised of the
following:
 Year Ended June 30,(in thousands)
    
    2005
    
    
    2004
    
    
    2003Current:Federal
    
    $
    197
    
    
    $
    2,171
    
    
    $
    State
    
    
    2
    
    
    
    1
    
    
    
    Foreign
    
    
    1,227
    
    
    
    532
    
    
    
    $
    1,426
    
    
    $
    2,704
    
    
    $
    Deferred:Federal
    
    
    (197
    )
    
    
    
    
    
    
    915State
    
    
    
    
    
    
    
    
    
    
    131Foreign
    
    
    197
    
    
    
    
    
    
    
    1,046$
    1,426
    
    
    $
    2,704
    
    
    $
    1,046
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Trident Microsystems, Inc.
Notes to Consolidated Financial Statements
  June 30,(in thousands)
    
    2005
    
    
    2004Deferred tax assets:Reserves and accruals
    
    $
    856
    
    
    $
    1,599Research and development credits
    
    
    12,856
    
    
    
    11,082Net operating losses
    
    
    18,874
    
    
    
    8,337Other
    
    
    3,857
    
    
    
    Deferred tax assets
    
    
    36,443
    
    
    
    21,018Valuation allowance
    
    
    (30,273
    )
    
    
    (15,415
    )Deferred tax assets, net
    
    
    6,170
    
    
    
    5,603Deferred tax liabilities:Capital gains not recognized for tax
    
    
    (3,561
    )
    
    
    (2,680
    )Unremitted earnings of foreign subsidiaries
    
    
    (5,972
    )
    
    
    (5,603
    )Other
    
    
    (198
    )
    
    
    (14
    )Deferred tax liabilities
    
    
    (9,731
    )
    
    
    (8,297
    )$
    (3,561
    )
    
    $
    (2,694
    )
 As of June 30, 2005, the Companys federal and state net operating loss carryforwards for income
tax purposes were approximately $48.4 million and $38.1 million, respectively. Federal and
state net operating losses will begin to expire in fiscal year ending 2014 and 2005,
respectively. Federal and state tax-credit carryforwards were $7.3 million and $5.5 million,
respectively. Federal tax credits will begin to expire in fiscal year ending 2017.
 Approximately $16.3 million of the valuation allowance relates to stock option deductions that,
when recognized, will result in a credit to shareholders equity.
 The reconciliation of the income tax provisions computed at the United States federal statutory
rate to the effective tax rate for the recorded provision for income taxes is as follows:
 Year ended June 30,2005
    
    2004Federal statutory rate
    
    
    (35.0
    )%
    
    
    35.0
    %State taxes, net of federal tax benefit
    
    
    (4.9
    )
    
    
    5.0Research and development credit
    
    
    (18.9
    )
    
    
    (1.0
    )Foreign rate differential
    
    
    24.3
    
    
    
    (9.2
    )Valuation allowance
    
    
    50.2
    
    
    
    (9.1
    )Effective income tax rate
    
    
    15.7
    %
    
    
    20.7
    %
 The Company has fully provided for U.S. federal income and foreign withholding taxes on a
non-U.S. subsidiarys undistributed earnings of approximately $14.9 million as of June 30, 2005.
No material provision has been made for taxes that might be payable upon remittance of the
Companys non-U.S. subsidiaries undistributed earnings of approximately $53.0 million as of
June 30, 2005, which are indefinitely reinvested in foreign operations.
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Trident Microsystems, Inc.
Notes to Consolidated Financial Statements
 9.
    
    Stock-Based CompensationStock Purchase Plans.In October 2001, the Board of Directors of the Company (the Board)
adopted the 2001 Employee Stock Purchase Plan (the 2001 ESPP), under which 750,000 shares of
the Companys common stock were reserved for sale to employees, and the shareholders approved
this plan in December 2001. The 2001 ESPP replaced the 1998 Employee Stock Purchase Plan (the
1998 ESPP). An aggregate of 299,000 shares have been issued under the 2001 ESPP. The 2001
ESPP was suspended in April 2005 pending further study of the plans financial impact under
Statement of Financial Accounting Standards No. 123 (revised 2004) and may be resumed in the
future. The Board adopted the 1998 ESPP in October 1998 and the stockholders approved it in
December 1998, reserving 500,000 shares of the Companys common stock for sale to employees.
The 1998 ESPP replaced the 1992 Employee Stock Purchase Plan, which was terminated on October
31, 1998. Shares under these plans were generally purchased by employees through payroll
deductions. Employees of the Company who were based outside the United States participated by
making direct contributions to the Company for the purchase of stock. Such payroll deductions
or direct contributions could not exceed 10% of an employees compensation. The purchase price
per share at which the shares of the Companys common stock were sold in offerings under these
plans equaled 85% of the lesser of the fair market value of the common stock on the first or the
last day of an offering period, which was generally a period of six months. During fiscal years
2005, 2004 and 2003, 7,000, 20,000 and 220,000 shares, respectively, were issued under the 2001
ESPP.Stock Options in TMI.The Company grants nonstatutory and incentive stock options to key
employees, directors and consultants. At June 30, 2005, there were 8,053,000 shares of common
stock reserved for issuance upon exercise of the stock options. Stock options are granted at
prices determined by the Board. Nonstatutory and incentive stock options may be granted at
prices not less than 85% of the fair market value and at not less than fair market value,
respectively, at the date of grant. Options generally become exercisable one year after date of
grant and vest over a maximum period of five years following the date of grant. The Company has
not granted stock options or equity instruments to non-employees other than members of its Board
of Directors. All TMI options granted during fiscal years ended June 2005, 2004 and
2003, were granted at exercise prices equal to the fair values of
the common stock on the date of grant.
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Trident Microsystems, Inc.
Notes to Consolidated Financial Statements
  Options
    
    
    
    
    
    
    Weighted Average
    
    
    OutstandingAvailable for
    
    
    Number of
    
    
    Exercise
    
    
    Price Per(in thousands, except per share data)
    
    Grant
    
    
    Options
    
    
    Price
    
    
    OptionBalance at June 30, 2002
    
    
    2,302
    
    
    
    5,737
    
    
    
    
    
    
    $
    1.75-$22.92Additional shares reserved
    
    
    1,013
    
    
    
    Plan shares expired
    
    
    (368
    )
    
    
    Options granted
    
    
    (1,647
    )
    
    
    1,647
    
    
    $
    2.88
    
    
    $
    1.85-$4.13Options exercised
    
    
    
    
    
    
    (377
    )
    
    $
    2.61
    
    
    $
    1.75-$5.17Options canceled
    
    
    308
    
    
    
    (308
    )
    
    $
    2.83
    
    
    $
    2.33-$6.50Balance at June 30, 2003
    
    
    1,608
    
    
    
    6,699
    
    
    
    
    
    
    $
    1.75-$22.92Additional shares reserved
    
    
    
    
    
    
    Plan shares expired
    
    
    (126
    )
    
    
    Options granted
    
    
    (350
    )
    
    
    350
    
    
    $
    11.86
    
    
    $
    10.43-$13.77Options exercised
    
    
    
    
    
    
    (1,869
    )
    
    $
    2.83
    
    
    $
    1.75-$9.50Options canceled
    
    
    648
    
    
    
    (648
    )
    
    $
    2.94
    
    
    $
    1.85-$9.50Balance at June 30, 2004
    
    
    1,780
    
    
    
    4,532
    
    
    
    
    
    
    $
    1.75-$22.92Additional shares reserved
    
    
    2,934
    
    
    
    Plan shares expired
    
    
    (18
    )
    
    
    Options granted (TMI)
    
    
    (174
    )
    
    
    174
    
    
    $
    15.72
    
    
    $
    10.70-$18.61Options granted (TTI)
    
    
    (2,934
    )
    
    
    2,934
    
    
    $
    1.57
    
    
    $
    1.57-$1.57Options exercised
    
    
    
    
    
    
    (1,175
    )
    
    $
    2.70
    
    
    $
    1.75-$6.00Options canceled
    
    
    60
    
    
    
    (60
    )
    
    $
    2.54
    
    
    $
    1.57-$3.04Balance at June 30, 2005
    
    
    1,648
    
    
    
    6,405
    
    
    
    
    
    
    $
    1.57-$22.92
   Options Outstanding
    
    Options ExercisableNumber
    
    Weighted Average
    
    Weighted
    
    Number
    
    WeightedRange of
    
    Outstanding
    
    Remaining
    
    Average
    
    Exercisable
    
    AverageExercise Prices
    
    (thousands)
    
    Contractual Life
    
    Exercise Price
    
    (thousands)
    
    Exercise Price$  1.57
- $  1.57
    
    
    2,916
    
    
    
    8.6
    
    
    $
    1.57
    
    
    
    34
    
    
    $
    1.57$  1.75
- $  2.88
    
    
    1,511
    
    
    
    4.6
    
    
    $
    2.42
    
    
    
    1,382
    
    
    $
    2.45$  2.93
- $  5.17
    
    
    1,384
    
    
    
    6.8
    
    
    $
    3.58
    
    
    
    934
    
    
    $
    3.67$  6.33 - $18.61
    
    
    572
    
    
    
    8.6
    
    
    $
    12.91
    
    
    
    96
    
    
    $
    11.73$22.92 - $22.92
    
    
    22
    
    
    
    0.4
    
    
    $
    22.92
    
    
    
    22
    
    
    $
    22.92$  1.57 - $22.92
    
    
    6,405
    
    
    
    7.2
    
    
    $
    3.29
    
    
    
    2,468
    
    
    $
    3.44
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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements
 As part of the restructuring of its graphics division, on June 11, 2003, the exercise period of
stock options granted to the employees under the graphics division was extended for several
months after their termination effective June 30, 2003. Accordingly, the stock options were
subject to remeasurement and the intrinsic value of $105,000 was charged as stock-based
compensation in the year ended June 30, 2003.
 All TTI options were granted at exercise prices below the
fair values of the TTI Common Stock on the date of grant. The options held by TTI option holders were assumed as a part
of the acquisition of minority interest (Note 10), and as a
result, non-qualified options to purchase approximately 2.8 million Company common shares were
issued at an exercise price of $1.57 per share, and with the same term and vesting provisions as
the TTI options (a total term of ten years from the date of the
original grant by TTI). Of the 2.8 million Company common shares
issued, approximately 0.7 million were granted to employees
during the course of fiscal 2005 and the balance were outstanding at
the beginning of the fiscal year. Also during the course of the year
the equivalent of 0.5 million Company shares, which were
previously TTI options, were exercised into TTI stock and then
exchanged for TMI shares and 0.1 million were cancelled. The
incremental intrinsic value of the unvested options, totaling approximately $31.7 million, has
been recorded as additional deferred stock based compensation resulting in a total deferred
compensation balance of $ 43.1 million, from what were originally TTI option grants as of March
31, 2005. The deferred stock based compensation will be amortized over the remaining vesting
period on a straight-line basis. The amortization of $9.5 million was recorded during the year
ended June 30, 2005. The estimated amortization expense in the next 3 years and thereafter is
as follows:
 For the year ending: (in thousands)June 30, 2006
    
    $
    16,430June 30, 2007
    
    
    13,203June 30, 2008 and thereafter
    
    
    6,647Total
    
    $
    36,280
 10. Purchase of minority interest in subsidiaries
   Fair value of Trident Microsystems, Inc. common stock
    
    $
    31,146Cash
    
    
    6,145Transaction costs
    
    
    501Total purchase price
    
    $
    37,792Purchase price allocation:Net tangible assets acquired
    
    $
    6,154In-process research and development
    
    
    5,171Inventory write-up
    
    
    366Customer relationships
    
    
    2,144Core and developed technologies
    
    
    23,957Total purchase price
    
    $
    37,792
 55




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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements
      
  All of the Companys acquired identifiable intangible assets, including the core and
developed technology acquired including DPTV and HDTV product technologies, and customer
relationships are subject to amortization and have approximate original estimated
weighted average useful lives of one to eight years. Intangible assets amortization was
recorded during the year ended June 30, 2005 in the amount of $1.1 million. The
estimated amortization expense in the next 5 years and thereafter is as follows:
 For the year ending:(in thousands)June 30, 2006
    
    $
    5,453June 30, 2007
    
    
    6,336June 30, 2008
    
    
    5,595June 30, 2009
    
    
    3,592Thereafter
    
    
    3,644Total
    
    $
    24,620
 The options held by TTI option holders were assumed as a part of the acquisition, and as a result,
non-qualified options to purchase approximately 2.8 million Company common shares were issued at an
exercise price of $1.57 per share, and with the same term and vesting provisions as the TTI options
(a total term of ten years from the date of the original grant by TTI). The incremental intrinsic
value of the unvested options, totaling approximately $31.7 million, has been recorded as
additional deferred stock compensation and brought the total deferred compensation balance to $
43.1 million all stemming from what were originally TTI option grants as of March 31, 2005. These
will be amortized over the remaining vesting period on a straight-line basis. $9.5 million in
stock-based compensation amortization was recorded during the year ended June 30, 2005. The
estimated amortization expense in the next 3 years and thereafter is as follows:
 For the year ending: (in thousands)June 30, 2006
    
    $
    16,430June 30, 2007
    
    
    13,203June 30, 2008 and thereafter
    
    
    6,647Total
    
    $
    36,280
 56




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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements
 The following table represents unaudited pro forma financial information for the twelve months
ended June 30, 2005 and 2004 had the Company completed the acquisition of minority interests as
of July 1, 2003. The pro forma results include the effects of the amortization of identifiable
intangible assets and deferred stock-based compensation. The pro forma results exclude
$366,000 for the cost of goods sold regarding the inventory write-up, and $5.2 million for
in-process research and development charges, for the twelve months ended June 30, 2005. The
unaudited pro forma financial information is presented for illustrative purposes only and does
not necessarily reflect the results of operations that would have occurred had the combined
companies constituted a single entity during such periods, and is not necessarily indicative of
results which may be obtained in the future.
 For the Twelve Months Ended:(In thousands except per share amounts, unaudited)
    
    June 30, 2005
    
    
    June 30, 2004Revenue
    
    $
    69,011
    
    
    $
    52,551Pro forma net loss
    
    $
    (11,661
    )
    
    $
    (10,146
    )Pro forma
net loss per share 
basic and fully diluted
    
    $
    (0.46
    )
    
    $
    (0.42
    )Shares used in calculating
basic and fully diluted amounts
    
    
    25,565
    
    
    
    24,205
 11.
    
    Preferred Rights AgreementOn July 24, 1998, the Board adopted a Preferred Shares Rights Agreement (Agreement) and
pursuant to the Agreement authorized and declared a dividend of one preferred share purchase
right (Right) for each common share outstanding of the Company on August 14, 1998. The Rights
are designed to protect and maximize the value of the outstanding equity interests in the
Company in the event of an unsolicited attempt by an acquirer to take over the Company, in a
manner or terms not approved by the Board. Each Right becomes exercisable to purchase
one-hundredth of a share of Series A Preferred Stock of the Company at an exercise price of
$33.33 and expire on July 23, 2008. The Company may redeem the Rights at a price of $0.001 per
Right.
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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements
 12.
    
    Segment InformationSubsequent to the transfer of its graphics division to XGI in July 2003, the Company operates in
only one reportable segment: digital media. Accordingly, certain comparative amounts were
reclassified to conform with current period presentation.The following is a summary of the Companys segment information (in thousands):
 Digital MediaYear Ended June 30, 2005
    
    (TTI)
    
    
    Graphics
    
    
    Other
    
    
    TotalRevenues
    
    $
    67,580
    
    
    $
    
    
    
    $
    1,431
    
    
    $
    69,011Operating income (loss)
    
    
    3,694
    
    
    
    
    
    
    
    (12,595
    )
    
    
    (8,901
    )
 Digital MediaYear Ended June 30, 2004
    
    (TTI)
    
    
    Graphics
    
    
    Other
    
    
    TotalRevenues
    
    $
    50,119
    
    
    $
    
    
    
    $
    2,432
    
    
    $
    52,551Operating income (loss)
    
    
    10,602
    
    
    
    
    
    
    
    (6,168
    )
    
    
    4,434
 Digital MediaYear Ended June 30, 2003
    
    and TTI
    
    
    Graphics
    
    
    Other
    
    
    TotalRevenues
    
    $
    25,875
    
    
    $
    26,247
    
    
    $
    630
    
    
    $
    52,752Operating income (loss)
    
    
    592
    
    
    
    (16,779
    )
    
    
    (10
    )
    
    
    (16,197
    )Unallocated general and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (2,257
    )
    
    
    (2,257
    )
   (in thousands)
    
    United States
    
    
    Taiwan
    
    
    Japan
    
    
    China
    
    
    Korea
    
    
    Others
    
    
    ConsolidatedFiscal Year 2005:Product sales
    
    $
    204
    
    
    $
    5,318
    
    
    $
    21,190
    
    
    $
    30,176
    
    
    $
    10,461
    
    
    $
    1,662
    
    
    $
    69,011Long-lived assets
    
    
    312
    
    
    
    234
    
    
    
    
    
    
    
    1,608
    
    
    
    
    
    
    
    
    
    
    
    2,154Fiscal Year 2004:Product sales
    
    $
    213
    
    
    $
    7,492
    
    
    $
    3,567
    
    
    $
    30,465
    
    
    $
    10,012
    
    
    $
    802
    
    
    $
    52,551Long-lived assets
    
    
    285
    
    
    
    419
    
    
    
    
    
    
    
    1,668
    
    
    
    
    
    
    
    
    
    
    
    2,372Fiscal Year 2003:Product sales
    
    $
    67
    
    
    $
    6,768
    
    
    $
    22,803
    
    
    $
    16,287
    
    
    $
    4,077
    
    
    $
    2,750
    
    
    $
    52,752Long-lived assets
    
    
    816
    
    
    
    356
    
    
    
    
    
    
    
    1,617
    
    
    
    
    
    
    
    
    
    
    
    2,789
  58




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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements
 13.
    
    Commitments and Concentration of Sales and Credit RiskBuilding Leases.The Company leases facilities under noncancelable operating lease agreements,
which expire at various dates through 2008. Rental expense for the years ended June 30, 2005,
2004 and 2003 was $2.8million, $2.5 million and $2.3 million, respectively. Future
minimum lease payments under non-cancelable operating leases at June 30, 2005 were as follows
(in thousands):
 Years ending June 30:2006
    
    $
    2,5002007
    
    
    9002008
    
    
    200Total minimum lease payments
    
    $
    3,600
 Concentration of Sales and Credit Risks.The following
table shows the percentage of our revenues in the years ended 2005,
2004 and 2003 that was derived from customers who individually
accounted for more than 10% of revenues in that year:
 Customer
    
    2005
    
    2004
    
    2003A)
    
    
    
    
    
    
    
    43
    %B)
    
    14
    %
    
    23
    %
    
    11
    %C)
    
    
    
    
    16
    %
    
    D)
    
    10
    %
    
    15
    %
    
    E)
    
    22
    %
    
    
    
    
    
 With regard to concentration of credit risk, one customer
accounted for 53% of accounts receivable as of June 30, 2005.
Five customers accounted for 35%, 22%, 19%, 16% and 14% of accounts
receivable as of June 30, 2004.Financial instruments that potentially subject the Company to significant concentrations of
credit risk consist principally of cash and cash equivalents, and trade accounts receivable.
The Company places its cash and cash equivalents primarily in market rate accounts. The Company
offers credit terms on the sale of its products to certain customers. The Company performs
ongoing credit evaluations of its customers financial condition and, generally, requires no
collateral from its customers. The Company maintains an allowance for uncollectible accounts
receivable based upon the expected collectibility of all accounts receivable.In addition to cash equivalents and short-term investments, the Companys financial instruments
include accounts receivable and accounts payable, which are carried at cost. This approximates
the fair value because of the short-term maturity of these instruments.14.
    
    ContingenciesFrom time to time, the Company may be involved in litigation in the normal course of business.
The results of any litigation matter are inherently uncertain. In the event of any adverse
decision in litigation with third parties that could arise in the future with respect to
patents, other intellectual property rights relevant to its products and defective products, the
Company could be required to pay damages and other expenses, to cease the manufacture, use and
sale of infringing products, to expend significant resources to develop non-infringing
technology, or to obtain licenses to the infringing technology.
 59




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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements
 Interim Financial Information (Unaudited)
   FISCAL 2005
    
    
    QUARTER ENDED(in thousands, except per share data)
    
    JUNE 30
    
    
    MARCH 31
    
    
    DECEMBER 31
    
    
    SEPTEMBER 30Revenues
    
    $
    20,886
    
    
    $
    16,136
    
    
    $
    15,387
    
    
    $
    16,602Gross profit
    
    
    10,213
    
    
    
    8,966
    
    
    
    8,499
    
    
    
    9,184Income (loss) from operations
    
    
    (6,570
    )
    
    
    (4,041
    )
    
    
    (378
    )
    
    
    2,088Net Income (loss)
    
    
    (6,855
    )
    
    
    (4,515
    )
    
    
    (546
    )
    
    
    1,382Net income (loss) per share  basic
    
    
    (0.27
    )
    
    
    (0.19
    )
    
    
    (0.02
    )
    
    
    0.06Net income (loss) per share  diluted
    
    
    (0.27
    )
    
    
    (0.19
    )
    
    
    (0.02
    )
    
    
    0.04
 FISCAL 2004
    
    
    QUARTER ENDED
    
    
    SEPTEMBER 30(in thousands, except per share data)
    
    JUNE 30
    
    
    MARCH 31
    
    
    DECEMBER 31
    
    
    RestatedRevenues
    
    $
    12,646
    
    
    $
    13,846
    
    
    $
    16,227
    
    
    $
    9,832Gross profit
    
    
    7,148
    
    
    
    7,832
    
    
    
    8,924
    
    
    
    4,973Income (loss) from operations
    
    
    810
    
    
    
    1,181
    
    
    
    2,575
    
    
    
    (132
    )Net Income
    
    
    989
    
    
    
    2,489
    
    
    
    1,431
    
    
    
    5,469Net income per share  basic
    
    
    0.04
    
    
    
    0.11
    
    
    
    0.06
    
    
    
    0.25Net income per share  diluted
    
    
    0.04
    
    
    
    0.10
    
    
    
    0.06
    
    
    
    0.23
 Restatement of Financial Results for the Quarter Ended September 30, 2003, the six months
ended December 31, 2003 and the nine months ended March 31, 2004.
   Three months ended
    
    
    Six months ended
    
    
    Nine months endedSeptember 30, 2003
    
    
    December 31, 2003
    
    
    March 31, 2004As reported
    
    
    As restated
    
    
    As reported
    
    
    As restated
    
    
    As reported
    
    
    As restatedGain on investments, net
    
    $
    7,205
    
    
    $
    7,995
    
    
    $
    7,120
    
    
    $
    7,910
    
    
    $
    9,061
    
    
    $
    9,851Net Income
    
    $
    4,679
    
    
    $
    5,469
    
    
    $
    6,111
    
    
    $
    6,901
    
    
    $
    8,600
    
    
    $
    9,390Basic net income per share
    
    $
    0.22
    
    
    $
    0.25
    
    
    $
    0.28
    
    
    $
    0.31
    
    
    $
    0.39
    
    
    $
    0.42Diluted net income per share
    
    $
    0.19
    
    
    $
    0.23
    
    
    $
    0.25
    
    
    $
    0.28
    
    
    $
    0.35
    
    
    $
    0.38
 60




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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements
 Schedule II
 
 Valuation and Qualifying Accounts
  Sales ReturnsBalance at
    
    
    Charged to
    
    
    
    
    
    
    Balance atFor the
    
    Beginning
    
    
    Costs and
    
    
    
    
    
    
    EndYear Ended
    
    Of Period
    
    
    Expenses
    
    
    Deductions
    
    
    Of PeriodJune 30, 2003
    
    $
    2,102
    
    
    
    99
    
    
    
    1,592
    
    
    $
    609June 30, 2004
    
    
    609
    
    
    
    
    
    
    
    309
    
    
    
    300June 30, 2005
    
    
    300
    
    
    
    113
    
    
    
    
    
    
    
    413
 61




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Quarterly Evaluation of Changes in Internal Control Over Financial Reporting
  
 Item 9B. Other Information
   62




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##### Table of Contents



PART III
 
 Item 10. Directors and Executive Officers of the Registrant
    
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management
 Equity Compensation Plan Information
  Number of sharesremaining available forfuture issuanceNumber of shares to
    
    
    
    
    
    
    under equitybe issued upon
    
    
    Weighted-average
    
    
    compensation plansexercise of
    
    
    exercise price of
    
    
    (excluding sharesoutstanding options,
    
    
    outstanding options,
    
    
    reflected inwarrants and rights
    
    
    warrants and rights
    
    
    column (a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
stockholders
    
    
    4,908,145
    (1)
    
    $
    2.91
    
    
    
    1,213,065
    (2)Equity compensation
plans not approved
by
stockholders(3)
    
    
    1,497,408
    
    
    $
    4.54
    
    
    
    885,211Total
    
    
    6,405,553
    
    
    $
    3.29
    
    
    
    2,098,276
 63




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##### Table of Contents



(1)
    
    Includes 1,552,594 shares that are reserved and issuable upon exercise of options outstanding
under the 1992 Plan, which expired on October 16, 2002, 189,451 shares that are reserved and
issuable upon exercise of options outstanding under the 1994 Plan, which expired on January
13, 2004, 250,000 shares that are reserved and issuable upon exercise of options outstanding
under the 2002 Plan and 2,916,100 shares that are reserved and issuable upon exercise of
options outstanding under the TTI Plan.(2)
    
    Includes 450,565 shares reserved for future issuance under the Purchase Plan and 762,500
shares reserved future issuance under the 2002 Plan.(3)
    
    Consists of shares subject to options that are outstanding or may be issued pursuant to the
1996 Plan. Material Features of the 1996 Nonstatutory Stock Option Plan
   
 Item 13. Certain Relationships and Related Transactions
  
 Item 14. Principal Accountant Fees and Services
   Fiscal YearFee Category
    
    2005
    
    
    2004Audit
    
    $
    715,000
    
    
    $
    292,000Audit-related
    
    
    61,000
    
    
    
    74,000Tax
    
    
    157,000
    
    
    
    122,000All other fees
    
    
    2,000
    
    
    
    Total fees
    
    $
    935,000
    
    
    $
    488,000
 64




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##### Table of Contents



65




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##### Table of Contents



PART IV
 
 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
  Page NumberManagements Report on Internal Control Over Financial Reporting
    
    
    361.
    
    Financial Statements:Report of Independent Registered Public Accounting Firm
    
    
    37Consolidated Balance Sheet -
As of June 30, 2005 and 2004
    
    
    38Consolidated Statement of Operations -
For the Three Years Ended June 30, 2005
    
    
    39Consolidated Statement of Changes in Stockholders Equity
For the Three Years Ended June 30, 2005
    
    
    40Consolidated Statement of Cash Flows
For the Three Years Ended June 30, 2005
    
    
    41Notes to Consolidated Financial Statements
    
    
    422.
    
    Financial Statement Schedules:II  Valuation and Qualifying Accounts for Each of the Three Years
          Ended June 30, 2005
    
    
    61
 66




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##### Table of Contents



3. Exhibits:
 Exhibit
    
    Description2.1
    
    Securities Purchase Agreement between XGI Technology Inc. and Trident Microsystems (Far East)
Ltd. (10)2.2
    
    Amendment to Securities Purchase Agreement between XGI Technology Inc. and Trident
Microsystems (Far East) Ltd. (10)2.3
    
    Share Subscription Agreement between XGI Technology Inc. and Trident Microsystems (Far East)
Ltd. (10)2.4
    
    Asset Purchase Agreement between XGI Cayman Ltd. and Trident Microsystems (Far East) Ltd.
(10)2.5
    
    Amendment to Asset Purchase Agreement between XGI Cayman Ltd. and Trident Microsystems (Far
East) Ltd. (10)2.6
    
    License Agreement between Trident Microsystems, Inc. and XGI Cayman Ltd. (10)2.7
    
    Capitalization Agreement between XGI Technology Inc. and Trident Microsystems (Far East) Ltd.
(10)3.1
    
    Restated Certificate of Incorporation.(1)3.2
    
    Certificate of Amendment of Restated Certificate of Incorporation.(13)3.3
    
    Amended and Restated Bylaws.(12)4.1
    
    Reference is made to Exhibits 3.1, 3.2 and 3.3.4.2
    
    Specimen Common Stock Certificate.(2)4.3
    
    Form of Rights Agreement between the Company and ChaseMellon Shareholder Services, LLC, as
Rights Agent (including as Exhibit A the form of Certificates of Designation, Preferences and
Rights of the Terms of the Series A Preferred Stock, as Exhibit B the form of Right
Certificate, and as Exhibit C the Summary of Terms of Rights Agreement).(3)10.5(*)
    
    1990 Stock Option Plan, together with forms of Incentive Stock Option Agreement and
Non-statutory Stock Option Agreement.(2)10.6(*)
    
    Form of the Companys Employee Stock Purchase Plan.(2)10.7(*)
    
    Summary description of the Companys Fiscal 1992 Bonus Plan.(2)10.8(*)
    
    Form of the Companys Fiscal 1993 Bonus Plan.(2)10.9(*)
    
    Summary description of the Companys 401(k) plan.(2)10.10(*)
    
    Form of Indemnity Agreement for officers, directors and agents.(2)10.12(*)
    
    Form of Non-statutory Stock Option Agreement between the Company and Frank C. Lin.(4)10.13(*)
    
    Form of 1992 Stock Option Plan amending and restating the 1990 Stock Option Plan included as
Exhibit 10.5.(2)10.14
    
    Lease Agreement dated May 16, 2001 between the Company and iStar Financial , Inc. for the
Companys principal offices located at 1090 East Arques Avenue, Sunnyvale,
California.(9)10.15(*)
    
    Form of Change of Control Agreement between the Company and Frank C. Lin.(9)10.16
    
    Foundry Venture Agreement dated August 18, 1995 by and between the Company and United
Microelectronics Corporation.(5)(8)10.17(*)
    
    Form of 1998 Stock Option Plan which replaces the 1992 Stock Option Plan.(6)10.18(*)
    
    Form of Nonstatutory Stock Option Agreement for non-plan grants to directors.(11)10.19(+)
    
    Form of 1996 Nonstatutory Stock Option Plan.(11)21.1
    
    List of Subsidiaries.(7)23.1
    
    Consent of Independent Registered Public Accounting Firm.(7)24.1
    
    Power of Attorney (see signature
page.)(7)31.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer(7)31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer(7)32.1
    
    Section 1350 Certification of Chief Executive Officer(7)32.2
    
    Section 1350 Certification of Chief Financial Officer(7)
 
 1.
    
    Incorporated by reference from exhibit of the same number to the Companys Annual
Report on Form 10-K for the year ended June 30, 1993.2.
    
    Incorporated by reference from exhibit of the same number to the Companys Registration
Statement on Form S-1 (File No. 33-53768), except that Exhibit 3.2 is incorporated from
Exhibit 3.4. 67




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##### Table of Contents



3.
    
    Incorporated by reference from exhibit 99.1 to the Companys Current Report on Form 8-K
filed August 21, 1998.4.
    
    Incorporated by reference from exhibit of the same number to the Companys Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.5.
    
    Incorporated by reference from exhibit of the same number to the Companys Annual
Report on Form 10-K for the year ended June 30, 1995.6.
    
    Incorporated by reference to the Companys 1998 Employee Stock Purchase Plan Individual
Stock Option Agreements and 1996 Nonstatutory Stock Option Plan on Form S-8 filed April 23,
1999 (File No. 333-76895).7.
    
    Filed herewith.8.
    
    Confidential treatment has been requested for a portion of this document.9.
    
    Incorporated by reference from exhibit of the same number to the Companys Annual
Report on Form 10-K for the year ended June 30, 200110.
    
    Incorporated by reference from the Companys Current Report on Form 8-K dated July 25,
2003.11.
    
    Incorporated by reference from exhibit of the same number to the Companys Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002.12.
    
    Incorporated by reference from exhibit of the same number to the Companys Form 10-Q
dated December 31, 2003.13.
    
    Incorporated by reference from exhibit of the same number to the Companys Form 10-Q
dated March 31, 2004.(*)
    
    Management contracts or compensatory plans or arrangements covering executive officers or
directors of the Company.(+)
    
    Compensatory plans, contracts or arrangements adopted without the approval of security
holders pursuant to which equity may be awarded. 68




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##### Table of Contents



POWER OF ATTORNEY
  
 SIGNATURES
  TRIDENT MICROSYSTEMS, INC.Dated: September 13, 2005
    
    /s/ FRANK C. LINFrank C. LinChief Executive Officer
  Signature
    
    Title/s/ Frank C. Lin
    
    President, Chief Executive Officer and Chairman of(Frank C. Lin)
    
    the Board (Principal Executive Officer)/s/ John S. Edmunds
    
    Chief Financial Officer(John S. Edmunds)/s/ Peter Jen
    
    Senior Vice President, Asia Operations and Chief(Peter Jen)
    
    Accounting Officer/s/ Glen M. Antle
    
    Director(Glen M. Antle)/s/ Yasushi Chikagami
    
    Director(Yasushi Chikagami)/s/ John Luke
    
    Director(John Luke)/s/ Millard Phelps
    
    Director(Millard Phelps)
 69




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##### Table of Contents



Exhibit
    
    Description2.1
    
    Securities Purchase Agreement between XGI Technology Inc. and Trident Microsystems (Far East)
Ltd. (10)2.2
    
    Amendment to Securities Purchase Agreement between XGI Technology Inc. and Trident
Microsystems (Far East) Ltd. (10)2.3
    
    Share Subscription Agreement between XGI Technology Inc. and Trident Microsystems (Far East)
Ltd. (10)2.4
    
    Asset Purchase Agreement between XGI Cayman Ltd. and Trident Microsystems (Far East) Ltd.
(10)2.5
    
    Amendment to Asset Purchase Agreement between XGI Cayman Ltd. and Trident Microsystems (Far
East) Ltd. (10)2.6
    
    License Agreement between Trident Microsystems, Inc. and XGI Cayman Ltd. (10)2.7
    
    Capitalization Agreement between XGI Technology Inc. and Trident Microsystems (Far East) Ltd.
(10)3.1
    
    Restated Certificate of Incorporation.(1)3.2
    
    Certificate of Amendment of Restated Certificate of Incorporation.(13)3.3
    
    Amended and Restated Bylaws.(12)4.1
    
    Reference is made to Exhibits 3.1, 3.2 and 3.3.4.2
    
    Specimen Common Stock Certificate.(2)4.3
    
    Form of Rights Agreement between the Company and ChaseMellon Shareholder Services, LLC, as
Rights Agent (including as Exhibit A the form of Certificates of Designation, Preferences and
Rights of the Terms of the Series A Preferred Stock, as Exhibit B the form of Right
Certificate, and as Exhibit C the Summary of Terms of Rights Agreement).(3)10.5(*)
    
    1990 Stock Option Plan, together with forms of Incentive Stock Option Agreement and
Non-statutory Stock Option Agreement.(2)10.6(*)
    
    Form of the Companys Employee Stock Purchase Plan.(2)10.7(*)
    
    Summary description of the Companys Fiscal 1992 Bonus Plan.(2)10.8(*)
    
    Form of the Companys Fiscal 1993 Bonus Plan.(2)10.9(*)
    
    Summary description of the Companys 401(k) plan.(2)10.10(*)
    
    Form of Indemnity Agreement for officers, directors and agents.(2)10.12(*)
    
    Form of Non-statutory Stock Option Agreement between the Company and Frank C. Lin.(4)10.13(*)
    
    Form of 1992 Stock Option Plan amending and restating the 1990 Stock Option Plan included as
Exhibit 10.5.(2)10.14
    
    Lease Agreement dated May 16, 2001 between the Company and iStar Financial , Inc. for the
Companys principal offices located at 1090 East Arques Avenue, Sunnyvale,
California.(9)10.15(*)
    
    Form of Change of Control Agreement between the Company and Frank C. Lin.(9)10.16
    
    Foundry Venture Agreement dated August 18, 1995 by and between the Company and United
Microelectronics Corporation.(5)(8)10.17(*)
    
    Form of 1998 Stock Option Plan which replaces the 1992 Stock Option Plan.(6)10.18(*)
    
    Form of Nonstatutory Stock Option Agreement for non-plan grants to directors.(11)10.19(+)
    
    Form of 1996 Nonstatutory Stock Option Plan.(11)21.1
    
    List of Subsidiaries.(7)23.1
    
    Consent of Independent Registered Public Accounting Firm.(7)24.1
    
    Power of Attorney (see signature
page.)(7)31.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer(7)31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer(7)32.1
    
    Section 1350 Certification of Chief Executive Officer(7)32.2
    
    Section 1350 Certification of Chief Financial Officer(7)
 
 1.
    
    Incorporated by reference from exhibit of the same number to the Companys Annual
Report on Form 10-K for the year ended June 30, 1993.2.
    
    Incorporated by reference from exhibit of the same number to the Companys Registration
Statement on Form S-1 (File No. 33-53768), except that Exhibit 3.2 is incorporated from
Exhibit 3.4.3.
    
    Incorporated by reference from exhibit 99.1 to the Companys Current Report on Form 8-K
filed August 21, 1998. 70




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##### Table of Contents



4.
    
    Incorporated by reference from exhibit of the same number to the Companys Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.5.
    
    Incorporated by reference from exhibit of the same number to the Companys Annual
Report on Form 10-K for the year ended June 30, 1995.6.
    
    Incorporated by reference to the Companys 1998 Employee Stock Purchase Plan Individual
Stock Option Agreements and 1996 Nonstatutory Stock Option Plan on Form S-8 filed April 23,
1999 (File No. 333-76895).7.
    
    Filed herewith.8.
    
    Confidential treatment has been requested for a portion of this document.9.
    
    Incorporated by reference from exhibit of the same number to the Companys Annual
Report on Form 10-K for the year ended June 30, 200110.
    
    Incorporated by reference from the Companys Current Report on Form 8-K dated July 25,
2003.11.
    
    Incorporated by reference from exhibit of the same number to the Companys Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002.12.
    
    Incorporated by reference from exhibit of the same number to the Companys Form 10-Q
dated December 31, 2003.13.
    
    Incorporated by reference from exhibit of the same number to the Companys Form 10-Q
dated March 31, 2004.(*)
    
    Management contracts or compensatory plans or arrangements covering executive officers or
directors of the Company.(+)
    
    Compensatory plans, contracts or arrangements adopted without the approval of security
holders pursuant to which equity may be awarded. 71