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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, 1998           Commission file number 0-20784

                           TRIDENT MICROSYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

           Delaware                                             77-0156584
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

       189 North Bernardo Avenue
       Mountain View, California                                94043-5203
(Address of principal executive offices)                        (Zip code)

       Registrant's telephone number, including area code: (650) 691-9211

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to section 12(g) of the Act:

                         Common Stock, $0.001 Par Value
                                (Title of class)

        Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
                                                             Yes  [X]    No [ ]

        Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]

        The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing price of the Common Stock on August 31,
1998 ($3.406 per share), as reported on Nasdaq National Market was approximately
$35,375,967. Shares of Common Stock held by executive officers and directors and
by each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliate. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.

        The number of shares of the registrant's $0.001 par value Common Stock
outstanding on August 31, 1998, was 12,914,119.

        Part III incorporates by reference from the definitive proxy statement
for the registrant's 1998 annual meeting of stockholders to be filed with the
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this Form.

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                                TABLE OF CONTENTS
<TABLE>
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<S>                                                                                         <C>
PART I.....................................................................................  3
        Item 1.       Business.............................................................  3
        Item 2.       Properties........................................................... 11
        Item 3.       Legal Proceedings.................................................... 11
        Item 4.       Submission of Matters to a Vote of Securities Holders................ 11

PART II.................................................................................... 14
        Item 5.       Market for the Registrant's Common Stock and Related
                      Stockholder Matters.................................................. 14
        Item 6.       Selected and Supplementary Financial Data............................ 15
        Item 7.       Management's Discussion and Analysis of Financial Condition and
                      Results of Operations................................................ 16
        Item 7A.      Quantitative and Qualitative Disclosures About Risk.................. 21
        Item 8.       Financial Statements and Supplementary Data.......................... 21
        Item 9.       Changes in and Disagreements with Accountants on Accounting and
                      Financial Disclosure................................................. 21

PART III................................................................................... 22
        Item 10.      Directors and Executive Officers of the Registrant................... 22
        Item 11.      Executive Compensation............................................... 22
        Item 12.      Security Ownership of Certain Beneficial Owners and Management....... 22
        Item 13.      Certain Relationships and Related Transactions....................... 22

PART IV  23
        Item 14.      Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 23

POWER OF ATTORNEY.......................................................................... 42

SIGNATURES................................................................................. 42

INDEX TO EXHIBITS FILED TOGETHER WITH THIS ANNUAL REPORT................................... 43
</TABLE>

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PART I

ITEM 1. BUSINESS

        Trident Microsystems, Inc. ("Trident" or the "Company") designs,
develops and markets very large scale integrated circuit ("IC") videographics
and audio products for the desktop and portable personal computer (PC) market.
The Company's graphics, video and audio controllers typically are sold with
software drivers, a BIOS and related system integration support. The Company's
strategy is to apply its design expertise, which helped it succeed in the market
for Super Video Graphics Array ("SVGA") graphics controllers and GUI
accelerators, to other high volume graphics and multimedia markets such as
Digital Media for the general mass public, flat-panel LCD controllers for
notebooks, acceleration of Digital Versatile Disc ("DVD") based live-video
playback, and three-dimensional ("3D") display for game and entertainment
applications.

        The overall PC marketplace is characterized by extreme price competition
and rapid technological change as leading PC systems manufacturers compete among
themselves and other PC clone makers for market share. As a result, PC systems
manufacturers require low-cost, feature-rich, advanced graphics and multimedia
solutions. The Company believes that the systems manufacturers are moving
towards reducing system cost to the sub-$1000 level by purchasing IC graphics
and multimedia solutions that integrate functions formerly performed by several
separate components. Moreover, as DVD and video processing capabilities become
more popular, an increasing percentage of computer users require a
high-performance, low-cost graphics system that can display photo-realistic
images or display full-motion video on a sub-$1000 PC system.

        The Company's overall strategy is to capture these market opportunities
by using its design expertise to develop and manufacture videographics and
multimedia products that offer a superior combination of price, performance and
features. The Company is employing this strategy in the fast-growing graphics
and multimedia markets with significant volume potential and is focusing on
providing high performance and feature-rich products which it believes will
appeal to leading PC systems manufacturers.

MARKETS AND PRODUCTS

        Trident has targeted the PC desktop, portable, and multimedia markets.
The desktop market is the largest segment of the PC industry for the Company's
graphics and multimedia products and is characterized by intense price
competition and rapid technological advances. The desktop market includes
adapter card manufacturers, who build graphics controllers onto adapter cards
that serve as graphics subsystems, and PC systems manufacturers and motherboard
suppliers, who may either include adapter cards in their systems or design
graphics controllers onto their motherboards. The first two 3D products are the
3DImage975 and 3DImage985, both products incorporate an on-chip triangle set-up
engine. Overall, with the rapid desktop transition to 3D in 1997, the Company
believes its 3DImage family is well positioned to capitalize on the new market
requirements.

        Trident entered the portable market in 1995, and is now one of the
leading companies in the market. The Company's portable strategy is to leverage
its superior product positioning and continue to deliver the broadest product
offering in the industry. The Company's product line includes two 2D 64-bit
controllers, the Cyber9382 and Cyber 9385 (with TV-Output), the Cyber 9520
(3D/AGP/2MB SDRAM integrated), the Cyber 9525 DVD (3D/AGP/DVD/2-5MB integrated)
and the 3D portable graphics controller, the Cyber9397 and the 3D/AGP/DVD
integrated controller, the 9397DVD. In addition, the Company has successfully
entered production on the industry's first PCI 2D 64-bit 2MB SDRAM embedded LCD
controller. The Company's development direction is a three-way technology drive
with 3D, DVD, and embedded SDRAM solutions. Trident's portable vision is to be
"The only other chip on the notebookSM" by integrating 2D/3D, DVD, AGP embedded
memory, and audio in the future into one product. The Cyber9525DVD/9520DVD
together with the Cyber9388 and the DVD functionality in Cyber 9397DVD are the
tangible core of this vision.


        The Company has made a major effort to design products to fill the needs
of leading PC systems manufacturers as well as the needs of adapter card
manufacturers. Sales to leading PC systems manufacturers

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represented approximately 25% of net sales for fiscal 1998.

CURRENT PRODUCTS

Desktop Computer Market:

        3DIMAGE975. This is the Company's first 3D graphics accelerator for the
desktop market. It features a high performance 3D rendering engine, set-up
engine, TrueVideo(R) processor, motion video capture port, and ClearTV(TM) for
flicker-free TV-out support.

        PROVIDIA9685. This is the Company's first 64-bit desktop GUI accelerator
with refined flicker removal for more effective TV display. Other features
include dual hardware windows for video conferencing, improved GUI acceleration
and improved MPEG display performance.

        PROVIDIA9680 AND PROVIDIA9682. These pin-compatible products extend the
Company's first 64-bit GUI accelerator, the TGUI9660, to include video
acceleration. Both are capable of displaying full-motion MPEG I video when
matched with a Pentium 133 processor because the graphics chip offloads the
compute intensive tasks of Color-Space-Conversion (CSC) and scaling from the
Pentium processor. The ProVidia9682 can display live video from a capture port
for applications such as live TV or hardware MPEG decode. The ProVidia9682 also
includes Trident's TrueVideo logic which smoothes jagged edges in live video
images.

        TVG9470. This device is the Company's first GUI accelerator that
displays to TV and computer monitors. Based on the Company's 32-bit TGUI9440 GUI
core, additional circuitry processes the display data to remove flicker and
scale the screen dimensions to those required for NTSC or PAL TV. The product
includes an integrated RAMDAC and clock for full integration.

        TGUI9440. This mixed-signal 32-bit GUI accelerator is the Company's
third pin-compatible GUI accelerator in the TGUI94xx product line. The device is
a high-performance 32-bit graphics accelerator for the efficient use of memory
bandwidth by a 32-bit bus. This product was the first integrated GUI accelerator
to include a VESA Advanced Feature Connector (VAFC) digital analog converter
(DAC) for high resolution video-in-a-window.

        TKD8001. This is the Company's first integrated 24-bit DAC and dual
(memory and video) clock synthesizer. The TKD8001 is designed for use with the
Company's standard TVGA8900D/DR controller. Combining the true color DAC and
dual clock into one package saves cost and board space as compared with discrete
solutions

        TVGA8900D/DR. This is a higher-performance SVGA controller, offering
1024x768 resolution with up to 256 colors non-interlaced or up to 16.7 million
colors ("true color") at 640x480 resolution. The TVGA8900D supports the Trident
TKD8001, an integrated chip that includes a 24-bit DAC and a clock synthesizer.
TVGA8900DR has a BIOS ROM integrated with the controller chip.

        TVGA9000I. This is the Company's first generation mixed-signal SVGA
controller, integrating an 8-bit pseudo color DAC and dual clock synthesizer
reducing component count, permitting lower cost and more compact system designs.
This product supports up to 1024x768 resolution with 16 colors non-interlaced at
70Hz refresh rates.

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Portable Computer Market:

        CYBER9397. This is the Company's first 3D color LED flat panel graphics
accelerator for the mobile computer market. It features a hardware 3D rendering
engine with triangle set-up engine, TrueVideo(R) processor, motion video capture
port, dual video windows for videoconferencing, and ClearTVTM for flicker free
TV-Output support.

        CYBER 9397DVD. It is the follow-on product to the 9397 with additional
integrated AGP 2X and DVD hardware assist. The product provides 3D, AGP and DVD
for the mainstream notebook market.

        CYBER9388. The Cyber9388 is the Company's first 64-bit color LCD flat
panel graphics accelerator with 2MB embedded SDRAM. It features a single-cycle
high performance 2D engine, Time Video(R) processor, motion video capture port,
dual video windows for video conferencing, dual display support of different
resolution/color-depth/refresh-rate for presentation, and ClearTVTM for
flicker-free TV-output support.

        CYBER9382 AND CYBER9385. These are the Company's first 64-bit color LCD
flat panel graphics accelerators for the mobile computer market. Their
accelerator engines are based on the desktop ProVidia9682 with the same video
capture and display capability as well as hooks for Zoom Video capture from
products such as Trident's Omega82C094. The Cyber9385 is capable of display to
NTSC or PAL TV with enhanced flicker removal. Both products support 1.5MB frame
buffers and up to 1280x1024 displays in the latest revisions.

        CYBER9320. This is the Company's first color LCD flat panel graphics
accelerator for mobile computer markets. Its accelerator engine is based on the
TGUI9440 32-bit engine and brings desktop graphics performance to the notebook
PC. Other features include high quality DSTN display quality, power-down logic,
a VAFC DAC for video playback and 1024x768 dual monitor display.

        OMEGA82C094 AND OMEGA82C28. This is the Company's first PCI-to-PCMCIA
host controller chip set supporting two PC Card slots. This product is optimized
for use in high-performance notebook computers where multimedia applications
require high bandwidth. Omega82C094 supports the Zoomed Video standard
delivering full-screen broadcast-quality video free of the system bandwidth
constraints. Omega82C094 is register-set compatible with Intel i82092AA, the
industry's first PCI-to-PCMCIA host controller. The companion Omega82C28
interfaces to power switches and enables serialized interrupt requests for ISA
legacy support.

        OMEGA82C722G AND OMEGA82C722GX. The Omega82C722G is the Company's first
single-chip ISA-to-PCMCIA host controller supporting two PC Card slots. The
device is optimized for use in notebook computers where the saving of power and
board space is critical. Omega82C722GX is the mixed-voltage version of
Omega82C722G device. It supports PC Cards operated at either 5v or 3.3v. Both
Omega82C722G and 82C722GX are fully compliant with PCMCIA 2.1 and JEIDA 4.1.

        OMEGA82C365G. The Omega82C365 is the Company's first Intel 82365SL
pin-compatible ISA-to-PCMCIA host controller supporting two PC Card slots mainly
used for new desktop PC presentation applications requiring PC Card read/write
drives. The Omega82C365G fully complies with industry specifications such as
PCMCIA 2.1, JEIDA 4.1 and the de-facto standard of Intel 82365SL register set.
This device can be combined in sequence to support multiple slots.

Audio Product:

        4DWAVE-DX. This is the Company's first PCI audio accelerator and is
based on Microsoft's PC9x and Intel's AC'97 initiatives. It provides
acceleration of up to 64 stereo audio streams and offers audio effects, such as
reverb and chorus. Its wavetable engine provides high quality audio output
without requiring expensive external components. It also accelerates 3D
positional audio for most of today's more popular games. This product is mainly
focused on the segment zero portion of the PC market by providing high
performance at a low price.

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NEW PRODUCTS

        The following products are being sampled in limited quantities. The
Company's future success depends upon the successful completion of these and
other new products. There can be no assurance that the Company will be able to
commence shipment of these products in a timely manner or that they will be
successful in the marketplace.

Portable Products:

        CYBER9525DVD. Pin compatible with Cyber 9520, Cyber 9525DVD offers
additional hardware assist for DVD (MPEG2) video playback and on-chip 2-5MB
memory.

        CYBER9520. This is the Company's first 3D/AGP/2MB embedded 64-bit color
LCD flat panel graphics controller. It's based on the 9397DVD 3D core but
without the triangle set-up hardware to provide 3D for the mainstream notebook
market.

Desktop Product:

        3DIMAGE985. The 3DImage985 is the Company's second product offering to
the 3D desktop market with 2x full AGP 3D performance.

PRODUCTS UNDER DEVELOPMENT

        The Company continues to invest in product development programs which it
considers crucial to its success. In particular, the Company is investing in
extensions to its current desktop, portable and multimedia product lines in an
attempt to maintain product competitiveness particularly in the important area
of 3D graphics and multimedia including video and audio. New product development
also continues in technologies where further integration is likely to be needed
and may be applied throughout the Company's product line.

        There can be no assurance that the Company will be able to successfully
complete the development of these products or to commence shipments of these
products in a timely manner, or that product specifications required by the
market will not change during the development period. In addition, even if
successfully developed and shipped, there can be no assurance that new products
will be successful in the marketplace.

SALES, MARKETING AND DISTRIBUTION

        The Company sells its products primarily through direct sales efforts.
The Company has sales offices in Taipei, Taiwan; Hong Kong, China; Tokyo, Japan;
Houston, Texas and Mountain View, California. The Company's offices are staffed
with sales, applications engineering, technical support, customer service and
administrative personnel to support its direct customers. The Company also
markets its products through independent sales representatives and distributors.

        The Company's desktop customers have been primarily Asian adapter card
manufacturers who sell their products to PC manufacturers, VARs and
distributors. However, in the past few years leading systems manufacturers have
significantly increased their share of the PC market, displacing in part some of
the Asian adapter card manufacturers. While many manufacturers based in Asia may
sell PCs to leading systems manufacturers for resale, the choice of components
for these PCs generally is made by the leading systems manufacturers. The
Company has made a major effort to design products to fill the needs of leading
PC systems manufacturers as well as the needs of adapter card manufacturers.

        Trident's future success depends in large part on the success of its
sales to leading systems manufacturers. The Company continues to focus its sales
and marketing efforts with the goal of increasing sales to the leading PC
systems manufacturers and OEM channel. Competitive factors of particular
importance in such markets include 

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performance and the integration of functions on a single IC chip.

        During fiscal 1998, the Company generated 84% of its revenues from Asia
and 16% from North America and the rest of the world. Major systems
manufacturers often take delivery of their products in Asia for production
purposes, and such sales by the Company are reflected in the Company's revenues
in Asia. Sales to two customers, Union Computer and Fujitsu accounted for
approximately 15% and 11% of net sales, respectively, for fiscal 1998. A small
number of customers frequently account for a majority of the Company's sales in
any quarter. However, sales to any particular customer may fluctuate
significantly from quarter to quarter. Future operating performance may be
dependent in part on the ability to replace significant customers or win new
design-ins with current customers from one quarter to the next. Fluctuations in
sales to key customers may adversely affect the Company's operating results in
the future. For additional information on foreign and domestic operations, see
Note 8 of Notes to Financial Statements.

MANUFACTURING

        Trident has adopted a "fabless" manufacturing strategy whereby Trident
contracts-out its wafer fabricating needs to qualified contractors that it
believes provide cost, technology or capacity advantages for specific products.
As a result, the Company has generally been able to avoid the significant
capital investment required for wafer fabrication facilities and to focus its
resources on product design, quality assurance, marketing and customer support.
The Company has, however, made a substantial investment in a manufacturing joint
venture. Trident's wholly-owned subsidiary, Trident Microsystems (Far East) Ltd.
("Trident Far East"), manages the manufacturing operations of the Company.

        In order to obtain an adequate supply of wafers, especially wafers
manufactured using advanced process technologies, the Company entered into a
joint venture agreement in August 1995 with United Microelectronics Corporation
("UMC"), one of the Company's current foundries, under which the Company
invested a certain amount of New Taiwan dollars, equivalent to approximately
U.S.$49.3 million for a 9.3% equity interest in a joint venture with UMC and
other venture partners. The Company has been guaranteed 12.5% of total wafer
supply from the wafer fabrication facility of the new venture, United Integrated
Circuits Corporation ("UICC"). The UMC agreement is expected to provide the
Company with substantial additional capacity; however, it will also expose the
Company to certain financial risk if the Company does not obtain enough purchase
orders from its customers to consume the capacity or if the joint venture is not
successful in its operations. Part of the joint venture foundry facility was
destroyed in a fire on October 3, 1997. The facility is being rebuilt with
insurance proceeds and is expected to be completed in 1999.

        In fiscal 1998, the Company's primary foundries were UMC and Taiwan
Semiconductor Manufacturing Company ("TSMC"). The Company also received
additional capacity from Samsung Semiconductor, Inc. and Winbond Electronics
Corporation. In January 1997, the Company renegotiated its June 1995 wafer
purchase agreement with TSMC. This agreement committed the Company to purchase
and the supplier is to provide a certain number of wafers each year. In January
1997 TSMC reimbursed U.S.$14.4 million to Trident in conclusion of this
agreement, but the Company and TSMC continue to maintain their semiconductor
foundry relationship. The Company will continue to explore arrangements for
additional capacity commitments, although there is no assurance that any
additional agreements will be executed, or that additional capacity is required.

        The Company purchases product in wafer form from the foundries and
manages the contracting with third parties for the chip packaging and testing.
In order to manage the production back-end operations, the Company has been
adding personnel and equipment to this area. The Company's goal is to increase
the quality assurance of the products while reducing manufacturing cost. To
ensure the integrity of the suppliers' quality assurance procedures, the Company
has developed and maintained test tools, detailed test procedures and test
specifications for each product and requires the foundry and third party
contractors to use those procedures and specifications before shipping finished
products. The Company has experienced few customer returns based on the quality
of its products. However, Trident's future return experience may vary because
its newer, more complex products are more difficult to manufacture and test. In
addition, some of its customers, including major PC systems

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manufacturers may subject those products to more rigid testing standards than in
the past.

        The Company's reliance on third party foundries and assembly and testing
houses involves several risks including the absence of adequate capacity, the
unavailability of or interruptions in access to certain process technologies,
and reduced control over delivery schedules, manufacturing yields, quality
assurance and costs. The Company conducts business with certain foundries by
delivering written purchase orders specifying the particular product ordered,
quantity, price, delivery date and shipping terms and, therefore, except as set
forth in the above-mentioned contracts or agreements, such foundries are not
obligated to supply products to the Company for any specific period, in any
specific quantity or at any specified price, except as may be provided in a
particular purchase order.

        While the Company has obtained and continues to seek additional
capacity, the qualification process and the production ramp-up for additional
foundries has in the past taken and could in the future take longer than
anticipated. There can be no assurance that such additional capacity from
current foundries and new foundry sources will be available and will satisfy the
Company's requirements on a timely basis or at acceptable quality or per unit
prices. Constraints or delays in the supply of the Company's products, whether
because of capacity constraints, unexpected disruptions at the foundries or
assembly or testing houses, delays in additional production at existing
foundries or in obtaining additional production from existing or new foundries,
shortages of raw materials, or other reasons, could result in the loss of
customers and other material adverse effects on the Company's operating results,
including effects that may result should the Company be forced to purchase
products from higher cost foundries or pay expediting charges to obtain
additional supply. In addition, to the extent the Company elects to use multiple
sources for certain products, customers may be required to qualify multiple
sources, which could adversely affect the customers' desire to design-in the
Company's products.

RESEARCH AND DEVELOPMENT

        The Company conducted substantially all of its product development
in-house and had a staff of 293 research and development personnel as of June
30, 1998. The Company is focusing its development efforts primarily on the
development of more advanced graphics controllers, including 3D graphics
controllers, flat panel controller products for notebook PCs and multimedia
products. In addition, the Company intends to continue to devote significant
resources to the development of a broad range of high-performance, proprietary
software drivers. In anticipation of future market demand, the Company is
investing in a variety of new technologies through licensing and purchase
arrangements. These technologies may be incorporated in the Company's future
products, providing additional functionality and integration.

COMPETITION

        The markets in which the Company competes are highly competitive and the
Company expects that competition will increase. The principal factors of
competition in the Company's markets include price, performance, the timing of
new product introductions by the Company and its competitors, product features,
the emergence of new graphics and other PC standards, level of integration of
various functions, quality and customer support. The Company's principal current
competitors in graphics include ATI Technologies, Inc., Chips and Technologies,
Inc. (an Intel subsidiary), Cirrus Logic, Inc., Intel Corporation, NeoMagic,
Inc., and S3 Inc. and potential competitors include certain large semiconductor
manufacturers including National Semiconductor Corporation, and emerging
semiconductor manufacturers. Current competitors in audio include Cirrus Logic,
Inc., Creative Labs, Inc., and ESS Technology, Inc. Certain of the Company's
current competitors and many potential competitors have significantly greater
technical, manufacturing, financial and marketing resources than the Company.

        Leading PC systems manufacturers have increased market share in desktop
and portable PC systems in recent years. The Company believes that performance,
features and quality are particularly important in the North American, Japanese
and European systems manufacturer markets, and that integration of various
functions on a single IC is becoming increasingly important in these markets.
While the Company has recently gained entry to these geographic markets, there
can be no assurance that the Company will continue to be able to compete

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successfully as to price or any other factor or that the Company will continue
to be successful in its efforts to expand sales in these markets. The failure of
the Company to meet the technological and pricing challenges of its competition
would have an adverse effect on the Company's results of operations.

INTERNATIONAL OPERATIONS

        The Company's wholly-owned subsidiary, Trident Far East, maintains
offices in Hong Kong, China and Taipei, Taiwan. The Company's wholly-owned
subsidiary, Trident Microsystems Japan K.K. maintains a sales office in Tokyo,
Japan. Trident Far East is responsible for the manufacturing of the Company's
products and is principally responsible for international sales activities and
for operation of the Hong Kong and Taiwan offices. The Hong Kong office provides
sales and technical support for customers in Hong Kong and logistical support
for customers in Hong Kong and Taiwan. The Taiwan and Japan offices provide
sales and technical support for customers in their respective regions. Each
office directly hires its own employees. The Company has established research
and development facilities in Hsinchu, Taiwan and Shanghai, China.

        During fiscal 1998, 1997 and 1996, sales to OEM, ODM, and adapter card
customers in Asia accounted for approximately 84%, 74% and 78% of the Company's
net sales, respectively, and the Company anticipates that sales to customers in
Asia will continue to account for a substantial percentage of sales. In
addition, the foundries that manufacture the Company's products are located in
Asia. Due to this concentration of international sales and manufacturing
capacity in Asia, the Company is subject to the risks of conducting business
internationally, including unexpected changes in regulatory requirements,
fluctuations in the U.S. dollar which could increase the sales price in local
currencies of the Company's products in foreign markets, tariffs and other
barriers and restrictions, and the burdens of complying with a wide variety of
foreign laws. In addition, the Company is subject to general geopolitical risks,
such as political and economic instability and changes in diplomatic and trade
relationships, in connection with its sales, support and third-party fabrication
efforts in Hong Kong, Taiwan and elsewhere. The Company's sales have been
adversely affected recently by the general economic decline in Asia. Also,
political instability or significant changes in economic policy could disrupt
the Company's operations in foreign countries or result in the curtailment or
termination of such operations. While the Company has not experienced any other
material adverse effects on its operations as a result of other regulatory or
geopolitical factors, there can be no assurance that such factors will not
adversely impact the Company's operations in the future or require the Company
to modify its current business practices.

LICENSES, PATENTS AND TRADEMARKS

        The Company attempts to protect its trade secrets and other proprietary
information primarily through agreements with customers and suppliers,
proprietary information agreements with employees and consultants and other
security measures. In certain cases, the Company has applied for patents on its
technology. Although the Company intends to protect its rights vigorously, there
can be no assurance that these measures will be successful.

        The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. From time to time, the
Company has received notices claiming that it has infringed third-party patents
or other intellectual property rights. To date, licenses generally have been
available to the Company where third-party technology was necessary or useful
for the development or production of the Company's products. In the future,
however, there can be no assurance that third parties will not assert claims
against the Company with respect to existing or future products or that licenses
will be available on reasonable terms, or at all, with respect to any
third-party technology. In the event of litigation to determine the validity of
any third-party claims, such litigation could result in significant expense to
the Company and divert the efforts of the Company's technical and management
personnel, whether or not such litigation is determined in favor of the Company.
In the event of an adverse result in any such litigation, the Company could be
required to expend significant resources to develop non-infringing technology or
to obtain licenses to the technology which is the subject of the litigation.
There can be no assurance that the Company would be successful in such
development or that any such licenses would be available. Patent disputes in the
semiconductor industry have often been settled through cross licensing
arrangements. Because the Company currently does not have a portfolio of
patents, the Company may not be able to settle any 

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alleged patent infringement claim through a cross-licensing arrangement. In the
event any third party made a valid claim against the Company or its customers
and a license was not made available to the Company on commercially reasonable
terms, the Company would be adversely affected. In addition, the laws of certain
countries in which the Company's products have been or may be developed,
manufactured or sold, including the People's Republic of China, Taiwan and
Korea, may not protect the Company's products and intellectual property rights
to the same extent as the laws of the United States of America.

        Trident and TrueVideo are registered trademarks, and 3DImage975,
ProVidia9685, ProVidia9680, ProVidia9682, TVG9470, TGUI9440, TKD8001,
TVGA8900D/DR, TVGA9000i, Cyber9397, Cyber9397DVD, Cyber9388, Cyber9382,
Cyber9385, Cyber9320, Omega82C094, Omega82C28, Omega82C722G, Omega82C722GX,
Omega82C365G, Cyber9525DVD, Cyber9520, 3DImage985, are trademarks of the
Company. Windows, Windows 95, Windows NT and Video for Windows are trademarks of
Microsoft Corporation. OS/2 is a trademark of International Business Machines
Corporation. Other trademarks used herein are the property of their respective
owners.

BACKLOG

        Because the Company's business is characterized by short lead-time
orders and quick delivery schedules, the Company seeks to ship products within a
few weeks of receipt of orders. As a result, the Company operates without
significant backlog, and relies on bookings each quarter to comprise a
predominant portion of its sales for that quarter. Additionally, purchase orders
may be cancelable without significant penalty or subject to price
renegotiations, changes in unit quantities or delivery schedules to reflect
changes in customers' requirements or manufacturing availability. Consequently,
the Company does not believe that backlog is a reliable indicator of future
sales.

SEGMENTS

        Trident operates in the videographics and audio segments as described
above.

EMPLOYEES

        As of June 30, 1998, the Company had 439 full time employees, including
293 in research and development, 49 in product testing, quality assurance and
operations functions, 67 in marketing and sales and 30 in finance, human
resources, and administration. The Company instituted a reduction in force of
approximately 10% in July, 1998 and its total full time employees at August 31,
1998 was 398 with 264 in research and development, 46 in product testing,
quality assurance and operations functions, 60 in marketing and sales and 28 in
finance, human resources and administration. The Company has no plans to
increase its employee base during fiscal 1999. Competition for qualified
personnel in the semiconductor, software and the PC industry in general is
intense in Silicon Valley where the Company is located. The Company's future
success will depend in great part on its ability to continue to attract, retain
and motivate highly qualified technical, marketing, engineering and management
personnel. The Company's employees are not represented by any collective
bargaining agreements, and the Company has never experienced a work stoppage.
The Company believes that its employee relations are good.

                                       10

<PAGE>   11

ITEM 2. PROPERTIES

        The Company leases two buildings, one of approximately 58,000 square
feet and a second one of approximately 26,000 square feet, on North Bernardo
Avenue in Mountain View, California, pursuant to leases which expire in June
1999 and February 2000, respectively. These buildings are used as the Company's
headquarters and include development, marketing and sales, and administrative
offices. The Company also leases a 5,400 square foot research and development
facility in Chandler, Arizona. The Company leases office space for a sales
office in Houston, Texas. This sales office totals approximately 500 square
feet. Other Company leases include a 10,000 square foot office in Kowloon, Hong
Kong, China, for the Hong Kong branch office of the Cayman Islands subsidiary,
an 8,000 square foot sales office in Taipei, Taiwan, a 32,000 square foot
research and development facility in Hsinchu, Taiwan, a 11,000 square foot
research and development facility in Shanghai, China and a 300 square foot sales
office in Tokyo, Japan for the Japanese subsidiary.

ITEM 3. LEGAL PROCEEDINGS

        None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.

        None.

                                       11
<PAGE>   12

EXECUTIVE OFFICERS OF THE REGISTRANT

        As of June 30, 1998, the executive officers of the Company, who are
elected by and serve at the discretion of the Board of Directors, were as
follows:

<TABLE>
<CAPTION>
Name                         Age        Position                            Employed Since
----                         ---        --------                            --------------
<S>                          <C>        <C>                                 <C> 
Frank C. Lin                  53        President, Chief Executive                 1987
                                        Officer and Chairman of the Board

Jung-Herng Chang, Ph.D.       42        Senior Vice President, Graphics            1992
                                        Engineering

Peter Jen                     51        Senior Vice President, Asia                1988
                                        Operations and Chief Accounting
                                        Officer

Gerald Liu, Ph.D.             41        Senior Vice President, Product             1996
                                        Marketing

Amir Mashkoori                36        Senior Vice President, Operations          1995
                                        and Business Development
</TABLE>

        Mr. Lin founded Trident in July 1987 and has served in his present
position since that time. His career spans 25 years in the computer and
communications industries. Prior to Trident, he was Vice President of
Engineering and co-founder of Genoa Systems, Inc., a graphics and storage
product company. Before Genoa, Mr. Lin worked for GTE, ROLM, and was a senior
manager at Olivetti Advanced Technical Center in Cupertino, CA. He holds a
M.S.E.E. from the University of Iowa and an B.S.E.E. from National Chiao Tung
University, Taiwan. Mr. Lin is also a board member of Monte Jade Science and
Technology Association and United Integrated Circuits Corporation ("UICC"). UICC
is a joint venture among UMC, Trident and other fabless semiconductor companies.

        Dr. Chang joined the Company in July 1992. He was appointed to his
present position in January 1998. He was appointed Vice President, Engineering
in July 1994, and served as Chief Technical Officer from July 1992 through June
1994. From October 1988 through July 1992, he was a hardware design manager at
Sun Microsystems, Inc., a workstation company. From September 1985 through
September 1988, he was a research member at IBM's Thomas J. Watson Research
Center. Dr. Chang holds a Ph.D. in Computer Science and a M.S. in Electrical
Engineering and Computer Science from the University of California, Berkeley,
and a B.S. in Electrical Engineering from the National Taiwan University.

        Mr. Jen joined the Company in August 1988. He was appointed to the
position of Chief Accounting Officer in September 1998 and Senior Vice
President, Asia Operations in January 1998. He was appointed to the position of
Vice President, Asia Operations in April 1995, and served as General Manager of
Asia Operations from April 1994 to April 1995. He served as Vice President,
Operations from September 1992 to March 1994, and served as Vice President,
Finance from October 1990 through August 1992. From September 1985 to July 1988,
he was Controller at Genoa Systems, Inc., a graphics chipset design company.
Prior to that time, Mr. Jen served in finance and operations positions for
various corporations, including Bristol-Myers (Taiwan), Pacific Glass
Corporation, a subsidiary of Corning Glass Works, and Philips Telecommunicatie
Industrie, B.V. Mr. Jen holds an M.B.A. in Marketing from Central Missouri State
University and a B.S. in Accounting from National Taiwan University.

        Dr. Liu was appointed to his present position in January 1998. He joined
Trident in January 1996 with 15 years of broad industry experience. Prior to
joining Trident, Dr. Liu served eight years as founder and president of
venture-backed Knights Technology and its affiliate Omega Micro, Inc., a core
logic company acquired by Trident in January 1996. He continued to serve as a
board member of Knights Technology until its acquisition by Electroglas. Prior
to his joining Knights Technology, he had been with Fairchild Semiconductor. He
also was President of the 


                                       12

<PAGE>   13

Chinese Institute of Engineers, San Francisco Bay Chapter and a founding board
member of Chinese Software Professional Engineers. He holds a Ph.D. in Computer
Science from the University of California, Berkeley, a M.S.E.E. from the
University of Illinois, Chicago, and a B.S.E.E. from National Taiwan University.

        Mr. Mashkoori was appointed to his present position in January 1998. He
joined Trident in December 1995 as Vice President, Operations after 17 years
with Advanced Micro Devices, Inc. where he last held the position of Director of
Operations for the nonvolatile memory division. Prior to his directorship he
worked in a variety of management positions at AMD International operations and
memory test groups. He holds an M.B.A. and a B.S. in Finance from San Jose State
University.

                                       13
<PAGE>   14

PART II


ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

        The Company's stock has been traded on the Nasdaq National Market since
the Company's initial public offering on December 16, 1992 under the Nasdaq
symbol TRID. The following table sets forth, for the periods indicated, the high
and low closing sales prices for the Company's common stock as reported by
Nasdaq:

<TABLE>
<CAPTION>
Year Ended June 30,          High           Low
-------------------          ----           ---
<S>                        <C>            <C>   
1997
First Quarter             $16.750        $ 8.625
Second Quarter             23.125         14.500
Third Quarter              24.500         12.625
Fourth Quarter             16.000          8.750

1998
First Quarter             $19.375        $10.875
Second Quarter             16.875          7.688
Third Quarter              10.250          7.063
Fourth Quarter              7.875          5.000
</TABLE>

        As of June 30, 1998, there were approximately 199 registered holders of
record of the Company's common stock.

        The Company has never paid cash dividends on its common stock. The
Company currently intends to retain earnings, if any, for use in its business
and does not anticipate paying any cash dividends in the foreseeable future.

                                       14

<PAGE>   15
ITEM 6. SELECTED AND SUPPLEMENTARY FINANCIAL DATA

                           TRIDENT MICROSYSTEMS, INC.
                      SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                                          YEAR ENDED JUNE 30,
                                                                ------------------------------------------------------------------
(in thousands, except per share data)                             1998            1997          1996         1995          1994
                                                                ---------       ---------     ---------    ---------     ---------
<S>                                                             <C>             <C>           <C>         <C>            <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net Sales                                                       $113,002        $177,934      $168,089     $106,766      $69,139
Income (loss) from operations                                     (9,520)         20,553        22,742        9,776          973
Net Income (loss)                                                 (5,106)         15,340        16,860        8,011        1,480
Basic earnings (loss) per share                                    (0.39)           1.20          1.38         0.69         0.13
Diluted earnings (loss) per share                                  (0.39)           1.09          1.26         0.61         0.12
                                                                                                                                
CONSOLIDATED BALANCE SHEET DATA:                                                                                                
Cash, cash equivalents, and short-term and investments          $ 36,886        $ 59,945      $ 41,228     $ 60,636      $50,492
Working capital                                                   47,881          64,952        58,618       61,610       50,713
Total assets                                                     118,427         139,516       127,510       88,665       75,269
Long-term debt, less current portion                                 350             707            --           --           --
Total stockholders' equity                                       104,891         109,557        90,184       66,141       56,116
</TABLE>

               SUPPLEMENTARY QUARTERLY CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                   FISCAL 1998 QUARTER ENDED
                                                ------------------------------------------------------------------
 (IN THOUSANDS, EXCEPT PER SHARE DATA)          JUNE 30           MARCH 31         DECEMBER 31        SEPTEMBER 30
 ------------------------------------           -------           --------         -----------        ------------
<S>                                             <C>                <C>                <C>                <C>
Net sales                                       $19,274            $28,249            $26,939            $38,539
Gross margin                                      4,088              9,731              8,234             15,546
Income (loss) from operations                    (7,577)            (1,858)            (3,529)             3,443
Net income (loss)                                (5,307)              (923)            (1,949)             3,073
Basic earnings (loss) per share                 $ (0.41)           $ (0.07)           $ (0.15)           $  0.24
Diluted earnings (loss) per share               $ (0.41)           $ (0.07)           $ (0.15)           $  0.21
</TABLE>


<TABLE>
<CAPTION>
                                                                    FISCAL 1997 QUARTER ENDED
                                                ------------------------------------------------------------------
 (IN THOUSANDS, EXCEPT PER SHARE DATA)          JUNE 30           MARCH 31         DECEMBER 31        SEPTEMBER 30
 ------------------------------------           -------           --------         -----------        ------------
<S>                                             <C>                <C>                <C>                <C>
Net sales                                       $34,720            $46,511            $51,864            $44,838
Gross margin                                     13,407             17,447             18,413             15,263
Income from operations                            2,144              6,306              7,273              4,830
Net income                                        1,918              4,532              5,365              3,525
Basic earnings per share                        $  0.15            $  0.35            $  0.42            $  0.28
Diluted earnings per share                      $  0.14            $  0.32            $  0.38            $  0.26
</TABLE>



                                       15

<PAGE>   16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

ANNUAL RESULTS OF OPERATIONS

         The following table sets forth the percentages that consolidated
statement of operations items are to net sales for the years ended June 30,
1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                                       YEAR ENDED JUNE 30,
                                                    ------------------------
                                                    1998      1997      1996
                                                    ----      ----      ----
<S>                                                  <C>       <C>       <C>
Net sales                                            100 %     100%      100%
Cost of sales                                         67        64        66
                                                    ----      ----      ----
Gross margin                                          33        36        34
Research and development                              25        12        11
Selling, general and administrative                   17        12        10
                                                    ----      ----      ----
Income (loss) from operations                         (9)       12        13
Interest income, net                                   2         1         2
                                                    ----      ----      ----
Income (loss) before provision for income taxes       (7)       13        15
Provision (benefit) for income taxes                  (2)        4         5
                                                    ----      ----      ----
Net income (loss)                                     (5)        9        10
                                                    ====      ====      ====
</TABLE>

Net Sales

         Net sales in fiscal 1998 decreased to $113.0 million, or 36%, from
$177.9 million reported in fiscal 1997. The decrease in net sales was primarily
due to decreases in unit volume shipments and average selling prices (ASPs) of
approximately 26% of graphical user interface (GUI) accelerators and graphics
controllers in fiscal 1998 as compared to fiscal 1997. Sales of portable
products of $44.9 million were approximately 40% of the Company's net sales in
fiscal 1998 as compared to $65.8 million or 37% of net sales in fiscal 1997.
Sales of GUI accelerator desktop products were approximately $64.0 million or
57% of the Company's net sales in fiscal 1998 as compared to approximately $92.5
million or 52% in fiscal 1997.

         Net sales in fiscal 1997 increased to $177.9 million, or 6%, above the
$168.1 million reported in fiscal 1996. The increase in net sales was primarily
due to increases in the unit volume shipments of graphical user interface (GUI)
accelerators and graphics controllers of approximately 21% in fiscal 1997 as
compared to fiscal 1996 but was partly offset by the decrease in ASPs of
approximately 12% from 1996 ASPs. Sales of portable products increased to
approximately 37% of the Company's net sales in fiscal 1997 from only 15% in
fiscal 1996. Sales of GUI accelerator desktop products declined to approximately
52% of the Company's net sales in fiscal 1997 from approximately 66% in fiscal
1996.

         The Company has made a major effort to design products to fill the
needs of leading PC systems manufacturers as well as the needs of adapter card
manufacturers. Sales to leading PC systems manufacturers represented
approximately 25% of net sales for fiscal 1998, a decrease from 41% in fiscal
1997, and 37% in fiscal 1996. Sales to Asian customers, primarily in Hong Kong,
Taiwan, Korea and Japan, accounted for 84%, 74% and 78% of net sales in fiscal
1998, 1997, and 1996, respectively. Sales to two customers accounted for
approximately 15% and 11% of net sales for fiscal 1998. Sales to three customers
accounted for approximately 21%, 12% and 11% of net sales for fiscal 1997; and
approximately 16%, 12%, and 11% of net sales for fiscal 1996. Substantially all
of the sales transactions were denominated in U.S. dollars during all periods.
The Company derives a significant portion of its revenues from sales to


                                       16

<PAGE>   17

distributors. Sales to distributors represented 17% and 19% of net sales during
the twelve months ended June 30, 1998 and 1997, respectively. During the first
half of fiscal year 1998 the Company experienced higher than usual returns
resulting from certain distributors adjusting their inventory mix and levels.

         The Company plans to develop new and higher-performance GUI
accelerators, graphics controllers and multimedia products to sell to existing
customers as well as new customers in Asia, North America and Europe. The
Company's future success depends upon its successful introduction of these and
other new products on a regular and timely basis and upon those products meeting
customer requirements. There can be no assurance that the Company will be able
to complete the development of new products or to commence shipments of new
products in a timely manner, or that product specifications will not change
during the development period. In addition, even if such new products are
successfully developed and shipped, there can be no assurance that they will be
successful in the marketplace.

Gross Margin

         Trident's gross margin decreased to 33% in fiscal 1998 from 36% in
fiscal 1997. Gross margins were generally lower in fiscal 1998 because of
decreasing prices in the personal computer industry and a product mix which was
more heavily weighted towards desktop computers which have lower margins than
portable computer products. Trident's gross margin increased to 36% in fiscal
1997 from 34% in fiscal 1996 because of a product mix which was more heavily
weighted towards notebook GUI accelerators with higher gross margins.

         The Company believes that the prices of high-technology products
decline over time, as competition increases and new, advanced products are
introduced. The Company expects ASPs of existing products to continue to
decline, although the ASPs of the Company's entire product line may remain
constant or increase as a result of introductions of new higher-performance
products often with additional functionality which are planned to be sold at
higher prices. The Company's strategy is to maintain and improve gross margins
by (1) developing new products that have higher margins through its custom
design methodology and migration to new process technology, and (2) reducing
manufacturing costs by large-volume production. There is no assurance that the
Company will be able to develop and introduce new products on a timely basis or
that it can reduce manufacturing costs.

Research and Development

         Research and development expenditures increased to $28.2 million in
fiscal 1998 from $22.1 million and $17.9 million in fiscal 1997 and 1996,
respectively. Research and development expenditures as a percentage of net sales
were 25%, 12% and 11% in fiscal 1998, 1997 and 1996, respectively. The increase
in expenditures in fiscal 1998 compared to fiscal 1997 was primarily due to an
increase in spending in multimedia engineering, graphics engineering, the Taiwan
Research and Development Center costs and the start-up of the Shanghai Research
and Development Center. The increase in expenditures in fiscal 1997 compared to
fiscal 1996 was primarily due to the increase in headcount and associated
personnel-related costs, increased depreciation, and increased non-recurring
engineering expenses and outside engineering services resulting from the
Company's increased research and development efforts during 1997. As a result of
the Company's cost reduction efforts, the Company expects research and
development expenses to remain at or below the levels for fiscal 1998 during
fiscal 1999.

Selling, General and Administrative

         Selling, general and administrative expenditures decreased to $19.0
million in fiscal 1998 from $21.9 million in fiscal 1997 and were $16.7 million
in fiscal 1996. Selling, general and administrative expenditures as a percentage
of net sales were 17%, 12% and 10% in fiscal 1998, 1997 and 1996, respectively.
Selling expenditures were $13.5 million in fiscal 1998 as compared to $14.7
million and $11.2 million in fiscal 1997 and 1996, respectively. General and
administrative expenditures were to $5.5 million in fiscal 1998 as compared to
$7.2 million and $5.5 million in fiscal 1997 and 1996, respectively. Selling
costs in fiscal 1998 were lower than fiscal 1997 due to the slow-down in
personal computer sales and reductions in marketing personnel. Selling costs in
fiscal 1997 were higher than in fiscal 1996 due to additional staffing for an
OEM sales team and increased marketing


                                       17

<PAGE>   18

personnel. General and administrative expenditures were lower in fiscal 1998
than in fiscal 1997 primarily due to reductions in bonus expenses, personnel,
and consulting services. General and administrative expenditures were higher in
fiscal 1997 than in fiscal 1996 primarily due to increases in additional human
resources and information systems personnel. As a result of the Company's cost
reduction efforts, the Company expects selling, general and administrative
expenditures to remain at or below the levels for fiscal 1998 during fiscal
1999.

Interest Income, Net

         The amount of interest income earned by the Company varies directly
with the amount of its cash, cash equivalents, short-term investments and the
prevailing interest rates. Net interest income increased to $2.4 million in
fiscal 1998 from $2.0 million in fiscal 1997 due to cash investments being held
in higher yielding certificates of deposit. Interest income decreased slightly
to $2.0 million in fiscal 1997 from $2.1 million in fiscal 1996 primarily as a
result of declining interest rates in fiscal 1997. A significant amount of the
interest earned by the Company during fiscal 1996 was not subject to income
taxes.

Provision for Income Taxes

         As a percentage of income before income taxes, the provision (benefit)
for income tax was (28)% for fiscal year 1998, and 32% for fiscal years 1997 and
1996. The effective income tax rate was below the statutory rate primarily
because of operations in foreign countries with lower income tax rates. In
addition, a significant portion of earned interest was not subject to federal
income tax in fiscal 1996. Based on a number of factors, as of June 30, 1998 the
Company has provided a valuation allowance for state deferred tax assets due to
the uncertainty regarding their realization. These factors include primarily
recent operating losses incurred by the Company, the fact that the market in
which the Company competes is intensely competitive and characterized by rapidly
changing technology, relatively short duration for carry-forwards of state tax
losses, and statutory prohibition on carry back of state tax losses.

Future Results; Forward-Looking Statements

         This report contains, in addition to historical information,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
the completion of the UICC foundry, trends in the graphics marketplace, the
introduction of new products and new technologies in the Company's products and
expectations regarding expense levels. Such forward-looking statements represent
management's current expectations, are not guarantees and involve risks and
uncertainties. Actual results could vary significantly from those expected by
the Company. The significant factors that could affect actual results include
those specified below, as well as those specifically identified elsewhere in
this report.

         The Company has experienced fluctuations in its operating results in
the past and anticipates such fluctuations in the future. These fluctuations
have been caused by a variety of factors, including seasonal customer demand
(particularly during the summer when sales of PCs have traditionally been
slower), the timing of new product introductions, the acceptance of new
products, economic fluctuations, including fluctuations in Asia in particular,
competitive pressures on average selling prices, the availability of foundry and
assembly capacities and changes in the mix of products sold and changes in the
Company's customer mix. The Company's prior performance should not be presumed
to be an accurate indicator of future performance. Future results will depend
substantially upon the Company's ability to bring new products and technologies
to market on a timely basis, and upon the acceptance of those products. Also,
future results will depend upon the market's acceptance of the Company's
customers' products which incorporate the Company's products, and the amount and
timing of expenditures for research and development, and for selling, general
and administrative functions. Operating results have also been adversely
affected by fluctuations in the market for desktop or portable PCs, the
Company's ability to predict product demand and manage its inventory, and order
cancellations or rescheduling. The Company currently expects to report operating
losses for the next several quarters and cannot accurately predict when it will
return to profitability.

         The Company derives a significant portion of its revenue from sales to
distributors. The Company has


                                       18

<PAGE>   19

limited control over the extent to which products sold to distributors are sold
through to end users. Accordingly, a portion of the Company's sales may from
time to time result in increased inventory at its distributors. The Company
provides reserves for returns and allowances for distributor inventories. These
reserves are based on the Company's estimates of inventory held by its
distributors and the expected sell through of its products by its distributors.
Actual results could differ from these estimates.

         The Company's future operating results also may be affected by various
factors that are beyond its control. These include adverse changes in general
economic conditions, political instability, governmental regulation or
intervention affecting the personal computer industry, government regulation
resulting from U.S. foreign and trade policy, and fluctuations in foreign
exchange rates (particularly in relation to the U.S. dollar and Asian
currencies).

         Because the Company's customers distribute their products worldwide,
changes in the global graphics marketplace, such as the shift in market share
from Asian clone makers to leading North American PC systems manufacturers, have
affected and will continue to affect the Company's operating results.
Furthermore, the Company's operating results will fluctuate with changes in the
Asian economies, particularly those of Taiwan and Hong Kong, since the Company's
revenues have been and are expected to be generated primarily from customers in
Asia.

         The market for graphics controllers has become increasingly
competitive, and the Company's results have been and in the future may be
adversely affected by the actions of existing or future competitors, including
the development of new technologies, the incorporation of graphics functionality
into other components and claims by third parties of infringement of patent or
similar intellectual property rights.

         The Company's products are extremely complex devices. The Company
establishes and implements test specifications and imposes quality standards
upon its suppliers and also performs separate application-based compatibility
and system testing for its products. However, its customers may discover defects
in the Company's products related to their particular application. To the extent
that the Company is unable to remedy defects or provide products able to meet
its customers' requirements, the Company may experience lower revenues and
excess inventories which could have an adverse effect on the Company's results
of operations.

         The Company currently relies on several independent foundries to
manufacture its products either in finished form or wafer form. If a foundry
terminates its relationship with the Company or the Company's supply from a
foundry is interrupted or terminated for any other reason, such as a natural
disaster, the Company may not have sufficient time to replace the supply of
products manufactured by that foundry. While the Company has made significant
investments to secure foundry capacity, there can be no assurance that it will
obtain sufficient foundry capacity to meet customer demand in the future,
particularly if that demand should increase. The Company is continuously
evaluating potential new sources of supply. However, the qualification process
and the production ramp-up for additional foundries have in the past taken, and
in the future could take, longer than anticipated. There can be no assurance
that capacity from current foundries and new foundry sources will be available
to satisfy the Company's requirements on a timely basis or at acceptable quality
or per unit prices.

         In addition, the Company's products are assembled and tested by several
independent subcontractors. The Company's reliance on independent manufacturing,
assembly and testing houses involves a number of risks, including the lack of
guaranteed capacity and reduced control over delivery schedules, manufacturing
yields, quality assurance and costs. Constraints or delays in the supply of the
Company's products, because of capacity constraints, unexpected disruptions at
the foundries or assembly or testing houses, delays in obtaining additional
production at existing foundries or from new foundries, shortages of raw
materials, or other reasons, could result in the loss of customers and other
material adverse effects on the Company's operating results, particularly if the
Company is forced to purchase products from higher cost foundries or pay
expediting charges to obtain additional supply in a timely manner.

         The market price of the Company's common stock has been, and may
continue to be, extremely volatile. Factors such as new product announcements by
the Company or its competitors, quarterly fluctuations in the Company's
operating results and general conditions in the graphics controller market may
have a significant impact


                                       19

<PAGE>   20

on the market price of the Company's common stock. These conditions, as well as
factors that generally affect the market for stocks of high-technology
companies, could cause the price of the Company's stock to fluctuate
substantially over short periods.

         Sales are not expected to increase significantly until an economic
recovery in East Asia and the introduction of the Company's next generation
products. No assurance can be made as to the time, if any, at which there will
be a recovery.

         Future sales growth, if any, may strain Company resources. In
particular increased sales to large system manufacturers in diverse markets and
the resulting requirements for design support would place substantial demands on
Trident's research and development and sales functions. In addition, the
Company's ability to manage any further growth will depend upon its ability to
manage and expand its foundry relationships. Should Trident's management fail to
expand these functions to keep pace with growth should it occur, the Company's
business and results of operations could be adversely affected.

LIQUIDITY AND CAPITAL RESOURCES

         As of June 30, 1998, the Company's principal sources of liquidity
included cash and cash equivalents of $22.9 million and short-term investments
of $14.0 million. Cash used in operating activities was $7.7 million in fiscal
year 1998. Cash provided by operating activities in fiscal years 1997 and 1996
was $31.4 million and $11.1 million, respectively. Cash used in operating
activities in fiscal 1998 was mainly due to unprofitable operations, an increase
in inventory, decreases in accounts payable and accrued expenses, primarily
offset by a decrease in accounts receivable. Cash provided by operating
activities in fiscal 1997 was mainly due to profitable operations, decreases in
inventory and other assets, and partially offset by increases in accounts
receivable and decreases in accounts payable. Capital expenditures in fiscal
1998, 1997 and 1996 were $3.8 million, $3.5 million and $4.8 million,
respectively.

         During fiscal years 1998, 1997, and 1996 the Company issued 319,000,
392,000 and 717,000 shares of common stock, respectively. These issuances
generated cash of $2.5 million, $2.9 million, and $3.7 million in fiscal 1998,
1997, and 1996, respectively.

         In fiscal year 1998, the Company invested $2.0 million in cash in a
privately-held semiconductor design company for an equity interest of less than
10%. The investment is presented as a long-term investment in the financial
statements.

         In August 1995, the Company entered into a joint venture agreement with
UMC and other venture partners to establish a foundry, UICC. Under the
agreement, the Company invested $49.3 million in the joint venture and the
foundry guarantees to Trident 12.5% of the foundry's total wafer supply. On
October 3, 1997, a fire at UICC's fabrication plant in Hsin Chu, Taiwan,
completely destroyed its fabrication equipment. The fabrication plant, and the
destroyed equipment, was insured. Trident was not utilizing the UICC fabrication
plant, and there are no existing Trident products on UICC's production lines.
The UICC foundry is being rebuilt and is expected to be in production in 1999.
At June 30, 1998, the Company held a 9.3% equity ownership in UICC.

         The Company's investment in the UICC joint venture is intended to
secure capacity so that it can meet expected increased demand, should it occur.
However, there are certain risks associated with the transaction including the
Company's ability, together with its partners, to fully utilize the capacity of
UICC. The Company will continue to consider transactions to secure additional
foundry capacity as circumstances warrant.

         The agreement with UMC has utilized a significant amount of Trident's
available funds; however the Company believes its current resources are
sufficient to meet its needs for at least the next twelve months. The Company
regularly considers transactions to finance its activities, including debt and
equity offerings and new credit facilities or other financing transactions. The
Company believes its current reserves are adequate.


                                       20

<PAGE>   21

         In April, 1998, the Company's Board of Directors approved a $20 million
stock repurchase program over the next twelve months. During fiscal year 1998,
274,500 shares of common stock were repurchased for $2.1 million under this
Plan. During fiscal year 1997, the Company repurchased 100,000 shares of common
stock for $1.1 million. The Company's cash reserves may decline as a result of
its future use, if any, of the repurchase program.

YEAR 2000

         The Company has a Year 2000 project designed to identify and assess the
risks associated with its information systems, products, operations and
infrastructure, and suppliers that are not Year 2000 compliant and to develop,
implement, and test remediation and contingency plans to mitigate these risks.
The project is composed of four phases: (1) identification of risks, (2)
assessment of risks, (3) development of remediation and contingency plans, and
(4) implementation and testing.

         Information systems. In 1997, the Company undertook a project to
upgrade all its information systems to Year 2000 compliance.

         Products. The Company has assessed the capabilities of all of its
products sold to customers. Based on the assessments made to date, none of the
Company's products are affected by Year 2000 issues.

         Operations and Infrastructure. Office equipment and other items used in
the operations and facilities of the Company are currently being assessed for
Year 2000 compliance to be completed during the second quarter of fiscal 1999.

         Suppliers. The Company is also in the process of evaluating its
supplier base to determine whether Year 2000 issues affecting suppliers will
adversely impact the Company's operations. To mitigate this risk, the Company
has contacted all of its suppliers to assess their Year 2000 readiness and will
continue to monitor the progress of its key suppliers. The Company has a limited
number of key suppliers and expects to have the assessment of these key
suppliers completed during the next six months.

         General and Risk Factors. The Company's Year 2000 project is currently
in the assessment phase and, with respect to certain information systems and
products, in the remediation phase. The Company believes that its greatest
potential risks are associated with its information systems and systems embedded
in its operations and infrastructure. The Company is at the beginning stage of
assessments for its operations and infrastructure, and cannot predict whether
significant problems will be identified. The Company has not yet determined the
extent of contingency planning that may be required. Based on the status of the
assessment made and remediation plans developed to date, the Company is not in a
position to state the total cost of remediation of all Year 2000 issues. Costs
identified to date are expected to be not less than $100,000.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not applicable.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The Financial Statements and supplemental data of the Company required
by this item are set forth at the pages indicated at Item 14(a).

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         None.


                                       21

<PAGE>   22

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information regarding Directors required by this Item is
incorporated by reference from the definitive proxy statement for the Company's
1998 annual meeting of stockholders to be filed with the Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Form (the "Proxy Statement"). Information relating to the executive
officers of the Company is set forth in Part I of this report under the caption
"Executive Officers of the Registrant."

         Information required by this item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference from the Proxy Statement under the caption "EXECUTIVE COMPENSATION AND
OTHER MATTERS--Section 16(a) Beneficial Ownership Reporting Compliance."

ITEM 11. EXECUTIVE COMPENSATION

         The information required by this Item is incorporated by reference from
the Proxy Statement under the caption "EXECUTIVE COMPENSATION AND OTHER
MATTERS."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by this Item is incorporated by reference from
the Proxy Statement under the captions "INFORMATION ABOUT TRIDENT
MICROSYSTEMS--Stock Ownership of Certain Beneficial Owners and Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this Item is incorporated by reference from
the Proxy Statement under the caption "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."


                                       22

<PAGE>   23

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

         (a)      The following documents are filed as a part of this Form:

<TABLE>
<CAPTION>
                  1.       Financial Statements:

                                                                                                     PAGE NUMBER
                                                                                                     -----------
<S>               <C>                                                                                     <C>
                           Report of Independent Accountants                                              24

                           Consolidated Balance Sheet -                                                   25
                           As of June 30, 1998 and 1997

                           Consolidated Statement of Operations -                                         26
                           For the Three Years Ended June 30, 1998

                           Consolidated Statement of Changes in Stockholders' Equity                      27
                           For the Three Years Ended June 30, 1998

                           Consolidated Statement of Cash Flows                                           28
                           For the Three Years Ended June 30, 1998

                           Notes to Consolidated Financial Statements                                     29

                  2.       Financial Statement Schedules:

                           For years ended June 30, 1998, 1997 and 1996:

                           Report of Independent Accountants on Financial Statement Schedules             40
</TABLE>

<TABLE>
<CAPTION>
                           Schedule                                                                  Page Number
                           --------                                                                  -----------
<S>                        <C>                                                                            <C>
                           II.  Valuation and Qualifying Accounts and Reserves                            41

                           All other schedules are omitted because they are not
                           applicable or the required information is shown in
                           the consolidated financial statements or notes
                           thereto.

                  3.       Exhibits: See Index to Exhibits on page 43. The
                           Exhibits listed in the accompanying Index to Exhibits
                           are filed or incorporated by reference as part of
                           this report.

         (b)       Reports on Form 8-K:

                           Report under item 5 filed on August 21, 1998
                           regarding the adoption of the Rights Agreement dated
                           July 24, 1998.
</TABLE>


                                       23
<PAGE>   24
                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of
Trident Microsystems, Inc.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
Trident Microsystems, Inc. and its subsidiaries at June 30, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP
San Jose, California
July 17, 1998, except for Note 10 which is as of July 24, 1998


                                       24
<PAGE>   25
TRIDENT MICROSYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                              JUNE 30,
                                                                    -------------------------
(in thousands, except per share data)                                  1998            1997
                                                                    ---------       ---------
<S>                                                                 <C>             <C>      
ASSETS
Current Assets:
    Cash and cash equivalents                                       $  22,916       $  29,745
    Short-term investments                                             13,970          30,200
    Accounts receivable                                                 8,183          20,643
    Inventories                                                        10,146           7,296
    Deferred income taxes                                               2,266           2,926
    Prepaid expenses and other current assets                           1,236           1,171
                                                                    ---------       ---------
        Total current assets                                           58,717          91,981
Property and equipment, net                                             7,766           7,463
Investment in joint venture                                            49,289          39,631
Other assets                                                            2,655             441
                                                                    ---------       ---------
        Total assets                                                $ 118,427       $ 139,516
                                                                    =========       =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
    Accounts payable                                                $   3,359       $  14,274
    Accrued expenses                                                    5,805          10,703
    Current portion of obligation under capital lease                     380             286
    Income taxes payable                                                1,292           1,766
                                                                    ---------       ---------
        Total current liabilities                                      10,836          27,029

Deferred income taxes                                                   2,350           2,223
Obligations under capital lease, less current portion                     350             707
                                                                    ---------       ---------
        Total liabilities                                              13,536          29,959
                                                                    =========       =========

Commitments (Note 9)
Stockholders' Equity:
    Common stock, $ 0.001 par value; 30,000 shares authorized;
    13,289 and 12,970 shares issued and outstanding                        13              13
    Additional paid-in capital                                         45,339          42,799
    Retained earnings                                                  62,724          67,830
    Treasury stock, at cost, 374 and 100 shares                        (3,185)         (1,085)
                                                                    ---------       ---------
        Total stockholders' equity                                    104,891         109,557
                                                                    =========       =========
        Total liabilities and stockholders' equity                  $ 118,427       $ 139,516
                                                                    =========       =========
</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                       25

<PAGE>   26
TRIDENT MICROSYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                   YEAR ENDED JUNE 30,
                                                        ----------------------------------------
(in thousands, except per share data)                     1998             1997          1996
                                                        ---------       ---------      ---------
<S>                                                     <C>             <C>            <C>      
Net sales:
     Sales                                              $ 113,002       $ 163,129      $ 158,471
     Sales to related parties                                  --          14,805          9,618
                                                        ---------       ---------      ---------
                                                          113,002         177,934        168,089
Cost of sales                                              75,402         113,404        110,675
                                                        ---------       ---------      ---------
Gross margin                                               37,600          64,530         57,414
Research and development expenses                          28,156          22,082         17,931
Selling, general and administrative expenses               18,964          21,895         16,741
                                                        ---------       ---------      ---------
Income (loss) from operations                              (9,520)         20,553         22,742
Interest income, net                                        2,428           2,008          2,052
                                                        ---------       ---------      ---------
Income (loss) before provision for income taxes            (7,092)         22,561         24,794
Provision (benefit) for income taxes                       (1,986)          7,221          7,934
                                                        ---------       ---------      ---------
Net income (loss)                                       $  (5,106)      $  15,340      $  16,860
                                                        =========       =========      =========
Basic earnings (loss) per share                         $   (0.39)      $    1.20      $    1.38
                                                        =========       =========      =========
Shares used in computing per share amounts                 13,007          12,746         12,255
                                                        =========       =========      =========
Diluted earnings (loss) per share                       $   (0.39)      $    1.09      $    1.26
                                                        =========       =========      =========
Shares used in computing diluted per share amounts         13,007          14,067         13,423
                                                        =========       =========      =========
</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       26
<PAGE>   27
TRIDENT MICROSYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                              DEFERRED
                                                                            COMPENSATION
                                                                              RELATED TO      NOTES
                                                   COMMON      ADDITIONAL     RESTRICTED    RECEIVABLE
                                                   STOCK        PAID-IN        STOCK AND       FROM        TREASURY        RETAINED
(in thousands)                        SHARES       AMOUNT       CAPITAL      STOCK OPTIONS  STOCKHOLDERS    STOCK          EARNINGS
                                      ------      --------     ----------   --------------  ------------   ---------       --------
<S>                                   <C>         <C>           <C>           <C>            <C>            <C>            <C>     
Balance at June 30, 1995              11,861      $     11      $ 31,387      $   (253)      $   (634)      $     --       $ 35,630
Issuance of common stock                 717             1         3,684            --             --             --             --
Amortization of deferred
       compensation                       --            --            --           253             --             --             --
Payment of stockholder
        notes receivable                  --            --            --            --             49             --             --
Income tax benefit on
     disqualifying disposition
     of common stock options              --            --         3,196            --             --             --             --
Net income                                --            --            --            --             --             --         16,860
                                      ------      --------      --------      --------       --------       --------       --------
Balance at June 30, 1996              12,578            12        38,267            --           (585)            --         52,490
Issuance of common stock                 392             1         2,891            --             --             --             --
Payment of stockholder
        notes receivable                  --            --            --            --            585             --             --
Income tax benefit on
     disqualifying disposition
     of common stock options              --            --         1,641            --             --             --             --
Purchase of treasury shares               --            --            --            --             --         (1,085)
Net income                                --            --            --            --             --             --         15,340
                                      ------      --------      --------      --------       --------       --------       --------
Balance at June 30, 1997              12,970            13        42,799            --             --         (1,085)        67,830
Issuance of common stock                 319            --         2,540            --             --             --             --
Purchase of treasury shares               --            --            --            --             --         (2,100)            --
Net loss                                  --            --            --            --             --             --         (5,106)
                                      ------      --------      --------      --------       --------       --------       --------
Balance at June 30, 1998              13,289      $     13      $ 45,339      $     --       $     --       $ (3,185)      $ 62,724
                                      ======      ========      ========      ========       ========       ========       ========
</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       27
<PAGE>   28
TRIDENT MICROSYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                             YEAR ENDED JUNE 30,
                                                                      ----------------------------------
(in thousands)                                                          1998         1997         1996
                                                                      --------     --------     --------
<S>                                                                   <C>          <C>          <C>     
Cash Flows from Operating Activities:
     Net income (loss)                                                $ (5,106)    $ 15,340     $ 16,860
     Adjustments to reconcile net income to cash
     provided by operating activities:
         Depreciation and amortization                                   3,532        2,677        1,910
         Provision for doubtful accounts and sales returns                  49           76           13
         Income tax benefit on disqualifying disposition
           of common stock options                                          --        1,641        3,196
         Amortization of deferred compensation                              --           --          253
         Gain on disposal of property and equipment                         --           --         (112)
         Changes in assets and liabilities:
            Accounts receivable                                         12,411       (3,364)      (8,117)
            Inventories                                                 (2,850)      19,571      (15,230)
            Prepaid expenses and other current assets                      (65)       3,569       (1,112)
            Other assets                                                  (214)        (219)         630
            Deferred income taxes, net                                     787        3,135       (1,971)
            Accounts payable                                           (10,916)      (9,810)      12,557
            Accrued expenses                                            (4,898)       2,588          601
            Income taxes payable                                          (474)      (3,844)       1,643
                                                                      --------     --------     --------
               Net cash provided by (used in) operating activities      (7,744)      31,360       11,121
                                                                      --------     --------     --------
Cash Flows from Investing Activities:
     Sales (purchases) of short-term investments, net                   16,230       (5,866)       5,693
     Proceeds from disposal of fixed assets                                 --           --        1,009
     Purchases of property and equipment                                (3,834)      (3,519)      (4,755)
     Advance payment from(to) vendor under wafer capacity agreement         --       14,400      (16,800)
     Investment in joint venture                                        (9,658)     (25,915)     (13,716)
     Long-term Investment                                               (2,000)          --           --
                                                                      --------     --------     --------
               Net cash provided by (used in) investing activities         738      (20,900)     (28,569)
                                                                      --------     --------     --------
Cash Flows from Financing Activities:
     Issuance of common stock                                            2,540        2,891        3,684
     Repayment of capital leases                                          (263)          --           --
     Principal repayments by stockholders of notes receivable               --          585           49
     Purchase of treasury stock                                         (2,100)      (1,085)          --
                                                                      --------     --------     --------
               Net cash provided by financing activities                   177        2,391        3,733
                                                                      --------     --------     --------
Net increase (decrease) in cash and cash equivalents                    (6,829)      12,851      (13,715)

Cash and cash equivalents at beginning of year                          29,745       16,894       30,609
                                                                      --------     --------     --------
Cash and cash Equivalents at end of year                              $ 22,916     $ 29,745     $ 16,894
                                                                      ========     ========     ========
Supplemental Disclosure of Cash Flow Information:
     Cash paid during the year for income taxes                       $    544     $  6,470     $  4,083
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                       28
<PAGE>   29
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1.   THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     THE COMPANY

     Trident Microsystems, Inc. (the "Company") designs, develops and markets
     videographics and multimedia integrated circuits for both the desktop and
     portable PC market.

     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis 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 purchased with an original maturity of 90 days or
     less from the date of purchase. Cash and cash equivalents at June 30, 1998
     and 1997 include certificates of deposits of $13,221,000 and $8,080,000,
     respectively. Short-term investments are comprised of certificates of
     deposits with contractual maturities of less than one year and have been
     classified "available-for-sale." At June 30, 1998, the fair value of the
     Company's investments approximated cost.

     Inventories. Inventories are stated principally at standard cost adjusted
     to approximate the lower of cost (first-in, first-out method) or market
     (net realizable value).

     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.

     Investments. Equity investment of less than 20% wherein the Company does
     not have the ability to exert significant influence are accounted for using
     the cost method.

     Revenue Recognition. Revenue from product sales is recognized upon
     shipment. Provision is made for expected sales returns and allowances when
     revenue is recognized. The Company has limited control over the extent to
     which products sold to distributors are sold through to end users.
     Accordingly, a portion of the Company's sales may from time to time result
     in increased inventory at its distributors. The Company provides reserves
     for returns and allowances for distributor inventories. These reserves are
     based on the Company's estimates of inventory held by its distributors and
     the expected sell through of its products by its distributors. Actual
     results could differ from these estimates.

     Software Development Costs. To date, the period between achieving
     technological feasibility and the general availability of such software has
     been short and software development costs qualifying for capitalization
     have been insignificant. Accordingly, the Company has not capitalized any
     software development costs.

     Income Taxes. The Company accounts for income taxes using the asset and
     liability method, under which the expected future tax consequences of
     temporary differences between the book and tax bases of assets and
     liabilities are recognized as deferred tax assets and liabilities. The
     Company does not record a deferred tax

                                       29

<PAGE>   30
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

     provision on unremitted earnings of foreign subsidiaries to the extent that
     such earnings are considered permanently invested.

     Net Income (loss) per Share. Basic net income (loss) per share is computed
     by dividing net income (loss) available to common shareholders by the
     weighted average number of common shares outstanding during the period.
     Diluted net income per share is calculated using the weighted average
     number of outstanding shares of common stock plus dilutive potential common
     stock shares. Potential common stock shares consist of common stock
     options, computed using the treasury stock method based on the average
     stock price for the period.

     Foreign Currency Transactions. The functional currency of the Company's
     operations in all countries is the U.S. dollar. Sales and purchase
     transactions are generally denominated in U.S. dollars. Foreign transaction
     gains and losses were not material for each period presented.

     Stock-based Compensation. The Company accounts for stock-based employee
     compensation arrangements in accordance with provisions of APB No. 25,
     "Accounting for Stock Issued to Employees" and complies with the disclosure
     provisions of FAS No. 123, "Accounting for Stock-Based Compensation. "
     Under APB No. 25, compensation cost is generally recognized based on the
     difference, if any, between the quoted market price of the Company's stock
     on the date of grant and the amount an employee must pay to acquire the
     stock.

     New Accounting Pronouncements. In June 1997, the Financial Accounting
     Standards Board issued Statement of Financial Accounting Standards No. 130
     (FAS No. 130), "Reporting Comprehensive Income" and No. 131 (FAS No. 131),
     "Disclosures About Segments of an Enterprise and Related Information." FAS
     No. 130 establishes standards for reporting and display of comprehensive
     income and its components in a full set of general-purpose financial
     statements. FAS No. 130 is effective for fiscal years beginning after
     December 15, 1997. Reclassification of financial statements for earlier
     periods provided for comparative purposes is required. FAS No. 131
     supercedes FAS No. 14 and requires segment information be reported on the
     basis that it is used internally for evaluating segment performance and
     deciding how to allocate resources to segments in quarterly and annual
     reports. FAS No. 131 is effective for annual reports for fiscal years
     beginning after December 15, 1997 and applicable to interim financial
     statements beginning in the second year of application, along with
     comparative information for interim periods in the initial year of
     applications.

     Reclassifications. Certain prior year balances have been reclassified to
     conform to the current year presentation.


                                       30
<PAGE>   31
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

2.   BALANCE SHEET COMPONENTS

<TABLE>
<CAPTION>
                                                                       JUNE 30,
                                                                 ---------------------
(in thousands)                                                     1998         1997
                                                                 --------     --------
<S>                                                              <C>          <C>     
Accounts receivable:
   Trade accounts receivable                                     $  8,813     $ 21,224
   Less: allowance for doubtful accounts                             (630)        (581)
                                                                 --------     --------
                                                                 $  8,183     $ 20,643
                                                                 ========     ========
Inventories:
   Work in process                                               $  2,615     $  3,154
   Finished goods                                                   7,531        4,142
                                                                 --------     --------
                                                                 $ 10,146     $  7,296
                                                                 ========     ========
Property and Equipment:
   Machinery and equipment                                       $ 15,799     $ 12,574
   Furniture and fixtures                                           1,952        1,527
   Leasehold improvements                                           2,289        2,007
                                                                 --------     --------
                                                                   20,040       16,108
   Less: accumulated depreciation and amortization                (12,274)      (8,645)
                                                                 --------     --------
                                                                 $  7,766     $  7,463
                                                                 ========     ========
Other assets:
   Long-term equity investment                                   $  2,000     $     --
   Other                                                              655          441
                                                                 --------     --------
                                                                 $  2,655     $    441
                                                                 ========     ========
Accrued expenses:
   Compensation accruals                                         $  1,883     $  2,771
   Sales allowances                                                   671        2,953
   Nonrecurring engineering charges                                   625          897
   Other                                                            2,626        4,082
                                                                 --------     --------
                                                                 $  5,805     $ 10,703
                                                                 ========     ========
</TABLE>


                                       31

<PAGE>   32
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

3.       NET INCOME (LOSS) PER SHARE

         The following is a reconciliation of the numerators and denominators of
         the basic and diluted net income (loss) per share calculations for
         fiscal 1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                             FOR THE YEAR ENDED JUNE 30,
                                          ---------------------------------
(In thousands, except per share data)       1998         1997        1996
                                          --------     --------    --------
<S>                                       <C>          <C>         <C>     
BASIC NET INCOME (LOSS) PER SHARE
Net income  (loss) available to Common
  Shareholders                            $ (5,106)    $ 15,340    $ 16,860
                                          ========     ========    ========
Weighted average common shares              13,007       12,746      12,255
                                          ========     ========    ========
Basic net income (loss) per share         $  (0.39)    $   1.20    $   1.38
                                          ========     ========    ========
DILUTED NET INCOME (LOSS) PER SHARE

Net income (loss) available to Common
  Shareholders                            $ (5,106)    $ 15,340    $ 16,860
                                          ========     ========    ========
Weighted average common shares              13,007       12,746      12,255

Dilutive common stock equivalents               --        1,321       1,168
                                          --------     --------    --------
Weighted average common shares
  and equivalents                           13,007       14,067      13,423
                                          ========     ========    ========
Diluted net income (loss) per share       $  (0.39)    $   1.09    $   1.26
                                          ========     ========    ========
</TABLE>

         During fiscal 1998, all options outstanding were anti-dilutive due to
         the net loss incurred for the year and were accordingly excluded from
         the net loss per share calculation. During fiscal 1997 and 1996 options
         to purchase 260,301, and 65,301 shares of common stock, respectively,
         were antidilutive and excluded from the dilutive net income per share
         calculations because the options' exercise price was greater than the
         average market price of the common shares.

4.       AGREEMENTS WITH WAFER FOUNDRIES

         Wafer Capacity Agreement. In June 1995, the Company and one of its
         suppliers of semiconductor wafers entered into an agreement under which
         the Company committed to purchase and the supplier committed to provide
         a certain number of wafers. The Company paid $16,800,000 under the
         agreement in August 1995. During fiscal 1997, the Company applied
         $2,400,000 of the payment against wafer purchases and renegotiated the
         agreement. In January 1997, the Company received reimbursement for the
         remaining $14,400,000 from the supplier. The Company and its supplier
         continue to maintain their semiconductor wafer supplier relationship.

         Investment in Joint Venture. In August 1995, the Company entered into a
         joint venture agreement with United Microelectronics Corporation (UMC)
         and other venture partners to establish a foundry, United Integrated
         Circuits Corporation (UICC). Under the agreement, the Company invested
         $49.3 million in the joint venture and the foundry guarantees to
         Trident 12.5% of the foundry's total wafer supply. At June 30, 1998,
         the Company held a 9.3% equity ownership in UICC. In October 1997, a
         fire at UICC's fabrication 


                                       32
<PAGE>   33
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         plant in Hsin Chu, Taiwan completely destroyed its fabrication
         equipment. The fabrication plant, and the destroyed equipment, was
         insured.

<TABLE>
<CAPTION>
5. INCOME TAXES
   The components of income (loss) before taxes are as follows:
                                                                                       YEAR ENDED JUNE 30,
                                                                                ----------------------------------
  (In thousands)                                                                  1998         1997         1996
                                                                                --------     --------     --------
<S>                                                                             <C>          <C>          <C>     
  Income (loss) subject to domestic income taxes only                           $ (5,905)    $  6,958     $ 16,116
  Income (loss) subject to foreign income taxes, and in
          certain cases, domestic income taxes                                    (1,187)      15,603        8,678
                                                                                --------     --------     --------
                                                                                $ (7,092)    $ 22,561     $ 24,794
                                                                                ========     ========     ========
</TABLE>

  The provision (benefit) for income taxes is comprised of the following:

<TABLE>
<CAPTION>
                                                                                       YEAR ENDED JUNE 30,
                                                                                ----------------------------------
  (In thousands)                                                                  1998         1997         1996
                                                                                --------     --------     --------
<S>                                                                             <C>          <C>          <C>     
  Current:
     Federal                                                                    $ (2,411)    $  2,833     $  7,171
     State                                                                          (362)         578        1,786
     Foreign                                                                          --          675          948
                                                                                --------     --------     --------
                                                                                  (2,773)       4,086        9,905
                                                                                --------     --------     --------
  Deferred:
     Federal                                                                         391        2,749     $ (1,828)
     State                                                                           396          386         (143)
                                                                                --------     --------     --------
                                                                                     787        3,135       (1,971)
                                                                                --------     --------     --------
                                                                                $ (1,986)    $  7,221     $  7,934
                                                                                ========     ========     ========
</TABLE>

The deferred tax assets (liabilities) are comprised of the following:

<TABLE>
<CAPTION>
                                                     JUNE 30,
                                                -------------------
(In thousands)                                    1998       1997
                                                -------     -------
<S>                                             <C>         <C>    
Deferred tax assets:
   State income taxes                           $    --     $    89
   Vacation, bonus and other accruals               788       1,341
   Allowances, reserves and other                 1,375       1,425
   Research and development credits               1,190          --
   Net operating losses                             221          --
   Other                                            485          71
                                                -------     -------
                                                  4,059       2,926
   Valuation allowance                           (1,793)         --
                                                -------     -------
Deferred tax assets, net                          2,266       2,926
Deferred tax liabilities:
   Unremitted earnings of foreign subsidiary     (2,350)     (2,223)
                                                -------     -------
                                                $   (84)    $   703
                                                =======     =======
</TABLE>


                                       33
<PAGE>   34
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         Based on a number of factors, as of June 30, 1998 the Company has
         provided a valuation allowance for state deferred tax assets due to the
         uncertainty regarding their realization. These factors include
         primarily recent operating losses incurred by the Company, the fact
         that the market in which the Company competes is intensely competitive
         and characterized by rapidly changing technology, relatively short
         duration for carry forwards of state tax losses, and statutory
         prohibition on carry back of state tax losses.

         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:

<TABLE>
<CAPTION>
                                                          YEAR ENDED JUNE 30,
                                                    ------------------------------ 
(In thousands)                                      1998          1997        1996
                                                    -----         -----       ----- 
<S>                                                 <C>           <C>         <C>  
Federal statutory rate                              (35.0)%       35.0%       35.0%
State taxes, net of federal tax benefit              (3.2)         2.0         4.3
Tax exempt income                                    --           --          (1.6)
Research and development credit                     (17.8)        (1.4)         --
Foreign earnings subject to lower tax rates          13.7         (6.6)       (5.9)
Valuation allowance                                  16.4           --          --
Other                                                (2.1)         3.0         0.2
                                                    -----         -----       ----- 
Effective income tax rate                           (28.0)%       32.0%       32.0%
                                                    -----         -----       ----- 
</TABLE>

         The Company has not provided for U.S. federal income and foreign
         withholding taxes on approximately $22 million of a non-U.S.
         subsidiary's undistributed earnings as of June 30, 1998, because such
         earnings are intended to be reinvested outside the U.S. indefinitely.

6.  STOCK-BASED COMPENSATION

         Stock Purchase Plan. In October 1992, the Board of Directors of the
         Company adopted the 1992 Employee Stock Purchase Plan (the "Purchase
         Plan") under which 500,000 shares of the Company's common stock may be
         issued. Shares are to be purchased from payroll deductions; employees
         of the Company who are based outside the United States may participate
         by making direct contributions to the Company for the purchase of
         stock. Such payroll deductions or direct contributions may not exceed
         10% of an employee's compensation. The purchase price per share at
         which the shares of the Company's common stock are sold in an offering
         generally will be equal to 85% of the lesser of the fair market value
         of the common stock on the first or the last day of the offering.
         During fiscal 1998, 1997 and 1996, shares issued under this plan
         aggregated 137,000, 58,000 and 35,000.

         Stock Options. The Company grants nonstatutory and incentive stock
         options to key employees, directors and consultants. At June 30, 1998,
         shares of common stock reserved for issuance upon exercise of the stock
         options aggregated 6,195,000. Stock options are granted at prices
         determined by the Board of Directors. 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.


                                       34
<PAGE>   35
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

     The following table summarizes the option activities for the years ended
June 30, 1996, 1997 and 1998:

<TABLE>
<CAPTION>
                                             OPTIONS        OPTIONS      WEIGHTED AVERAGE     OUTSTANDING
                                          AVAILABLE FOR    NUMBER OF         EXERCISE          PRICE PER
(In thousands, except per share data)         GRANT         OPTIONS           PRICE              OPTION
                                          -------------    ---------     ----------------     -------------
<S>                                       <C>              <C>           <C>                  <C>
Balance, June 30, 1995                           512          2,316                           $ 0.77-$20.06

Additional shares reserved                     2,095             --
Options granted                               (1,142)         1,142         $   15.66         $12.63-$34.38
Options exercised                                 --           (673)        $    4.81         $ 0.77-$11.25
Options expired or canceled                      493           (493)        $   13.62         $ 1.55-$23.25
                                              ------          -----         ---------         -------------
Balance, June 30, 1996                         1,958          2,292                           $ 0.77-$34.38
Additional shares reserved                     1,000             --
Options granted                               (3,523)         3,523         $   10.69         $ 9.00-$21.50
Options exercised                                 --           (334)        $    6.22         $ 0.77-$ 9.38
Options expired or canceled                    1,631         (1,631)        $   12.95         $ 4.63-$25.63
                                              ------          -----         ---------         -------------
Balance, June 30, 1997                         1,066          3,850                           $ 1.05-$34.38
Options granted                               (3,478)         3,478         $    9.39         $ 5.00-$18.00
Options exercised                                 --           (192)        $    7.37         $ 1.55-$10.25
Options expired or canceled                    2,834         (2,834)        $   11.72         $ 1.55-$21.50
                                              ------          -----         ---------         -------------
Balance, June 30, 1998                           422          4,302                           $ 1.05-$34.38
                                              ======          =====         
</TABLE>

         At June 30, 1998, 1997 and 1996, options for 1,293,000, 703,000, and
         538,000 shares of common stock were vested but not exercised. In July
         1996, the Company canceled 1,077,000 options outstanding under the
         Option Plan with exercise prices greater than $9.375 and reissued the
         options with an exercise price of $9.375. In January, 1998, the Company
         canceled 1,702,000 outstanding options granted after July 28, 1997 with
         exercise prices greater than $8.625 and reissued the options with an
         exercise price of $8.625.


                                       35
<PAGE>   36
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         The following table summarizes information about stock options
         outstanding at June 30, 1998:

<TABLE>
<CAPTION>
                       OPTIONS OUTSTANDING                              OPTIONS EXERCISABLE
-----------------------------------------------------------------   ---------------------------
                      NUMBER     WEIGHTED AVERAGE      WEIGHTED       NUMBER       WEIGHTED
      RANGE OF      OUTSTANDING      REMAINING         AVERAGE      EXERCISABLE     AVERAGE
   EXERCISE PRICES  AT 6/30/98   CONTRACTUAL LIFE  EXERCISE PRICE   AT 6/30/98   EXERCISE PRICE
-----------------------------------------------------------------   ---------------------------
<S>                  <C>                <C>           <C>           <C>              <C>      
$ 1.05 - $ 7.00        880,000          6.5           $    5.63       572,000        $    5.08
$ 7.06 - $ 8.56        699,000          9.0           $    7.64        88,000        $    7.80
$ 8.63 - $ 8.63      1,502,000          9.6           $    8.63       230,000        $    8.63
$ 8.88 - $ 9.75        891,000          8.3           $    9.38       264,000        $    9.35
$10.00 - $34.38        330,000          7.5           $   13.37       139,000        $   17.30
-----------------------------------------------------------------   --------------------------
$1.05-$34.38         4,302,000          8.4           $    8.37     1,293,000        $    8.08
-----------------------------------------------------------------   --------------------------
</TABLE>

FAIR VALUE PRESENTATION.

         Had compensation cost for the Company's stock-based compensation awards
         been determined based on the fair value method consistent with the
         method prescribed FAS No. 123, the Company's net income (loss) and
         earnings (loss) per share would have been further adjusted to the pro
         forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                         YEAR ENDED JUNE 30,
                                                    -----------------------------------------------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA            1998                1997                   1996
                                                    ----------          ----------            -----------
<S>                                                 <C>                 <C>                   <C>        
Net income (loss)
   As reported                                      $   (5,106)         $   15,340            $    16,860
                                                    -----------         ----------            -----------
   Pro forma                                        $  (11,377)         $   10,389            $    15,140
                                                    -----------         ----------            -----------

Net income (loss) per share
   As reported:
     Basic                                          $    (0.39)         $     1.20            $      1.38
                                                    -----------         ----------            -----------
     Diluted                                        $    (0.39)         $     1.09            $      1.26
                                                    -----------         ----------            -----------

   Pro forma: 
     Basic                                          $    (0.87)         $     0.80            $      1.24
                                                    -----------         ----------            -----------
     Diluted                                        $    (0.87)         $     0.73            $      1.13
                                                    -----------         ----------            -----------

</TABLE>

         Under SFAS 123, the fair value of each option grant is estimated on the
         date of grant using the Black-Scholes option-pricing model with the
         following weighted-average assumptions used for grants in fiscal 1998,
         1997 and 1996, respectively.


                                       36
<PAGE>   37
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                    YEAR ENDED JUNE 30,
                                              ---------------------------------------------------------------
                                                  1998                     1997                     1996
                                              ------------             ------------             ------------ 
<S>                                           <C>                      <C>                      <C>          
Stock Options Plans
   Expected dividend yield                         --                       --                       --
   Expected stock price volatility                 69%                      68%                      72%
   Risk-free interest rate                    5.61% - 5.99%            6.07% - 6.60%            5.51% - 6.69%
   Expected life (years)                           5                        5                        5
Stock Purchase Plan
   Expected dividend yield                         --                       --                       --
   Expected stock price volatility              62% - 72%                64% - 72%                61% - 69%
   Risk-free interest rate                    5.30% - 5.52%            5.20% - 5.52%            5.30% - 5.55%
   Expected life (years)                           0.5                      0.5                      0.5
</TABLE>

         Weighted average fair value of options granted were $5.78 and $5.34 for
         fiscal year 1998 and 1997 respectively.

         Stock Repurchases. On April 22, 1998 the Company's Board of Directors
         authorized the Company to repurchase up to $20,000,000 of its own
         common stock at prevailing prices over the next 12 months. In April and
         May 1998, the Company repurchased 274,500 shares for $2,100,000 in
         cash. On April 22, 1997 the Company's Board of Directors authorized the
         Company to repurchase up to 600,000 shares of its own common stock
         under certain conditions at prevailing market prices through October
         1997. In April 1997, the Company repurchased 100,000 shares for
         $1,085,000 in cash. Shares repurchased are being held as treasury stock
         until reissued to the Company's stock option and stock purchase plans
         or other benefit plans the Company may adopt in the future or for other
         corporate purposes.

7.  RELATED PARTY TRANSACTIONS

         During the years ended June 30,1997 and 1996, the Company sold products
         with revenues of $14,805,000 and $9,618,000 respectively, to a
         stockholder of the Company and affiliates of that stockholder. The
         Company believes that the terms of the transactions with those
         customers were no less favorable to the Company than those offered to
         entities unrelated to the Company. As of June 30, 1997 and 1996 the
         Company had accounts receivable from an affiliate of a stockholder of
         the Company related to such sales totaling $4,802,000 and $1,961,000,
         respectively.

8.  GEOGRAPHIC SEGMENT INFORMATION

         The Company sells principally to multinational original equipment
         manufacturers, many of whom have manufacturing facilities in Asia, and
         to adapter card manufacturers primarily located in Asia. Sales to
         customers in Asia totaled 84%, 74% and 78% for fiscal 1998, 1997 and
         1996, respectively. Export sales to third party customers oustside of
         the United States totaled $240,000, $1,553,000, and $7,158,000,
         respectively. The following is a summary of the Company's geographic
         operations:


                                       37

<PAGE>   38
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                  ASIA AND         INTERCOMPANY
(IN THOUSANDS)                            UNITED STATES           PACIFIC          ELIMINATION          CONSOLIDATED
                                          -------------           --------         ------------         ------------
<S>                                       <C>                     <C>              <C>                  <C>
Fiscal Year 1998:
    Product sales                            $ 47,666             $113,672            $ 48,336            $ 113,002
    Income (loss) from operations             (11,062)               1,542                  --               (9,520)
    Identifiable assets                        75,877               42,951                 401              118,427

Fiscal Year 1997:
    Product sales                            $ 74,716             $158,845            $ 55,627            $ 177,934
    Income from operations                      5,053               15,500                  --               20,553
    Identifiable assets                        87,637               53,398               1,519              139,516

Fiscal Year 1996:
    Product sales                            $137,784             $131,568            $101,263            $ 168,089
    Income from operations                     14,782                7,960                  --               22,742
</TABLE>

         The Company effected a reorganization in March 1996. The Company
         established a wholly owned subsidiary in the Cayman Islands, British
         West Indies. The Cayman Islands subsidiary and its two branch offices
         in Hong Kong and Taiwan are responsible for the manufacturing of the
         Company's products and principally responsible for the international
         sale of the Company's products. Operations in the Company's subsidiary
         in Hong Kong and the Taiwan branch office of the Hong Kong subsidiary
         were wound down during fiscal year 1996.

9. COMMITMENTS AND CONCENTRATION OF SALES AND CREDIT RISK

         Capital Leases. In June 1997, the Company entered into a capital lease
         agreement with an equipment maker for research equipment in the amount
         of $1,102,000. At June 30, 1998, leased capital assets and related
         accumulated depreciation included in property, plant and equipment were
         $1,102,000 and $398,000 respectively, and the related capital lease
         obligation was $730,000. Total future minimum lease payments under the
         capital lease at June 30, 1998 are $416,000 and $382,000 in fiscal
         years 1999 and 2000 respectively.

         Building Leases. The Company leases facilities under noncancelable
         operating lease agreements, which expire at various dates through 2001.
         Rental expense for the years ended June 30, 1998, 1997 and 1996 was
         $2,127,000, $1,656,000 and $1,092,000, respectively. Total future
         minimum lease payments under operating leases at June 30, 1998 were
         $1,856,000, $1,254,000, $530,000 and $397,000 in fiscal years 1999,
         2000, 2001 and 2002, respectively.

         Concentration of Sales and Credit Risks. Two customers comprised 15%
         and 11%, respectively, of the Company's net sales for the year ended
         June 30, 1998. Three customers comprised 21%, 12% and 11%, of the
         Company's net sales for the year ended June 30, 1997. Three customers
         comprised 16%, 12% and 11% of the Company's net sales for year ended
         June 30, 1996.


                                       38
<PAGE>   39
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         Financial instruments that potentially subject the Company to
         significant concentrations of credit risk consist principally of cash
         and cash equivalents, short-term investments and trade accounts
         receivable. The Company places its cash and cash equivalents and
         short-term investments primarily in market rate accounts and highly
         rated municipal and debt obligations. 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.

10. SUBSEQUENT EVENT

         Preferred Rights Agreement. On July 24, 1998 , the Board of Directors
         ("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 $50.00
         and expire on July 23, 2008. The Company may redeem the Rights at a
         price of $0.001 per Right.


                                       39
<PAGE>   40
                      REPORT OF INDEPENDENT ACCOUNTANTS ON
                          FINANCIAL STATEMENT SCHEDULES


To the Board of Directors of
Trident Microsystems, Inc.

Our audits of the consolidated financial statements referred to in our report
dated July 17, 1998, except for Note 10 which is as of July 24, 1998 appearing
on page 24 of this Form 10-K also included an audit of the Financial Statement
Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial
Statement Schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.


PricewaterhouseCoopers LLP
San Jose, California
July 17, 1998, except for Note 10 which is as of July 24, 1998


                                       40
<PAGE>   41

                                   SCHEDULE II

                            TRIDENT MICROSYSTEMS INC.
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<TABLE>
<CAPTION>
                      Beginning         Charged to Costs      Charged to Other                        Ending
Description            Balance             & Expense              Accounts         Deductions         Balance
------------------   ----------         ----------------      ----------------     ----------        ----------
<S>                  <C>                <C>                   <C>                  <C>               <C>
Allowance for
Doubtful Accounts:
1996                 $  492,000             $   13,000                                               $  505,000
1997                    505,000                 76,000                                                  581,000
1998                    581,000                 49,000                                                  630,000

Allowance for
Realizable
Inventory:
1996                 $1,564,000             $4,719,000                             $  614,000        $5,669,000
1997                  5,669,000              2,547,000                              1,127,000         7,089,000
1998                  7,089,000              3,394,000                              1,169,000         9,314,000
</TABLE>


                                       41
<PAGE>   42
                                POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Peter Jen as his attorney-in-fact, with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission.

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on September 24, 1998 by the following persons on behalf
of the registrant and in the capacities indicated.

<TABLE>
<CAPTION>
          SIGNATURE                                  TITLE
-----------------------------    -----------------------------------------------
<S>                              <C>
/s/ Frank C. Lin                 President, Chief Executive Officer and Chairman
-----------------------------    of the Board (Principal Executive Officer)
(Frank C. Lin)

/s/ Peter Jen                    Senior Vice President, Asia Operations and Chief
-----------------------------    Accounting Officer (Principal Financial and
(Peter Jen)                      Accounting Officer)

/s/ Glen M. Antle                Director
-----------------------------
(Glen M. Antle)

/s/ Yasushi Chikagami            Director
-----------------------------
(Yasushi Chikagami)

/s/ Charles A. Dickinson         Director
-----------------------------
(Charles A. Dickinson)

/s/ Millard Phelps               Director
-----------------------------
(Millard Phelps)
</TABLE>

                                       42
<PAGE>   43

            INDEX TO EXHIBITS FILED TOGETHER WITH THIS ANNUAL REPORT

<TABLE>
<CAPTION>
                                                                                        Page
Exhibit    Description                                                                 Number
-------    -----------                                                                 ------
<S>        <C>                                                                         <C>
 3.1       Restated Certificate of Incorporation.(1)

 3.2       Bylaws of Trident Delaware Corporation, a Delaware corporation.(2)

 4.1       Reference is made to Exhibits 3.1 and 3.2.

 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 March 23, 1994 between the Company and
           Chan-Paul Partnership for the Company's principal offices located at
           189 North Bernardo Avenue, Mountain View, California.(4)

10.16      Foundry Venture Agreement dated August 18, 1995 by and between the
           Company and United Microelectronics Corporation.(6)(8)

21.1       List of Subsidiaries.(7)                                                     44

23.1       Consent of Independent Accountants.(7)                                       45

24.1       Power of Attorney (See page 42).(7)

27.1       Financial Data Schedule (EDGAR version only)(6)                              46
</TABLE>

----------

(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 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, 1996.

(5)   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, 1994.

(6)   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.

(7)   Filed herewith.

(8)   Confidential treatment has been requested for a portion of this document.

(*)   Management contracts or compensatory plans or arrangements covering
      executive officer or directors of the Company.


                                       43