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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-K 
 For the fiscal year ended June 30, 2004
    
    Commission file number 0-20784
 TRIDENT MICROSYSTEMS, INC.  Delaware
    
    77-0156584(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)1090 East Arques AvenueSunnyvale, California
    
    94085(Address of principal executive offices)
    
    (Zip code)
 Registrants telephone number, including area code: (408) 991-8800 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 (§ 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. [ X ] Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ X ] No [   ] The aggregate market value of the Common Stock held by non-affiliates of
the Registrant, based upon the closing price of the Common Stock on December
31, 2003 ($17.42 per share), as reported on the NASDAQ National Market was
approximately $235,219,281. 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 affiliates.
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, 2004, was 22,941,958. Part III incorporates by reference from the definitive proxy statement for
the registrants 2004 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 PagePART I
    
    
    
    
    3Item 1.
    
    Business
    
    
    3Item 2.
    
    Properties
    
    
    13Item 3.
    
    Legal Proceedings
    
    
    13Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    13PART II
    
    
    
    
    15Item 5.
    
    Market for the
Registrants Common Stock and Related Stockholder Matters
    
    
    15Item 6.
    
    Selected and Supplementary Financial Data
    
    
    16Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 7A.
    
    Quantitative and Qualitative Disclosures About Risk
    
    
    30Item 8.
    
    Financial Statements and Supplementary Data
    
    
    32Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    57Item 9A.
    
    Controls and Procedures
    
    
    57Item 9B.
    
    Other Information
    
    
    57PART III
    
    
    
    
    57Item 10.
    
    Directors and Executive Officers of the Registrant
    
    
    57Item 11.
    
    Executive Compensation
    
    
    58Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    58Item 13.
    
    Certain Relationships and Related Transactions
    
    
    59Item 14.
    
    Principal Accountant Fees and Services
    
    
    59PART IV
    
    
    
    
    61Item 15.
    
    Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    61POWER OF ATTORNEY
    
    
    64SIGNATURES
    
    
    64INDEX TO EXHIBITS FILED TOGETHER WITH THIS ANNUAL REPORT
    
    
    65EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I 
 Item 1. Business We are a designer, developer and marketer of integrated circuits (ICs) for
digital media applications, such as digital television, LCD TV and digital
set-top boxes (STB). Since 1987 we have designed, developed and marketed very
large-scale ICs for graphics applications, historically for the personal
computer (PC) market, and since 1999 for digitally processed televisions (DPTV)
for the consumer television market. In June 2003 we announced a restructuring
of our business to divest our legacy graphics business and in a separate
transaction merge the companys Digital Media division (DM) with Trident
Technologies Inc (TTI)  a majority owned Taiwanese subsidiary to strengthen
and extend the companys digital TV business. TTI had previously been
operating primarily as a Taiwan based semiconductor design house which had
developed among other things, scaling technology useful for digital media
applications. One of the parent companys principal suppliers United
Microelectronics Corporation (UMC) was, and continues to be a strategic
minority shareholder in TTI. As of July 30, 2004, TTI was an 83% owned
subsidiary of Trident Microsystems. Since the fall of 2003 we have focused our business primarily on the
rapidly growing DPTV market and related areas. Our DPTV business is operated
primarily through our majority-owned subsidiary, Trident Technologies, Inc.
(TTI). We are also focused on the operations of our subsidiary in China in
which we conduct and plan to expand our VLSI operations. We have been investing in and experiencing success in the digital
television market for several years. During that time, the digital television
industry has grown rapidly and we believe that this industry is on the verge of
a further, significant growth phase. To date we have invested in developing
strong relationships with Tier I Consumer Electronics OEMs like Samsung,
Toshiba and Sony as well as others. In addition, we are also focused on
developing strong relationships with fast growing Chinese manufacturers like
Skyworth, TCL, Konka, Changhong, Xoceco and Hisense. We believe over time more
of the high volume digital television business will migrate to the Chinese
manufacturers so we believe its important to have strong relationships on both
ends of the market spectrum. We have also invested in integrating different
technologies and providing integrated system-on-chip (SOC) advantages to our
customers as well as innovation in video quality. We believe our early
entrance and success in this market place, our many years of expertise in the
business of enhancing digital image quality and our growing reputation and
success with top tier manufacturers will provide a strategic advantage for us
in this emerging market. Tridents market strategy relies on leveraging television display
controller design wins to further supply digital decoding and other value-added
portions of television systems to leading consumer electronics OEMs. Trident
believes that creating an integrated video decoder and processor that achieves
superior image quality attractive to the worlds leading Television OEMs
requires both mixed signal semiconductor and television system knowledge as
well as a capacity to work with customers who are experts in these areas in a
heuristic learning process through many design cycles. With this goal already
achieved, we believe that our customers will accept many additional
complimentary standard function solutions from Trident such as High Definition
Media Interface (HDMI) and ATSC/DVB decoding. Executing this strategy demands that Trident be an early mover with new
technology, achieving outstanding execution of complex system-on-chip designs.
Trident has established its position as an early mover through the industrys
first integration of multi-standard video decoding and comb filtering with
advanced video processing with the DPTV-DX chip in 2001. Trident again
demonstrated its ability to lead with new technology with the introduction of
the industrys first integrated 10-bit ADC in the DPTV 3D Pro in 2002. Trident
plans continue this tradition in the next two quarters with the introduction of
advanced video processing integrated with ATSC/DVB decoding and HDMI integrated
with 10-bit 3D multi-standard video decoding. Achieving such industry firsts
demonstrates the Companys continuing ability to execute highly complex chip
designs which add significant additional features and performance within
standard market cycle timeframes. References to we, Trident, or the Company in this report refer to
Trident Microsystems, Inc. and its subsidiaries, including Trident
Technologies, Inc. (TTI) which was 83% owned as of June 30, 2004. 3




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Markets and Applications As we go forward into fiscal year 2005, our principal design, development
and marketing effort will focus primarily on our Digital Media products. Our
Digital Media Division accounted for 95% and 49% of total revenues for fiscal
years ended June 30, 2004 and 2003, respectively. We plan to continue
developing the next generation DPTV product as well as other advanced products
for digital TV and digital STB for the world wide digital television market
including specifically China, Japan, Korea, Taiwan and Europe. Designed for
system design flexibility, and high integration level, our goal is for users of
our single chip DPTV Video Processors(s) to benefit from feature rich devices
at competitive prices. The DPTV video processor converts analog TV into an
advanced progressive digital quality television. We can also provide many of
these same video processing advantages to digitally broadcast television
content and we have developed additional technology to support this type of
signal processing as well. Eventually the worldwide television market is
expected to be dominated by digitally broadcast content and we believe our
future success depends on our ability to integrate additional technologies and
have our products support that market volume opportunity on an ongoing basis.
While we have developed valuable experience in many areas over the years,
following the divestiture of our Graphics Division assets, we anticipate in the
near term the digital television and AV Notebooks markets to generate
substantially all of our revenues. However, there can be no guarantee that our
products will be accepted by the market or increase our revenues or
profitability. The following table illustrates our product families and markets: Product Family
    
    Description
    
    MarketsDPTV
    
    Integrated multi-standard
video decoding, format
conversion, and image
enhancement processors
    
    High-definition TV
including CRT, plasma,
LCD, rear-projection and
front-projection display
types, AV Notebook PC,
Multi-function LCD
Monitors.HiDTV
    
    Integrated ATSC/DVB
(MPEG2) decoding, format
conversion, and image
enhancement processors
    
    Digital TV including CRT,
plasma, LCD,
rear-projection and
front-projection display
types.
 Current Digital Media Products: We have been developing products for other digital media applications,
such as set top boxes and progressive television sets since 1999. The DPTV
market in particular has begun to emerge as a high volume market for these
products. Our DPTV products are designed to optimize and enhance video quality
for various display devices, such as Cathode Ray Television (CRTTV), Liquid
Crystal Display Television (LCDTV), Plasma Display Panel (PDP), Projection
Television, Liquid Crystal Display Projection TV and AV Notebooks. Tridents
DPTV product family propels the corporate mission of Digital Media For The
Masses by delivering tomorrows digital media technology to todays consumer. DPTV3D.DPTV3D integrates an advanced 3-D digital comb video decoder
for NTSC, PAL, and SECAM formats. Based on Tridents patented proprietary
Unified Memory Architecture (UMA), DPTV-3D digital comb video decoder does not
require extra frame buffers for performing 3D comb filtering. With film-mode
recovery, DPTV-3D can accurately detect the frame rates of incoming video
sources, and then correctly restore the video source to the original film mode
sequences in play back. The motion adaptive de-interlacing and edge-smoothing
feature of the DPTV-3D further refines the video display quality. The DPTV
chip enables a SDTV signal to display in Picture-In-Picture mode,
Picture-Out-Picture mode, and 16:9 or 4:3 aspect ratio modes. DPTV-3D
supports non-linear scaling in panorama mode to ensure the most natural picture
aspect ratio for the viewers. DPTV-3Ds integrated 3-D digital comb video
decoder has a built-in VBI circuit for closed captioning and V-chip for
parental control that is EIA 608 compliant. Furthermore, DPTV-3Ds
graphic-based On-Screen Display provides a user-friendly and graphic-oriented
TV menu control interface. DPTVMV.DPTVMV is a derivative of DPTV3DP. It has all the features of
DPTV-3D, except that DPTVMVs integrative video decoder is a 2D comb filter
video decoder. The DPTVMV is the main component in the premier TV chipset
solution on the market. Designed for maximum system design flexibility, users
of Tridents 4




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single chip DPTV Video Processor(s) will benefit from one of the most
feature rich devices available while maintaining a price competitive advantage
over the existing solution(s). The DPTV-MV converts todays analog TV into
an advanced progressive TV quality. Decoded HDTV digital video streams can be
formatted to different output display modes by DPTV. DPTV3DPRO.The DPTV3DPRO is Tridents third generation DPTV single-chip
mixed-signal video processor product. It integrates a high performance,
multi-region 3D digital comb video decoder, a motion and edge adaptive
de-interlacer with film mode recovery, scan rate and frequency conversion
circuitries, and a graphical-based OSD for full support of todays premier
digital TV applications. DPTV3DPRO uses Tridents patented Unified Memory
Architecture (UMA), which allows both 3D comb filter video decoding and video
enhancement processing to share the same frame buffer memory made up of
high-speed and cost-effective PC graphic memory. Designed for maximum system
design flexibility, DPTV3DPRO integrates all video interfaces to support
hybrid digital and analog TV chassis applications. DPTV3DPRO is ideal for
applications in Digital TVs, Plasma TVs, LCD TVs, and Set-top boxes, where high
precision video processing and scan rate frequency conversion are required. PANELTV3DPRO.The PANELTV3DPRO is Tridents third generation DPTV
single-chip mixed-signal video processor product. It integrates a high
performance, multi-region 3D digital comb video decoder, a motion and edge
adaptive de-interlacer with film mode recovery, scan rate and frequency
conversion circuitries, and a graphical-based OSD for full support of todays
premier digital TV applications. PANELTV3DPRO uses Tridents patented Unified
Memory Architecture (UMA), which allows both 3D comb filter video decoding and
video enhancement processing to share the same frame buffer memory made up of
high-speed and cost-effective PC graphic memory. Designed for maximum system
design flexibility, PANELTV3DPRO integrates all video interfaces to support
hybrid digital and analog TV chassis applications. The PANELTV3DPRO uses a
320-pin BGA package allowing multiple video data input and output
configurations. PANELTV3DPRO is ideal for applications in Digital TVs, Plasma
TVs, LCD TVs, and Set-top boxes, where high precision video processing and scan
rate frequency conversion are required. PANELPRO-MM.The PanelPro-MM is an advanced high-quality controller
chip, that designed with an external CPU for maximum system design flexibility,
users of Tridents single chip PanelPro-MM Video Processor will benefit from
one of the most feature rich devices available while maintaining a price
competitive advantage over the existing solution(s). The PanelPro-MM
integrates - Clamping, pre-amp, ADC, sync separator, scaling engine, and
external SDRAM/SGRAM interface - to deliver a high quality, high integration
controller for the mainstream LCD monitors with dual (VGA analog and digital)
interfaces plus video inputs up to D4. The chip handles dual 24-bit digital
RGB port, SYNC input, and separated 8-bit /16-bit digital port for video
decoder connection. The SYNC input interfaces directly with any
VGA/SVGA/XGA/UXGA graphics board or any other compatible source. The
PanelPro-MM accepts video signals from both 8/16-bit YUV CCIR601 or 8-bit
CCIR656 formats from a video decoder and receives digital signals from an
external DVI transmitter. It delivers 48-bit digital data and all essential
control signals for driving an 8-bit or 6-bit TFT LCD panel. Frame rate
conversion is also supported with external SDRAM / SGRAM. TVX2.Tridents TVX2 is a versatile NTSC/PAL TV encoder chip equipped
with an advanced, programmable multi-tap TV de-flicker and UV chroma filter
that provides sharp text, superb graphics, and vivid video quality while
substantially reducing dot crawl and color bleeding for computer images
displaying on TV. TVX2 enables Entertainment PC applications such as 3D
gaming, web TV, video conferencing, etc. to be displayed on television. DPTVSVP. The DPTV SVP is Tridents 4th generation TV-on-a-chip
mixed-signal video processor product. It integrates the 4th generation TCD33D
color comb video decoder, an object-based motion and edge adaptive
de-interlacer with film mode recovery, scan rate and frequency conversion
circuitries, and a graphical-based OSD for full support of todays premier
digital TV applications. DPTVSVP integrates extra circuitry for enhancing
video images, horizontal and vertical sharpness, spatial noise reduction, and
black and white extension to provide a cinema-perfect picture. DPTVSVP uses
Tridents patented Unified Memory Architecture (UMA), which allows both 3D comb
video decoding and video enhancement processing to share the same frame buffer
memory made up of high-speed and cost-effective PC graphic memory. Designed
for maximum system design flexibility, DPTVSVP integrates wide ranges of video
interfaces to support converging digital and analog TV chassis applications.
Designed for LCD TVs, the DPTVSVP built-in LCD-BRITE feature improves the
ordinary 5




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LCD panel response time. DPTVSVP is ideal for applications in Digital
TVs, Plasma TVs, LCD TVs, and Set-top boxes, where high-precision video
processing and scan rate frequency conversion are required. PANELTVSVP. The PanelTVSVP is Tridents 4th generation TV-on-a-chip
mixed-signal video processor product. It integrates the 4th generation TCD33D
color comb video decoder, an object-based motion and edge adaptive
de-interlacer with film mode recovery, scan rate and frequency conversion
circuitries, and a graphical-based OSD for full support of todays premier
digital TV applications. PanelTVSVP integrates extra circuitry for enhancing
video images, horizontal and vertical sharpness, spatial noise reduction, and
black and white extension to provide a cinema-perfect picture. PanelTVSVP
uses a 320 BGA package allowing multiple video data input and output
configurations. PanelTVSVP uses Tridents patented Unified Memory
Architecture (UMA), which allows both 3D comb video decoding and video
enhancement processing to share the same frame buffer memory made up of
high-speed and cost-effective PC graphic memory. Designed for maximum system
design flexibility, PanelTVSVP integrates wide ranges of video interfaces to
support converging digital and analog TV chassis applications. Designed for
LCD TVs, the PanelTVSVP built-in LCD-BRITE feature improves the ordinary LCD
panel response time. PanelTVSVP is ideal for applications in Digital TVs,
Plasma TVs, LCD TVs, and Set-top boxes, where high-precision video processing
and scan rate frequency conversion are required. SVP-EX.The SVP-EX is Tridents fifth and the latest generation
all-in-one video processor product family. It features the industrys first
Truevideo 10-bit video processing technology that is optimized for 1080i HDTV
component input. Embedded with a DCRe engine, the SVP-EX video processor
deliverers the highest quality digital video images. The DCRe technology
integrates an advanced 3D-comb video decoder, advance motion adaptive
de-interlacing engine for up to 1080i input, object-based digital noise
reduction, cubic-4 image scaling, film mode support, average picture level
(APL) feedback to increase the TV set dynamic range, edge smoothing, and
dynamic sharpness enhancement. The SVP-EX video processor is equipped with
numerous outputs including a 24-bit TTL, DAC, and LVDs interface, making it
extremely versatile with Trident proprietary DCRe technology delivering vivid
cinema-realistic motion and still images the new SVP-EX processor family is
ideal for high-performance flat-panel LCD, Rear-Projection, Flat CRT and Plasma
Display TVs. DCRe.DCRe, Digital Cinema Reality Engine, is Tridents proprietary
technology to address the need for todays high-end multimedia digital
television application requirement. It embodies Tridents DPTV design vision
in offering a highly integrated and common-chassis multimedia digital
television design platform that is both a high quality television set as well
as a multimedia display terminal for PC graphics. This design platform is able
to receive and decode the conventional NTSC/PAL/SECAM broadcasting signals, to
display PC VGA inputs and to receive high definition component inputs from the
digital set-top box. Products in Development: Tridents product market strategy is to continually provide the most
integrated video processor solution to the market. Trident is the worlds
first and in many cases, the only company to integrate high precision ADC,
advanced 3D comb filter video decoder, de-interlacer, and scaler into a single
chip. We intend to lead the industry in innovations and we are planning
introductions of the next generation of DPTV chips in the current fiscal year.
Currently, our TTI subsidiary and Silicon Image, Inc. are working on a joint
product development to accelerate the adoption of the emerging
industry-standard High-Definition Multimedia Interface (HDMI) to the
mainstream digital TVs segments. Not only will Trident license the HDMI
technology from Silicon Image for future product integration into the DPTV
and the HiDTV product families, but also, the two companies are
collaborating
in the development and plan to collaborate in the sales and marketing of a
mainstream high-quality analog front-end device to be used in the advanced TV
and HDTV market. Our product design combine the advanced video technologies
from both companies.
In addition, TTI is currently working on the next-generation, system-on-chip
digital TV engine (HiDTV) for the design of High Definition Digital TV
systems. The processor design integrates a majority of key functions including
HD MPEG2 decode needed to support both digital and analog TV broadcasting with
minimum external components. Trident and TrueVideo are registered trademarks DPTV3D, DPTVMV,
DPTV3DPRO, PANELTV3DPRO, PANELPRO-MM, DPTV SVP, PanelTVSVP, DCRe, and
HiDTV are trademarks of the Company as of June 30, 2004. Other trademarks
used in this report are the property of their respective owners. 6




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Graphics Products: As a result of the sale of the assets of our Graphics Division, we no
longer produce graphics chips for the PC market. Graphics chips accounted for
the majority of our revenue in fiscal 2003 and all prior periods. Sales, Marketing and Distribution We sell our products primarily through direct sales efforts. Our
digitally processed television products are marketed primarily from our offices
in Taipei, Taiwan; Shanghai, China; and Sunnyvale, California. Our offices are
staffed with sales, applications engineering, technical support, customer
service and administrative personnel to support our direct customers. We also
market our products through independent sales representatives and distributors. Our future success depends in large part on the success of our sales to
leading digital television manufacturers. The focus of our sales and marketing
efforts will be to increase sales to the leading digital television
manufacturers and OEM channels. Competitive factors of particular importance
in such markets including TV platform support, performance and the integration
of functions on a single integrated circuit chip. Our digitally processed television customers include leading manufacturers
of TVs in China, Taiwan, Japan and Korea. We service these customers primarily
through our offices in the United States, Taiwan and China. As digital
television is rapidly developing in the United States, Europe, Japan, Korea,
China and elsewhere, we expect that leadership in this industry will also
rapidly change, and our objective is to become a supplier to a broad range of
manufacturers in this marketplace, and to manufacturers for other markets as
DPTV is deployed in those markets. During fiscal year 2004, we generated nearly all of our revenues from
Asia. A small number of customers frequently account for a majority of our
sales in any quarter. However, sales to any particular customer may fluctuate
significantly from quarter to quarter. Fluctuations in sales to key customers
may adversely affect our operating results in the future. For additional
information on foreign and domestic operations, see Note 10 to the Consolidated
Financial Statements. Manufacturing We have adopted a fabless manufacturing strategy whereby we contract-out
our wafer fabricating needs to qualified contractors that we believe provide
cost, technology or capacity advantages for specific products. As a result, we
have generally been able to avoid the significant capital investment required
for wafer fabrication facilities and to focus our resources on product design,
quality assurance, marketing and customer support. Our subsidiary, Trident
Technology, Inc. has provided manufacturing operations for our Digital Media
Business Unit since the closing of our restructuring in August 2003. In fiscal
2004, United Microelectronic Corporation (UMC), in which we held an
investment valued at $51.8 million as of June 30, 2004, provided substantially
all of our foundry requirements. We purchase product in wafer form from the foundries and we manage the
contracting with third parties for the chip packaging and testing. In order to
manage the production back-end operations, we have been adding personnel and
equipment to this area. Our goal is to increase the quality assurance of the
products while reducing manufacturing cost. To ensure the integrity of the
suppliers quality assurance procedures, we have developed and maintained test
tools, detailed test procedures and test specifications for each product, and
we require the foundry and third party contractors to use those procedures and
specifications before shipping finished products. We have experienced few
customer returns based on the quality of our products. However, our future
return experience may vary because our more advanced, more complex products are
more difficult to manufacture and test. In addition, some of our customers may
subject those products to more rigid testing standards than in the past. Our reliance on third party foundries, UMC in particular, and assembly and
testing houses involves several risks including the absence of adequate
capacity, the unavailability of or interruptions in access to certain process 7




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technologies, and reduced control over delivery schedules, manufacturing
yields, quality assurance and costs. We often conduct business with 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 us for any specific period,
in any specific quantity or at any specified price, except as may be provided
in a particular purchase order. Constraints or delays in the supply of our 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 our operating results, including effects that
may result should we be forced to purchase products from higher cost foundries
or pay expediting charges to obtain additional supply. In addition, to the
extent we elect 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 our products. Research and Development We have spent approximately $11.5 million, $21.6 million and $22.2 million
on Company sponsored research and development activities during fiscal 2004,
2003 and 2002, respectively. The decrease in research and development spending
for fiscal 2004 was primarily the result of decreased headcount subsequent to
our restructuring effective July 2003. We have conducted substantially all of
our product development in-house and, as of June 30, 2004, our staff of
research and development personnel equaled 163. Competition The markets in which we compete are highly competitive and we expect that
competition will increase. The principal factors of competition in our markets
include, but are not limited to price, performance, the timing of new product
introductions by us and our competitors, product features, level of integration
of various functions, quality and customer support. In the digital television
market our principal competitors are Toshiba, Philips Electronics, Micronas AG,
Pixelworks, Inc., Genesis Microchip, Inc., ATI Technologies Inc., Zoran
Corporation, ST Microelectronics, and Media Tek, Ltd. Other smaller
competitors supplying LCDTV chip sets may arise in the future. Certain of our
current competitors and many potential competitors have significantly greater
technical, manufacturing, financial and marketing resources than we have. We plan to continue developing the next generation DPTV product as well
as other advanced products for digitally processed television and digital set
top boxes for the digitally processed television market in China, Japan, Korea
and Taiwan. We believe the market for digital television will be competitive,
and will require substantial research and development, sales and marketing
efforts to stay competitive in this market. Therefore we expect to devote
significant resources to the DPTV market even though competitors are
substantially more experienced than we are in this market. However, these
efforts may not be successful. Our Operations and Management Structure Prior to July 2003, we operated two business divisions  the graphics
division and the digital media division. In July 2003, we undertook several
transactions to restructure our operations. The assets of our graphics
division were acquired by XGI Technology, Inc. (XGI), the graphics business
previously spun off from Silicon Integrated System Corp, and we simultaneously
made a 30% equity investment in XGI. We later sold a portion of our investment
in XGI and we now hold an approximately 20% equity interest in XGI. In a separate transaction, the assets of our digital media division were
merged with our subsidiary, TTI, in August 2003 which brought our equity
interest in TTI to 90%. In September 2003, we sold a portion of our equity
interest in TTI and now hold an approximately 83% equity interest in TTI.
However, our current equity interest in TTI may decline in the future, as
discussed more fully below, due to dilution of interest resulting from employee
exercises of stock options in TTI or further sales of equity interests in TTI. 8




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As a result of the above-described transactions, our operations were
significantly restructured to focus our resources on our digital media business
and capitalize on opportunities in the growing digital media market. Our
operations are now organized as follows: TMIs wholly owned subsidiary, Trident
Microsystems, (Far East) Ltd. (TMFE), a holding company organized in the Cayman
Islands, owns an 83% equity interest in TTI and a 100% equity interest in each
of Trident Multimedia Technologies Co., Ltd (TMT) and Trident Multimedia
Systems (TMS). The operational structures of TMI and TTI are explained more
fully below. Trident Microsystems, Inc. (TMI) Trident Microsystems, Inc. (TMI) is a public company, organized in the
United States, with headquarters in Sunnyvale, California. TMI designs,
develops and markets integrated circuits for digital media applications through
its operation of TTI and its other subsidiaries. Set forth below is the name, age and position of each of TMIs executive
officers and directors as of June 30, 2004, including Jung-Herng Chang who does
not hold an executive officer title with TMI but, as the President of our
primary subsidiary, TTI, is considered an executive officer and affiliate of
TMI: Name
    
    Age
    
    PositionFrank C. Lin
    
    
    59
    
    
    President, Chief Executive Officer and
Chairman of the Board of DirectorsJohn Edmunds
    
    
    47
    
    
    Chief Financial OfficerPeter Jen
    
    
    58
    
    
    Senior Vice President, Asia Operations and
Chief Accounting OfficerJung-Herng Chang
    
    
    48
    
    
    Senior Vice President, EngineeringMillard Phelps
    
    
    76
    
    
    DirectorJohn Luke
    
    
    71
    
    
    DirectorGlen Antle
    
    
    66
    
    
    DirectorYasushi Chikagami
    
    
    65
    
    
    Director
 In addition to the above positions that Mr. Lin and Mr. Jen hold with TMI,
they also hold positions with certain of TMIs subsidiaries, as described
below. Mr. Lin, Mr. Edmunds and Mr. Jen receive cash compensation for their
services solely through TMI. However, Mr. Lin, Mr. Edmunds and Mr. Jen each
hold options to acquire common stock in both TMI and TTI. As of June 30, 2004,
Mr. Lin, Mr. Edmunds and Mr. Jen hold options to acquire an aggregate of
1,027,500, 150,000 and 412,000 shares of TMI common stock, respectively, and
2,270,000, 130,000 and 130,000 shares of TTI common stock, respectively. Dr.
Jung-Herng Chang receives cash compensation and equity compensation solely
through TTI and holds options to acquire 460,000 shares of TMI common stock.
As of June 30, 2004, Dr. Chang holds options to acquire an aggregate of
1,900,000 shares of TTI common stock. The options to acquire TMI shares for
Mr. Lin, Mr. Jen and Dr. Chang were granted over a series of years and are now
100% vested and exercisable. These options provide a new forward looking
retention incentive to key executives which will vest over four years. Trident Technologies, Inc. (TTI) With the assistance of TMI and its other subsidiaries, TTI is responsible
for development, sales and marketing of our digital media products. Our
current TTI subsidiary is the result of a reorganization in September 2003.
Combining the Digital Media division with TTI allowed us to aggressively focus
on developing more exciting products in the emerging digital television market,
and the restructured TTI has the potential to seek a separate IPO in 9




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Taiwan. To facilitate this opportunity TTI added independent members to its
board of directors. As TTI would be viewed as a pre IPO company in Taiwan we
were in a far better position to attract and retain good multimedia engineering
talent in the Far East. While we currently own approximately 83% of TTI, our interest in TTI may
decline over time, as discussed below. The quarterly results of TMI depend, in
part, on the charges we incur as a result of the minority ownership of TTI. In
general, such minority interest charges represent the share of income relating
to minority shareholders of our consolidated subsidiaries. If our equity
interest in TTI were to decline, the percentage of income taken as a charge for
minority interests in our consolidated subsidiaries would increase, thereby
affecting our financial results. TTI grants stock options separately in TTI to its employees, and virtually
all of the previous parent company employees, other than our executive
officers, stopped vesting in TMI options when they became part of TTI. To
ensure a continuity of interests in both parent and subsidiary activities
executive officers continued to vest in equity in both companies. As is the
practice in Taiwan the exercise price of these options is initially fixed at
the inception of the plan for a given pool of options and then available for
grant at that price until the pool has expired. The initial fixed exercise
price of NT$ 10 for TTIs initial 16.2 million share pool was customary for an
emerging company as equivalent to the par value of the stock. As stock options
are granted this fixed exercise price may be well below the fair market value
of the stock at that time, as a result, consistent with generally accepted
accounting principles, TMI measures the intrinsic value of these stock options
and records deferred compensation at the time of grant to be amortized to
expense over the vesting period of the option. TMI and TTI continue to explore the possibility of an IPO in Taiwan but no
final decision has been reached in this regard. The IPO process typically takes
approximately 2 years in Taiwan, at this point, even if the company were to
decide to move forward the earliest such an event might take place would be
during the summer of 2005. As is the practice in Taiwan, an IPO is not required
for shares of private companies to trade in limited volumes in so called
emerging market transactions and this is true today of TTI. Going forward,
whether an IPO occurs or not, TMIs long-term strategy is to maintain a
majority interest in TTI. As a majority shareholder, TMI expects to continue
to consolidate TTI operations as part of its financial statements. TMI will
continue to be actively involved in overseeing the operations of TTI. As of June 30, 2004, there were 65.0 million shares of TTI common stock
outstanding and options to purchase 14.1 million shares of TTI common stock
outstanding, none of which were exercisable as of that date. Such options vest
over a period of four years from the grant date. The vast majority of options
were granted on August 29, 2003 when TTI was reconstituted. So for example, as
of September 2004, if the vested shares to date were exercised and the Company
did not otherwise reacquire or sell additional shares, the Companys interest
in TTI would be diluted from 83% to approximately 82%. Likewise, in the
absence of the Company reacquiring or selling additional shares, dilution of
the Companys interest in TTI may be seen in future periods as vested options
are exercised. There are approximately 2.1 million options available for grant
remaining in the initial pool, after which the company must have sufficiently
prospered and declared sufficient stock dividends to investors that the
cumulative historical grants to employees falls below 15% of the new higher
number of shares then outstanding. At that point, TTI may add to the pool and
bring the cumulative options granted or available to grant up to the 15% level
if it so chooses, which increment will then have an exercise price fixed at no
less than 85% of the fair market value of the stock at that time. Dilution of our interest in TTI would also result if we determine in the
future to sell further interests in TTI. We have considered the possibility of
a public offering by our TTI subsidiary in Taiwan and have taken steps to
prepare for such an offering, including facilitating the trading of unlisted
shares on Taiwans emerging stock market, which is a necessary step in the IPO
process. However, no final decision has been made to proceed with such an
offering. Our long-term strategy is to retain a majority interest in TTI in
all cases, but any such offering would increase the minority ownership in TTI. As of June 30, 2004, TTIs Board Members are Mr. Frank Lin, Chairman and
CEO of Trident Microsystems, Inc.; Mr. Jung-Herng Chang, President of Trident
Technologies, Inc.; Mr. Charles Kau, President of Inotera Memories, Inc.; Mr.
Gary Cheng, General Partner of Venglobal Capital; Mr. Daniel Wu, Chief Strategy
Officer, Taishin Financial Holding Co., Ltd. As of June 30, 2004, TTIs
executive officers are Jung-Herng Chang, President and Jason Wang, Chief
Financial Officer, Vice President of Operations and Finance. 10




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Trident Multimedia Technologies (Shanghai) Co., Ltd (TMT) We are also focused on the operations of our subsidiary in China, Trident
Multimedia Technologies (Shanghai) Co., Ltd (TMT). Over the past few years,
Trident has established a strong and powerful VLSI design team in TMT. Our
strategy is for the VLSI team to provide integrated design services to TTI and
third parties, and to utilize Tridents existing graphics and digital media
IPs to develop new products. We believe that by restructuring our operations
and combining the technical strength of Trident and its subsidiaries we have
emerged as a profitable company and will continue to emerge as a leading player
in the semiconductor industry. International Operations During fiscal years 2004 and 2003, practically all of our Digital Media
sales occurred in Asia. We anticipate that sales to customers in Asia will
continue to account for a substantial percentage of revenues. In addition, the
foundries that manufacture our products are located in Asia. Due to this
concentration of international sales and manufacturing capacity in Asia, we are
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 our products in
foreign markets, tariffs and other barriers and restrictions, and the burdens
of complying with a wide variety of foreign laws. In addition, we are subject
to general geopolitical risks, such as political and economic instability and
changes in diplomatic and trade relationships, in connection with our sales,
support and third-party fabrication efforts in Hong Kong, Taiwan and elsewhere.
Also, political instability or significant changes in economic policy could
disrupt our operations in foreign countries or result in the curtailment or
termination of such operations. While we have not experienced any material
adverse effects on our operations as a result of other regulatory or
geopolitical factors, there can be no assurance that such factors will not
adversely impact our operations in the future or require us to modify our
current business practices. Intellectual Property We attempt to protect our trade secrets and other proprietary information
primarily through agreements with customers and suppliers, proprietary
information agreements with employees and consultants and other security
measures. Although we intend to protect our rights vigorously, there can be no
assurance that these measures will be successful. We have obtained various
digital video processing technology patents and other patent applications are
pending. Furthermore, there can be no assurance that others will not
independently develop similar or competing technology or design around any
patents that may be issued. While we will maintain certain rights and
obligations with respect to our graphics technology, substantially all such
rights for the PC graphics field were transferred as part of the XGI
transaction in July 2003. The semiconductor industry is characterized by frequent litigations
regarding patent and other intellectual property rights. From time to time, we
have received notices claiming that we have infringed third-party patents or
other intellectual property rights. To date, licenses generally have been
available to us where third-party technology was necessary or useful for the
development or production of our products. However, we have been in litigation
with NeoMagic Corporation which was resolved in our favor as is described in
more detail under Item 3. Legal Proceedings. There can be no assurance that
third parties will not assert additional claims against us 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. Any litigation
to determine the validity of any third-party claims could result in significant
expense to us and divert the efforts of our technical and management personnel,
whether or not such litigation is determined in our favor. In the event of an
adverse result in any such litigation, we could be required to expend
significant resources to develop non-infringing technology or to obtain
licenses to the technology that is the subject of the litigation. There can be
no assurance that we will 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 we
currently do not have a large portfolio of patents, we may not be able to
settle any alleged patent infringement claim through a cross-licensing
arrangement. In the event any third party made a valid claim against us, or
our customers, and a license was not made available to us on commercially
reasonable terms, we would be adversely affected. In addition, the laws of
certain countries in which our products have been or may be 11




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developed, manufactured or sold, including the Peoples Republic of China,
Taiwan and Korea, may not protect our products and intellectual property rights
to the same extent as the laws of the United States of America. We may in the future initiate claims or litigations against third parties
for infringement of our proprietary rights to determine the scope and validity
of our proprietary rights. Any such claims, with or without merit, could be
time-consuming, result in costly litigation and diversion of technical and
management personnel or require us to develop non-infringing technology or
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on acceptable terms, if at all.
In the event of a successful claim of infringement and our failure or inability
to develop non-infringing technology or license the proprietary rights on a
timely basis, our business, operating results and financial condition could be
materially adversely affected. Backlog Our business is generally characterized by 6-8 weeks of backlog at any
given time. We are also organized and make some level of investment in
inventory to be able to respond to short lead time orders and quick delivery
schedules. As a result we operate with a modest amount of backlog for any
given 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. Further, a substantial portion of our customers
are required to post a letter of credit or pay for the goods in advance of
shipment, so that if the customer does not provide this type of security on a
timely basis the backlog may be rescheduled or simply never materialize.
Consequently, we do not believe that backlog is a reliable indicator of future
sales. Segments For fiscal years ended June 30, 2004, 2003 and 2002, the digital media
segment accounted for $50.1 million, $25.9 million and $6.5 million in
revenues, respectively. As a percentage of revenues for fiscal years ended
June 30, 2004, 2003 and 2002, the digital media segment accounted for 95%, 49%
and 6%, respectively. The digital media segment had operating income of $10.6
million and $0.6 million for the fiscal years ended June 30, 2004 and June 30,
2003, respectively. Employees As of June 30, 2004, we had 300 full time employees, including 163 in
research and development, 27 in product testing, quality assurance and
operations functions, 67 in marketing and sales and 43 in finance, human
resources, and administration. As of June 30, 2004, we had 49 employees in the
United States, 171 in Shanghai, China, 67 in Taiwan and 13 in Hong Kong. Our
future success will depend in great part on our ability to continue to attract,
retain and motivate highly qualified technical, marketing, engineering and
management personnel. Our employees are not represented by any collective
bargaining agreements, and we have never experienced a work stoppage. We
believe that our employee relations are good. Available Information We file electronically with the Securities and Exchange Commission (SEC)
our annual reports on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934. The public may read or copy any materials we file with
the SEC at the SECs Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC. The
address of that site is http://www.sec.gov. You may obtain a free copy of our most recent annual report on Form 10-K
and any amendments to the report on the day of filing with the SEC or on our
website on the World Wide Web at http://www.tridentmicro.com. 12




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We do not make available on our website quarterly reports on Form 10-Q or
current reports on Form 8-K because we state on our website the location where
such filings can be found on the SEC website and on http://www.FreeEdgar.com.
You may obtain a free copy of our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to these
reports by contacting the Investor Relations Department at our corporate
offices by calling 408-991-8090 or by sending an e-mail message to
investor@tridentmicro.com. 
 Item 2. Properties We lease a building of approximately 34,000 square feet on 1090 East
Arques Avenue in Sunnyvale, California, pursuant to a lease which expires in
June 2006. This building is used as our headquarters and includes development,
marketing and sales, and administrative offices. Our other leases include a
6,000 square-foot office in Hong Kong, China, for the Hong Kong branch office
of our Trident Far East subsidiary, two sales offices located in Taipei, Taiwan
totaling 13,000 square-feet, a 5,000 square-foot research and development
facility in Hsinchu, Taiwan, a 6,000 square-foot sales office in Shenzhen,
China; a 38,000 square-foot research and development facility in Shanghai,
China, and a 1,000 square-foot sales office in Beijing, China. 
 Item 3. Legal Proceedings On December 14, 1998, NeoMagic Corporation (NeoMagic) filed a patent
infringement action against the Company in the United States District Court for
the District of Delaware, Case No. 98-CV-699. On January 25, 1999, the Company
answered the complaint and filed a counterclaim alleging violation of Section 2
of the Sherman Act. The antitrust counterclaim was stayed by the Court pending
the outcome of NeoMagics patent infringement claim. The parties filed motions
for summary judgment and after several years of legal action, the Court issued
an order on May 9, 2003 granting Tridents motion for summary judgment of
non-infringement and denying NeoMagics motion for summary judgment of
infringement. NeoMagic appealed this decision and, on August 5, 2004, the
Federal Circuit issued a unanimous decision affirming summary judgment in the
Companys favor. Tridents counterclaim against NeoMagic remains pending in
Delaware federal district court. The results of any litigation matters are inherently uncertain. In the
event of an adverse decision in the described legal actions or disputes, or any
other related litigation with third parties that could arise in the future with
respect to patents or other intellectual property rights relevant to the
Companys products, the Company could be required to pay damages and other
expenses, to cease the manufacture, use and sale of infringing products, to
expend significant resources to develop non-infringing technology or to obtain
licenses to the infringing technology. The Company cannot make any assurance
that these matters will not materially and adversely affect the Companys
business, financial condition, operating results, or cash flows. 
 Item 4. Submission of Matters to a Vote of Securities Holders. None. 13




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Executive Officers of the Registrant As of June 30, 2004, the executive officers of the Company, who are
elected by and serve at the discretion of the Board of Directors, were as
follows: Name
    
    Age
    
    Position
    
    Employed SinceFrank C. Lin
    
    
    59
    
    
    President, Chief
Executive Officer and
Chairman of the Board
    
    
    1987Jung-Herng Chang, Ph.D.
    
    
    48
    
    
    President TTI (primary operating subsidiary)
    
    
    1992John Edmunds
    
    
    47
    
    
    Chief Financial Officer
    
    
    2004Peter Jen
    
    
    58
    
    
    Senior Vice President,
Asia Operations and
Chief Accounting
Officer
    
    
    1988
 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 a B.S.E.E. from National Chiao Tung
University, Taiwan. 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. 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. Edmunds joined the Company in June 2004. Mr. Edmunds was formerly
with Zoran Corporation, where he was Vice President of Finance. Previously he
served as Senior Vice President/CFO of Oak Technology which was acquired by
Zoran in August 2003. Prior to Oak Technology, Mr. Edmunds was Corporate
Controller/Director of Internal Audit at Electronics for Imaging. Mr. Edmunds
previously held several senior level finance positions during his eleven years
at Tandem Computers as well as during six years with the international
accounting firm Coopers and Lybrand. Mr. Edmunds holds a C.P.A. and a BS in
Finance and Accounting from University of California, Berkeley. 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. 14




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PART II 
  Item 5.
    Market for the Registrants Common Stock, Related Stockholder Matters
and Issuer Purchases of Common Stock 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
quarterly high and low sales prices for the Companys common stock as reported
by NASDAQ: Year Ended June 30,
    
    High
    
    Low2003First Quarter
    
    
    4.19
    
    
    
    1.83Second Quarter
    
    
    2.80
    
    
    
    1.54Third Quarter
    
    
    2.77
    
    
    
    1.83Fourth Quarter
    
    
    6.47
    
    
    
    2.202004First Quarter
    
    
    9.68
    
    
    
    5.20Second Quarter
    
    
    19.00
    
    
    
    8.60Third Quarter
    
    
    21.25
    
    
    
    11.68Fourth Quarter
    
    
    17.35
    
    
    
    10.36
 As of June 30, 2004, there were approximately 83 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. The Company did not make any repurchases of its common stock during the
fourth quarter of fiscal 2004. 15




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Item 6. Selected and Supplementary Financial Data TRIDENT MICROSYSTEMS, INC.
SELECTED CONSOLIDATED FINANCIAL DATA Year ended June 30,(in thousands, except per share data)
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000CONSOLIDATED STATEMENT OF OPERATIONS DATA:Total revenues
    
    $
    52,551
    
    
    $
    52,752
    
    
    $
    105,766
    
    
    $
    128,226
    
    
    $
    122,682Income (loss) from operations
    
    
    4,434
    
    
    
    (18,454
    )
    
    
    (13,006
    )
    
    
    2,394
    
    
    
    (4,206
    )Net income (loss)
    
    
    9,588
    
    
    
    (24,764
    )
    
    
    (35,651
    )
    
    
    (43,640
    )
    
    
    68,107Basic net income (loss) per share
    
    
    0.43
    
    
    
    (1.21
    )
    
    
    (1.77
    )
    
    
    (2.22
    )
    
    
    3.38Diluted net income (loss) per share
    
    
    0.38
    
    
    
    (1.21
    )
    
    
    (1.77
    )
    
    
    (2.22
    )
    
    
    2.95
 June 30,2004
    
    2003
    
    2002
    
    2001
    
    2000CONSOLIDATED BALANCE SHEET DATA:Cash, cash equivalents,
and short-term investments
    
    $
    84,331
    
    
    $
    49,867
    
    
    $
    84,018
    
    
    $
    79,385
    
    
    $
    149,706Working capital
    
    
    72,170
    
    
    
    41,171
    
    
    
    73,802
    
    
    
    79,191
    
    
    
    115,211Total assets
    
    
    96,256
    
    
    
    70,123
    
    
    
    118,524
    
    
    
    147,419
    
    
    
    222,376Long-term debt, less current portion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46Total stockholders equity
    
    
    73,812
    
    
    
    52,160
    
    
    
    90,656
    
    
    
    105,366
    
    
    
    155,961
 16




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Item 7.
    Managements Discussion and Analysis of Financial Condition and
Results of Operations Special Note Regarding Forward-Looking Statements When used in this report the words expects, anticipates, estimates
and similar expressions are intended to identify forward-looking statements.
Such statements include our expectations and beliefs concerning:  
    
    our prospects for success in the digital television market and its effect on our future financial results,  
    
    the effects of our restructuring on our business and future financial results,  
    
    future prospects for the digital television industry in general,  
    
    allocation of resources and control of expenses related to the digital television market, new products and internal
business strategies,  
    
    our plans and timeline for future product development in the digital television market,  
    
    future gross margin levels and our strategy to maintain and improve gross margins,  
    
    demand for and trends in revenue for our products,  
    
    trends in average selling prices,  
    
    the percentage of export sales,  
    
    maintenance of majority ownership in our subsidiaries,  
    
    the sufficiency of our financial resources over the next twelve months,  
    
    denomination of our international revenues and exposure to interest rate risk,  
    
    the adequacy of our internal controls over financial reporting,  
    
    the outcome of pending litigation,  
    
    future investments and/or acquisitions. We are subject to risks and uncertainties, including those set forth below
under Factors That May Affect
Our Results and elsewhere in this report, that could cause actual results to
differ materially from those projected. These forward-looking statements speak
only as of the date hereof. We expressly disclaim any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in our expectations with
regard thereto or any change in events, conditions or circumstances on which
any statement is based. The following discussion should be read in conjunction with our Consolidated
Financial Statements and Notes thereto. Overview of Business We design, develop and market integrated circuits for digital media
applications, such as digital television, liquid crystal display (LCD)
television and digital set-top boxes. Our system-on-chip semiconductors
provide the intelligence for these new types of displays by processing and
optimizing video and computer graphic signals to produce high-quality and
realistic images. Many of the worlds leading manufacturers of consumer
electronics and computer display products utilize our technology to enhance
image quality and ease of use of their products. Our goal is to provide the
best image quality enhanced digital media integrated circuits at competitive
prices to users. We sell our products primarily to digital television original equipment
manufacturers in China, Korea, Taiwan and Japan. Historically, significant
portions of our revenue have been generated by sales to a relatively small
number of customers. Our top five customers accounted for 67% of our total
revenue for the fiscal year ended June 30, 2004. Substantially all of our
revenue to date has been denominated in U.S. dollars. Our products are
manufactured primarily by United Microelectronics Corporation (UMC), a
semiconductor manufacturer located in Taiwan, which also owns a minority
interest in TTI. We operate primarily through subsidiaries and offices located in
California, Taiwan and China. Trident Microsystems, Inc. (TMI), located in
Sunnyvale, California, acts as an administrative home office, operating through
our 83% owned subsidiary, Trident Technology, Inc. (TTI), located in Taipei,
Taiwan, TTIs US Branch located in Sunnyvale, California and our 100% owned
subsidiary, Trident Multimedia Technologies (Shanghai) Co., Ltd. 17




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(TMT), located
in Shanghai, China. Our net income is determined after taking a charge for the
share of income relating to the minority interest in TTI. References to we, Trident, or the Company in this report refer to
Trident Microsystems, Inc. and its subsidiaries, including TTI which was 83%
owned by TMI as of June 30, 2004, and was 63% owned by TMI as of June 30, 2003. Critical Accounting Policies, Judgments and Estimates Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to customer programs and incentives, product returns, bad debts,
inventories, equity investments, income taxes, financing operations, warranty
obligations, excess component order cancellation costs, restructuring,
long-term service contracts, pensions and other post-retirement benefits, and
contingencies and litigation. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions. We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements. We recognize product sales as revenue, generally upon shipment, when
persuasive evidence of an arrangement exists, title and risk of loss pass to
the customer, the price is fixed or determinable, and collection of the
receivable is reasonably assured. A reserve for sales returns is established
based on historical trends in product returns. Sales to resellers with rights
of return or price protection are generally recognized upon shipment to end
user customers. Approximately 10% of sales in fiscal 2004 flowed through
distributors. We record estimated reductions to revenue for customer programs and
incentive offerings including special pricing agreements, promotions,
historical returns, inventory levels at distributors and other volume-based
incentives. If market conditions were to decline, we may take actions to
increase customer incentive offerings possibly resulting in an incremental
reduction of revenue at the time the incentive is offered. We account for stock-based employee compensation arrangements in
accordance with the provisions of APB No. 25, Accounting for Stock Issued to
Employees and comply with the disclosure provisions of Statements of SFAS No.
123, Accounting for Stock-Based Compensation and SFAS No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure. Under APB No. 25,
compensation cost is generally recognized based on the difference, if any,
between the quoted market price of our stock on the date of grant and the
amount an employee must pay to acquire the stock. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. We provide for the estimated cost of product warranties at the time
revenue is recognized. While we engage in extensive product quality programs
and processes, including actively monitoring and evaluating the quality of our
component suppliers, our warranty obligation is affected by product failure
rates and material usage and service delivery costs incurred in correcting a
product failure. Should actual product failure rates, material usage or
service delivery costs differ from our estimates, revisions to the estimated
warranty liability would be required. We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and 18




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market
conditions. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be required. We currently evaluate our long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets, whenever events
or changes in circumstances indicate that the carrying value of such assets may
not be recoverable. Factors considered important that could result in an
impairment review include significant underperformance relative to historical
or projected future operating results, significant changes in the manner of use
of acquired assets or the strategy for the our business, significant negative
industry or economic trends, and/or a significant decline in the our stock
price for a sustained period of time. We hold minority interests in companies having operations or technology in
areas within our strategic focus, three of which are publicly traded and have
highly volatile share prices. We record an investment impairment charge when
we believe an investment has experienced a decline in value that is
other-than-temporary. Future adverse changes in market conditions or poor
operating results of underlying investments could result in losses or an
inability to recover the carrying value of the investments that may not be
reflected in an investments current carrying value, thereby possibly requiring
an impairment charge in the future. 19




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##### Table of Contents



Results of Operations The following table sets forth the percentages that consolidated statement
of operations items are to revenues for the years ended June 30, 2004, 2003 and
2002: The following table provides statement of operations data and the percentage
change from the prior year (in thousands): Year ended June 30,2004
    
    2003
    
    2002Revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of revenues
    
    
    45
    
    
    
    72
    
    
    
    78Gross margin
    
    
    55
    
    
    
    28
    
    
    
    22Research and development expenses
    
    
    22
    
    
    
    41
    
    
    
    21Selling, general and administrative expenses
    
    
    25
    
    
    
    22
    
    
    
    13Income (loss) from operations
    
    
    8
    
    
    
    (35
    )
    
    
    (12
    )Gain (loss) on investments, net
    
    
    18
    
    
    
    (9
    )
    
    
    (41
    )Interest and other income(expense), net
    
    
    
    
    
    
    (1
    )
    
    
    1Minority interests in subsidiaries
    
    
    (3
    )
    
    
    
    
    
    
    Gain (loss) before income taxes
    
    
    23
    
    
    
    (45
    )
    
    
    (52
    )Provision (benefit) for income taxes
    
    
    5
    
    
    
    2
    
    
    
    (19
    )Net income (loss)
    
    
    18
    
    
    
    (47
    )
    
    
    (33
    )
 Year Ended June 30,
    
    
    
    
    
    Year Ended June 30,2004
    
    2003
    
    % change
    
    2003
    
    2002
    
    % changeRevenues
    
    $
    52,551
    
    
    $
    52,752
    
    
    
    
    
    
    $
    52,752
    
    
    $
    105,766
    
    
    
    (50
    )%Cost of revenues
    
    
    23,674
    
    
    
    37,720
    
    
    
    (37
    )%
    
    
    37,720
    
    
    
    82,970
    
    
    
    (55
    )%Gross profit
    
    
    28,877
    
    
    
    15,032
    
    
    
    92
    %
    
    
    15,032
    
    
    
    22,796
    
    
    
    (34
    )%Research and development expenses
    
    
    11,475
    
    
    
    21,600
    
    
    
    (47
    )%
    
    
    21,600
    
    
    
    22,218
    
    
    
    (3
    )%Sales, general and administrative expenses
    
    
    12,968
    
    
    
    11,886
    
    
    
    9
    %
    
    
    11,886
    
    
    
    13,584
    
    
    
    (13
    )%Income (loss) from operations
    
    $
    4,434
    
    
    $
    (18,454
    )
    
    
    124
    %
    
    $
    (18,454
    )
    
    $
    (13,006
    )
    
    
    (42
    )%
 Revenues Total revenues in fiscal 2004 were $52.6 million, which is slightly lower
than the $52.8 million reported in fiscal 2003. Sales of digital media
products represented approximately $50.1 million or 95% of total revenues in
fiscal 2004 as compared to approximately $25.9 million or 49% in fiscal 2003.
The increase in sales of digitally processed television products in fiscal 2004
was primarily attributed to continued success of the 3D and MV products largely
in Digital CRT markets as well as a favorable reception from new customers for
our SVP and LCD panel based products. The volume of Digital media units
increased by more than 120%, however as is typical in Consumer Electronics
markets, the average selling price eroded by an amount in the range of 10-15%.
The aggregate average selling price continues to be in a range of $ 15 -$ 20
per unit. No revenue was recorded for graphics products in the year ended June
30, 2004 as a result of the transfer of the graphics division to XGI in July
2003. Total revenues decreased in fiscal 2003 to $52.8 million, or 50%, from
$105.8 million reported in fiscal 2002. The decrease in revenues was primarily
due to the decrease in unit volume shipments of desktop and notebook PC
products in fiscal 2003. Sales of digital media products represented
approximately $25.9 million or 49% of total 20




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revenues in fiscal 2003 as compared
to approximately $6.2 million or 6% in fiscal 2002. Sales of graphics products
of $26.2 million were approximately 50% of total revenues in fiscal 2003 as
compared to $96.2 million or 91% of total revenues in fiscal 2002. Sales to Asian customers, primarily in China, Korea and Taiwan accounted
for 91% of our revenues in fiscal 2004. Sales to Asian customers, primarily in
Japan, Taiwan and China accounted for 98% of revenues in fiscal 2003. Sales to
3 customers, Skyworth, Konka (television manufacturers located in China) and
Samsung, accounted for approximately 23%, 16% and 15% of revenues,
respectively, for fiscal 2004. Sales to two customers, Inno Micro, which is a
supplier to Toshiba, and Skyworth accounted for approximately 43% and 11% of
revenues, respectively, for fiscal 2003. Sales to one customer, Inno Micro,
which is a supplier to Toshiba, accounted for approximately 58% of revenues for
fiscal 2002. Substantially all of our sales transactions were denominated in
U.S. dollars during all periods. Approximately 10% of sales in fiscal 2004
went through distributors. In the year ended June 30, 2004, one of our key OEM customers ordered a
lower volume of products than expected due to the customers inventory
transition issues. Although we expect this customers inventory transition to
be resolved in a timely manner, in forecasting our sequential growth, we do not
expect a complete resolution by the end of the quarter ending September 30,
2004. However, we expect to ship the SVP-EX to this customer in the month of
September, and expect the customer volumes to be higher in the December quarter
and back to normal levels moving into calendar 2005. Gross Margin Gross margin as a percentage of total revenues increased to 55% in fiscal
2004 from 28% in fiscal 2003. Gross margin as a percentage of total revenues
increased to 28% in fiscal 2003 from 22% in fiscal 2002. The increases were
primarily due to a relative increase in sales of digital media products which
have higher margins than PC graphics products. Our strategy is to maintain and
improve gross margins by (1) developing new products that have higher margins,
and (2) reducing manufacturing costs by improving production yield and
utilizing newer process technology. However, there is no assurance that we
will be able to develop and introduce new products on a timely basis or that we
can reduce manufacturing costs. Research and Development Research and development expenses decreased to $11.5 million in fiscal
2004 from $21.6 million in fiscal 2003, and from $22.2 million in fiscal 2002.
Research and development expenses as a percentage of total revenues were 22%,
41% and 21% in fiscal 2004, 2003 and 2002, respectively. The decrease in
absolute dollars spent in fiscal 2004 was primarily the result of decreased
spending on research and development relating to graphics products. We plan to continue developing the next generation DPTV product as well
as other advanced products for digital TV and digital Set Top Boxes (STB) for
the digital television market in China, Japan, Korea and Taiwan. However,
there can be no assurance that these products will be quickly or widely
accepted by consumers in the market place, or that the new products will be
developed and shipped in a timely manner. Selling, General and Administrative Selling, general and administrative expenses increased to $13.0 million in
fiscal 2004 from $11.9 million in fiscal 2003 and decreased from $13.6 million
in fiscal 2002. Selling, general and administrative expenses as a percentage
of revenues were 25%, 23% and 13% in fiscal 2004, 2003 and 2002, respectively.
Selling, general and administrative expenses increased in fiscal 2004 due to an
increase in professional fees and an increase in administrative expenses
relating to our restructuring activities. Selling, general and administrative
expenses decreased in 2003 from 2002 primarily as a result of lower selling
expenses due to a decrease in revenue for graphic products. 21




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Interest and Other Income (Expense), Net Net interest and other expense of $104,000 in fiscal 2004, was comprised
of an expense of $262,000, primarily due to currency exchange losses and
investment expenses, partially offset by interest income of $158,000. Net
interest and other expense was $269,000 in fiscal 2003 representing an expense
of $503,000 partially offset by interest income of $234,000. Interest income
declined in fiscal 2004 due to lower applicable interest rates as compared to
fiscal 2003. Interest income declined in fiscal 2003 due to lower cash
balances and lower applicable interest rates as compared to fiscal 2002. The
amount of interest income we earn varies directly with the amount of our cash
and cash equivalents balances and prevailing interest rates. Minority Interests in subsidiaries The $1.8 million recorded for minority interests in subsidiaries in fiscal
2004 represents the share of income relating to minority shareholders of our
consolidated subsidiaries. The amount of such charges is dependent upon the
income and minority ownership in our subsidiaries, TTI in particular. The
percentage held by minority shareholders will increase in the future if
employees of TTI exercise options to acquire TTI stock, or if we determine to
sell further interests in TTI to outside investors. We continue to explore the
possibility of an IPO in Taiwan which would increase the minority ownership in
TTI. However, no final decision has been reached in this regard. The IPO
process typically takes approximately 2 years in Taiwan, at this point, even if
the company were to decide to move forward the earliest such an event might
take place would be during the summer of 2005. We have taken preliminary steps
to enable an IPO, which include filing for regulatory approvals and most
recently, agreeing to facilitate sales of unlisted securities , including the
sale by TMI of a small number of less than 0.5% of its holdings to enable a
Taiwan securities firm to make an orderly market. Going forward, whether an
IPO occurs or not, TMIs long-term strategy is to maintain a majority interest
in TTI. Provision/benefit for Income Taxes A provision for income taxes of $2.7 million was recorded for the fiscal
year ended June 30, 2004 of which $2.2 million related to our operations in
Taiwan. For fiscal 2003 we recorded a provision for income taxes of $1.0 million
to increase our valuation allowance and reduce the carrying amount of our net
deferred tax asset to zero. Based on our assessment of all available evidence,
including consideration of historical and future estimated taxable losses, we
concluded that it was more likely than not our net deferred tax asset would not
be realized. The net deferred tax asset arose during fiscal 2003 due to
decreases in our deferred tax liabilities associated with cumulative unrealized
holding gains on our UMC investment. We recorded a benefit for income taxes of
$19.6 million for the fiscal year ended June 30, 2002. The income tax benefit
was primarily due to the reversal of deferred tax liabilities as a result of
the write-downs of our UMC investment. Investment in UMC and Other Investments As of June 30, 2004, the Company owned approximately 69.5 million shares
of United Microelectronics Corporation (UMC), which represents about 0.5% of
the outstanding stock of UMC. In the quarter ended September 30, 2001, we
concluded that due to a substantial decline in the market value of UMCs stock
price from June 30, 2001, the continued decline in stock prices of publicly
traded semiconductor companies and the continuing unfavorable outlook for the
semiconductor industry, that the decline in the investment value in UMC had
become other-than-temporary. Accordingly, $40.0 million, which represents the
difference between the carrying value on March 31, 2001 and the quoted fair
value on September 30, 2001, was written off against earnings as an impairment
loss on investments in accordance with Statements of Financial Accounting
(SFAS) No. 115 and Accounting Principles Board Opinion (APB) No. 18. See
Part II, Item 8, Notes 4 and 6 above (Investment in UMC and Comprehensive
Income (Loss), respectively) for discussion of this investment. During fiscal
year 2004 the Company sold 7.3 million shares of its investment in UMC for cash
of $7.4 million. This resulted in a gain of $2.7 million. We may sell
additional UMC shares in the near future if we believe it is in the best
interests of our stockholders to do so. 22




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During the fiscal year ended June 30, 2004, we recognized net investment gains
totaling $9.8 million as follows (in thousands): Gain on sale of UMC stock (Note 4)
    
    $
    2,652Gain on sale of graphics division and interests in XGI
    
    
    6,627Gain on sale of 7% interest in TTI
    
    
    1,027Broadband networking company write-off
    
    
    (230
    )Software development company write-off
    
    
    (177
    )Optical applications company write-off
    
    
    (272
    )Gain on sale of investment in a communications company
    
    
    125Gain on sale of investment in a system design software company
    
    
    132Venture capital funds write-down
    
    
    (90
    )Total
    
    $
    9,794
 During the fiscal year ended June 30, 2003, we also recognized net impairment
loss on investments other than UMC totaling $5.0 million as follows (in
thousands): Optical applications company
    
    $
    (987
    )Fiber optic technology company
    
    
    (151
    )Circuit design company
    
    
    (500
    )Analog circuit design company
    
    
    (753
    )Optical networking company
    
    
    (831
    )Broadband networking company
    
    
    (1,370
    )Software development company
    
    
    (110
    )Venture capital funds write-down
    
    
    (460
    )System design software company
    
    
    167Total
    
    $
    (4,995
    )
 During the fiscal year ended June 30, 2003, we recognized a gain on investment
of $167,000 resulting from the additional shares received upon the achievement
of certain milestones. During the fiscal year ended June 30, 2002, the Company recognized net
impairment losses on investments totaling approximately $42.7 million as
follows (thousands): UMC investment write-down (Note 4)
    
    $
    (39,980
    )ADSL company
    
    
    (270
    )Communications company
    
    
    (66
    )Broadband communications company
    
    
    (750
    )Voice over DSL communications company
    
    
    (850
    )Optical networking company
    
    
    (349
    )Broadband server technology company
    
    
    (275
    )Venture capital funds write-down
    
    
    (743
    )System design software company
    
    
    568Net loss
    
    $
    (42,715
    )
 See Part II, Item 8, Notes 4 and 5 to the Consolidated Financial Statements for
discussion of these investments and the related losses. Under the Investment Company Act of 1940 (the 1940 Act), a company
meeting the definition of an investment company is subject to various
stringent legal requirements on its operations. A company may become subject
to the 1940 Act if, among other reasons, it owns investment securities with a
value exceeding 40 percent of 23




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##### Table of Contents



the value of its total assets (excluding
government securities and cash items) on an unconsolidated basis, unless a
particular exemption or safe harbor applies. Investment securities do not
include interests in majority owned subsidiaries, and we intend to maintain a
majority interest in our subsidiaries, including TTI, for the foreseeable
future. We do hold other securities, including shares in UMC, and the value of
those securities fluctuates significantly. At times, the total value of the
investment securities we hold may, and recently has, exceeded 40% of total
assets. However, we are, and intend to remain, an operating company. Our
efforts are focused almost exclusively on our digital media business and we
intend to continue to conduct business as an operating company, and to take
such actions as are necessary to ensure we are not, and are not regulated as,
an investment company. Liquidity and Capital Resources As of June 30, 2004, our principal sources of liquidity included cash and
cash equivalents of $32.5 million, an increase from $5.1 million at June 30,
2003. In fiscal year 2004, $2.4 million of cash was provided by operations, as
compared to $17.4 million used by operations in fiscal year 2003. The cash
provided by operations was primarily due to net income, a decrease in accounts
receivable and an increase in income taxes payable and minority interests in
subsidiaries, offset by a decrease in accounts payable. Accounts receivable decreased to $2.4 million at June 30, 2004 from $4.3
million at June 30, 2003 primarily due to our restructuring which resulted in
decreased revenues after the transfer of our Graphics Division to XGI, and due
to more sales made on cash on delivery terms for digital media products.
Accounts payable decreased to $3.2 million at
June 30, 2004 from $8.0 million at June 30, 2003 primarily due to our decreased
research and development expenditures subsequent to our transfer of the
Graphics Division to XGI. Our income taxes payable increased to $4.3 million
primarily due to profitable operations in Taiwan. Minority interests in
subsidiaries increased to $4.0 million due to the restructuring of our
operations in TTI and the resulting share of income by minority interests in
TTI. During the fiscal year ended June 30, 2004, $19.6 million of net cash was
provided by investing activities which was comprised of the net proceeds of
$8.4 million from the transfer of our Graphics Division to XGI, the sale of
one-third of our interest in XGI, the sale of approximately 6.8% equity
interest in our TTI subsidiary for $2.8 million, the sale of 7.3 million shares
of our investment in UMC for $7.4 million and $1.8 million from the disposal of
short-term investments, partially offset by the purchase of investments of
$90,000. While we are an operating company not in the business of investing,
reinvesting, owning, holding or trading in securities, we regularly monitor the
advisability of disposing of our UMC stock and sell shares of such stock from
time to time when we believe it is in the best interests of our stockholders to
do so. Capital expenditures were $656,000 for fiscal year ended June 30, 2004,
compared to $458,000 for fiscal year ended June 30, 2003. During the fiscal year ended June 30, 2004, $5.3 million of cash was
provided by financing activities, which was the result of the exercising of
employee stock options. Contractual Obligations As of June 30, 2004, our principal commitments consisted of obligations
outstanding under non-cancelable operating leases and unconditional purchase
order commitments for wafers and chipsets. Our operating lease commitments
include the lease of our headquarters in Sunnyvale, California and leases for
four premises in China and two premises in Taiwan. Our lease agreements expire
at various dates through 2008 and require payment of property taxes, insurance,
maintenance and utilities. The following table summarizes our contractual
obligations and commitments as of June 30, 2004 (in millions): Payments due by periodLess than
    
    1 - 3
    
    3 - 5
    
    More thanContractual Obligations
    
    Total
    
    1 year
    
    years
    
    Years
    
    5 yearsOperating Leases
    
    
    5.4
    
    
    
    2.4
    
    
    
    3.0
    
    
    
    
    
    
    
    Purchase Obligations
    
    
    3.2
    
    
    
    3.2
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    8.6
    
    
    
    5.6
    
    
    
    3.0
    
    
    
    
    
    
    
    
 24




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We believe our current resources are sufficient to meet our needs for at
least the next twelve months. However, we regularly consider transactions to
finance our activities, including taking TTI public in Taiwan as well as debt
and equity offerings and new credit facilities or other financing transactions. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are
reasonably likely to have a material current or future effect on our financial
condition, revenue or expenses, results of operations, liquidity, capital
expenditures or capital resources. Factors That May Affect Our Results While we recognized operating income in the fiscal year ended June 30, 2004, we
have incurred operating losses in recent history. We recognized income from operations of $4.4 million in the fiscal year
ended June 30, 2004. However, we did incur losses for several quarters prior
to our reorganization. Our reorganization was intended to reduce our operating expenses and
position the Company in a market in which we may be profitable. We are trying
to expedite new digital media product launchings and to control operating
expenses to achieve and sustain profitability. However, there is no guarantee
that our efforts will be successful. Sales and marketing, product development
and general and administrative expenses may increase as a result of shifts
in the market place, our efforts in developing and marketing new products,
and our need to respond to these shifts, which could result in the need to
generate significantly higher revenue to achieve and sustain profitability. Our success depends upon the digital television market and we must continue to
develop new products and to enhance our existing products. The digitally processed television industry is characterized by rapidly
changing technology, frequent new product introductions, and changes in
customer requirements. Our future success depends on our ability to anticipate
market needs and develop products that address those needs. As a result, our
products could quickly become obsolete if we fail to predict market needs
accurately or develop new products or product enhancements in a timely manner.
The long term success in the digitally processed television business will
depend on the introduction of successive generations of products in time to
meet the design cycles as well as the specifications of television original
equipment manufacturers. Our failure to predict market needs accurately or to
develop new products or product enhancements in a timely manner will harm
market acceptance and sales of our products. If the development or enhancement
of these products or any other future products takes longer than we anticipate,
or if we are unable to introduce these products to market, our sales will not
increase. Even if we are able to develop and commercially introduce these new
products, the new products may not achieve widespread market acceptance
necessary to provide an adequate return on our investment. We have had fluctuations in quarterly results in the past and may continue to
do so in the future. Our quarterly revenue and operating results have varied in the past and
may fluctuate in the future due to a number of factors including:  
    
    uncertain demand in new markets in which we have limited experience;
    
    fluctuations in demand for our products, including seasonality;
    
    unexpected product returns or the cancellation or rescheduling of significant orders;
    
    our ability to develop, introduce, ship and support new
products and product enhancements and to manage product transitions;
    
    new product introductions by our competitors; 25




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##### Table of Contents




    
    seasonality, particularly in the third quarter of each fiscal
year, due to the extended holidays surrounding the Chinese New Year;
    
    our ability to achieve required cost reductions;
    
    our ability to attain and maintain production volumes and quality levels for our products;
    
    delayed new product introductions;
    
    unfavorable responses to new products;
    
    adverse economic conditions, particularly in Asia; and
    
    the mix of products sold and the mix of distribution channels through which they are sold. The quarterly results of TMI also depend in part on the charges we incur
as a result of the minority ownership of TTI. The minority ownership will
increase in the future as a result of the exercise of TTI options by employees
or if we determine to sell further interests in TTI. Dilution of shareholders interest may occur. As part of our business strategy, we review acquisition and strategic
investment prospects that would complement our current product offerings,
augment our market coverage or enhance our technical capabilities, or that may
otherwise offer growth opportunities. We consider from time to time investment
opportunities in new businesses, and we expect to make investments in and may
acquire businesses, products or technologies in the future. In the event of
any future acquisitions, we could issue equity securities, which would dilute
current stockholders percentage ownership. We are reviewing the possibility of a public offering of TTI stock in
Taiwan. A final decision has not been made to proceed with such an offering,
but we have taken steps to ensure that an offering could occur in Taiwan if we
decided to proceed. Any such offering would increase the minority ownership in
TTI, and result in larger charges, as a percentage of operating income, for
minority interest in subsidiaries. On November 5, 2003, the Company announced that its Board of Directors had
approved a three-for-two stock split of the Companys outstanding shares of
common stock to be effected in the form of a 50 percent stock dividend. The
stock split entitled each stockholder of record at the close of business on
November 26, 2003 to receive one additional share for every two outstanding
shares of common stock held on the record date. The additional shares
resulting from the stock split were distributed on December 12, 2003. On March
17, 2004, a Special Meeting of Stockholders was held and approval was given to
increase the number of authorized shares of common stock from 30,000,000 to
60,000,000. All share numbers in this document reflect the capital structure
as of the end of the fiscal quarter and are therefore on a post-split basis. These actions could affect our operating results and/or the price of our
common stock. Acquisitions and investment activities also entail numerous
risks, including: difficulties in the assimilation of acquired operations,
technologies or products; unanticipated costs associated with the acquisition
or investment transaction; adverse effects on existing business relationships
with suppliers and customers; risk associated with entering markets in which we
have no or limited prior experience; and potential loss of key employees of
acquired organizations. We cannot assure that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future, and our failure to do so could harm our business, operating results and
financial condition. We currently rely on certain international customers for a substantial portion
of our revenue. As a result of our focus on Digital Media products, we expect to be
primarily dependent on international sales and operations, particularly in
Taiwan, Japan, Korea and China, which are expected to constitute a significant
portion of our sales in the future. There are a number of risks arising from
our international business, which could adversely affect future results,
including:  
    
    exchange rate variations
    
    potential adverse tax consequences; and
    
    unexpected changes in regulatory requirements. 26




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Our international sales currently are U.S. dollar-denominated. As a
result, an increase in the value of the U.S. dollar relative to foreign
currencies could make our products less competitive in international markets. Intense competition exists in the market for digital media products. We plan to continue developing the next generation DPTV, HiDTV as well
as other advanced products for digital TV and digital STB for the digital
television market in the U.S., China, Japan, Korea, Taiwan and Europe. We
believe the market for digital television will be competitive, and will require
substantial research and development, technical support, sales and other
expenditures to stay competitive in this market. In the digital television
market our principal competitors are Toshiba, Philips Electronics, Micronas AG,
Pixelworks, Inc., Genesis Microchip, Inc. ATI Technologies Inc., Zoran
Corporation, ST Microelectronics, and Media Tek, Ltd. Certain of our current
competitors and many potential competitors have significantly greater
technical, manufacturing, financial and marketing resources than we have.
Therefore, we expect to devote significant resources to the DPTV and HiDTV
market even though competitors are substantially more experienced than we are
in this market. We are vulnerable to undetected product problems. Although we establish and implement test specifications, impose quality
standards upon our suppliers and perform separate application-based
compatibility and system testing, our products may contain undetected defects,
which may or may not be material, and which may or may not have a feasible
solution. We have experienced such errors in the past, and we cannot ensure
that such errors will not be found from time to time in new or enhanced
products after commencement of commercial shipments. These problems may
materially adversely affect our
business by causing us to incur significant warranty and repair costs,
diverting the attention of our engineering personnel from our product
development efforts and causing significant customer relations problems. Our reliance upon independent foundries could make it difficult to obtain
products and affect our sales. If the demand for our products grows, we will need to increase our
material purchases, contract manufacturing capacity and internal test and
quality functions. Any disruptions in product flow could limit our revenue,
adversely affect our competitive position and reputation and result in
additional costs or cancellation of orders under agreements with our customers. We currently rely on one third-party foundry to manufacture our products
either in finished form or wafer form. Generally, foundries are not obligated
to manufacture our products on a long-term fixed price base. If we encounter
shortages and delays in obtaining components, our ability to meet customer
orders would be materially adversely affected. The market price of our common stock has been, and may continue to be volatile. The market price of our common stock has been, and may continue to be
volatile. Factors such as new product announcements by us or our competitors,
quarterly fluctuations in our operating results and unfavorable conditions in
the digital television market may have a significant impact on the market price
of our common stock. These conditions, as well as factors that generally
affect the market for stocks and stocks in high-technology companies in
particular, could cause the price of our stock to fluctuate from time to time. Our success depends to a significant degree on the continued employment of key
personnel. Our success depends to a significant degree upon the continued
contributions of the principal members of our technical sales, marketing,
engineering and management personnel, many of whom perform important management
functions and would be difficult to replace. We particularly depend upon the
continued services of our executive officers, particularly Frank Lin, our
President and Chief Executive Officer, Dr. Jung-Herng Chang, President of TTI,
John Edmunds, Chief Financial Officer and Peter Jen, Senior Vice President,
Asia Operations and Chief Accounting Officer and other key engineering, sales,
marketing, finance, manufacturing and support personnel. 27




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In addition, we
depend upon the continued services of key management personnel at our overseas
subsidiaries. Our officers and key employees are not bound by employment
agreements for any specific term, and may terminate their employment at any
time. In order to continue to expand our product offerings both in the U.S.
and abroad, we must hire a number of research and development personnel.
Hiring technical sales personnel in our industry is very competitive due to the
limited number of people available with the necessary technical skills and
understanding of our technologies. Our ability to continue to attract and
retain highly skilled personnel will be a critical factor in determining
whether we will be successful in the future. Competition for highly skilled
personnel is intense, particularly in Northern California. If we are not
successful in attracting, assimilating or retaining qualified personnel to
fulfill our current or future needs, our business may be harmed. Our success depends in part on our ability to protect our intellectual property
rights, which may be difficult. The digital media market is a highly competitive industry in which we, and
most other participants, rely on a combination of patent, copyright, trademark
and trade secret laws, confidentiality procedures and licensing arrangements to
establish and protect proprietary rights. The competitive nature of our
industry, rapidly changing technology, frequent new product introductions,
changes in customer requirements and evolving industry standards heighten the
importance of protecting proprietary technology rights. Since the United
States Patent and Trademark Office keeps patent applications confidential until
a patent is issued, our pending patent applications may attempt to protect
proprietary technology claimed in a third party patent application. Our
existing and future patents may not be sufficiently broad to protect our
proprietary technologies as policing unauthorized use of our products is
difficult and we cannot be certain that the steps we have taken will prevent
the misappropriation or unauthorized use of our technologies, particularly in
foreign countries where the laws may not protect our proprietary rights as
fully as U.S. law. Our competitors may independently develop similar
technology, duplicate our products or design around any of
our patents or other intellectual property. If we are unable to
adequately protect our proprietary technology rights, others may be able to use
our proprietary technology without having to compensate us, which could reduce
our revenues and negatively impact our ability to compete effectively. We have
filed a number of lawsuits to enforce our intellectual property rights or to
determine the validity or scope of the proprietary rights of others. As a
result of any such litigation, we could lose our proprietary rights and incur
substantial unexpected operating costs. Any action we take to protect our
intellectual property rights could be costly and could absorb significant
management time and attention. In addition, failure to adequately protect our
trademark rights could impair our brand identity and our ability to compete
effectively. We have been involved in intellectual property infringement claims, and may be
involved in others in the future, which can be costly. Our industry is very competitive and is characterized by frequent
litigation alleging infringement of intellectual property rights. Numerous
patents in our industry have already been issued and as the market further
develops and additional intellectual property protection is obtained by
participants in our industry, litigation is likely to become more frequent.
From time to time, third parties have asserted and are likely in the future to
assert patent, copyright, trademark and other intellectual property rights to
technologies or rights that are important to our business. Historically we
have been involved in such disputes. See Part I, Item 3 (Legal Proceedings).
In addition, we may in the future enter into agreements to indemnify our
customers for any expenses or liabilities resulting from claimed infringements
of patents, trademarks or copyrights of third parties. Our pending litigation
and any future litigation arising from claims asserting that our products
infringe or may infringe the proprietary rights of third parties, whether the
litigation is with or without merit, has been and may in the future be,
time-consuming, resulting in significant expenses and diverting the efforts of
our technical and management personnel. We do not have insurance against our
alleged or actual infringement of intellectual property of others. These
claims, if resolved adversely to us, could cause us to stop selling our
products which incorporate the challenged intellectual property and could also
result in product shipment delays or require us to redesign or modify our
products or to enter into licensing agreements. These licensing agreements, if
required, would increase our product costs and may not be available on terms
acceptable to us, if at all. If there is a successful claim of infringement or
we fail to develop non-infringing technology or license the proprietary rights
on a timely basis, our business could be harmed. 28




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Natural disasters could limit our ability to supply products. Our primary suppliers are located in California and Taiwan, both active
earthquake fault zones. These regions have experienced large earthquakes in
the past and may experience them in the future. A large earthquake in any of
these areas could disrupt our manufacturing operations for an extended period
of time, which would limit our ability to supply our products to our customers
in sufficient quantities on a timely basis, harming our customer relationships. Future terrorist attacks may affect our business. We cannot guarantee that our business will be unaffected by terrorist
attacks in the future. The impact and future effects of terrorism are
currently uncertain, and we are unable to predict the future impact that
terrorist attacks may have on our business and operations, the international
markets in which we operate and the global economy in general. Changes in our business organization will affect our operations. As a result of our reorganization and as we go forward into fiscal year
2005, our principle design, development and marketing effort will focus
primarily on our Digital Media products. These products are now our only
product line and our success in the near term depends upon the growth of the
market for these products and our success in this market. Our success in the
longer term will also depend on our ability to develop and introduce other
digital media products. Through our TTI subsidiary, we plan to continue
developing the next generation DPTV and HDTV, as well as other advanced
products for digital TV and digital STB for the digital television market in
the
U.S., China, Japan, Korea, Taiwan and Europe. While we anticipate this market
to generate an increasing percentage of our revenues, we have limited
experience with digital video television. There can be no guarantee that our
digital media products will be accepted by the market or increase our revenues
or profitability. The performance of our investment in UMC is uncertain. We hold a substantial investment in UMC as well as a few smaller
investments in other companies. The values of these investments are subject to
market price volatility. We have in the past incurred losses on our
investments. In the future, we could further lose a portion of, or our entire
investment, in these companies. Changes in stock option accounting rules may adversely impact our reported
operating results prepared in accordance with generally accepted accounting
principles, our stock price and our competitiveness in the employee
marketplace. Technology companies like ours have a history of using broad based
employee stock option programs to hire, incentivize and retain our workforce in
a competitive marketplace. Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (SFAS 123) allows companies
the choice of either using a fair value method of accounting for options, which
would result in expense recognition for all options granted, or using an
intrinsic value method, as prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25), with a pro forma
disclosure of the impact on net income (loss) of using the fair value option
expense recognition method. We have elected to apply APB 25 and accordingly we
generally do not recognize any expense with respect to employee stock options
as long as such options are granted at exercise prices equal to the fair value
of our common stock on the date of grant. During March 2004 the FASB issued a proposed Statement, Share-Based
Payment, an amendment of FASB Statements No. 123 and 95. The proposed
statement eliminates the treatment for share-based transactions using APB 25
and generally would require share-based payments to employees be accounted for
using a fair-value-based method and recognized as expenses in our statements of
operations. The proposed standard would require the modified prospective
method be used, which would require that the fair value of new awards granted
from the beginning of the year of adoption plus unvested awards at the date of
adoption be expensed over the vesting term. In addition, the proposed
statement encourages companies to use the binomial approach to value stock
options, as opposed to the Black-Scholes option pricing model that we currently
use for the fair value of our options under SFAS 123 disclosure provisions. 29




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The effective date the proposed standard is recommending is for fiscal
years beginning after December 15, 2004. Should this proposed statement be
finalized, it will have a significant impact on our consolidated statement of
operations as we will be required to expense the fair value of our stock
options rather than disclosing the impact on our consolidated result of
operations within our footnotes in accordance with the disclosure provisions of
SFAS 123 (see Note 1 of the notes to consolidated financial statements). This
will result in lower reported earnings per share which could negatively impact
our future stock price. In addition, should the proposal be finalized, this
could impact our ability to utilize broad based employee stock plans to reward
employees and could result in a competitive disadvantage to us in the employee
marketplace. We are exposed to increased costs and risks associated with complying with
increasing and new regulation of corporate governance and disclosure standards. We are spending an increasing amount of management time and external
resources to comply with changing laws, regulations and standards relating to
corporate governance and public disclosure, including the Sarbanes-Oxley Act of
2002, new SEC regulations and Nasdaq Stock Market rules. In particular,
Section 404 of the Sarbanes-Oxley Act of 2002 requires managements annual
review and evaluation of our internal control systems, and attestations of the
effectiveness of these systems by our independent registered public accounting
firm. We are currently documenting our internal control systems and procedures
and considering improvements that may be necessary in order for us to comply
with the requirements of Section 404 by the end of 2004. This process may
require us to hire additional personnel and outside advisory services and has
resulted in additional accounting and legal expenses. In addition, the
evaluation and attestation processes required by Section 404 are new and
neither companies nor auditing firms have significant experiences in testing or
complying with these requirements. Accordingly, we may encounter problems or
delays in completing the review and evaluation, the implementation of
improvements and the receipt of a positive attestation by our independent
registered public accounting firm. While we believe that we currently have
adequate internal controls over financial reporting, in the event that our
chief executive officer, chief financial officer or independent registered
public accounting firm determine that our controls over financial reporting are
not effective as defined under Section 404, investor perceptions of our company
may be adversely affected and could cause a decline in the market price of our
stock 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest rate risk We currently maintain our cash equivalents primarily in money market funds
and highly liquid marketable securities. We do not have any derivative
financial instruments. As of June 30, 2004, approximately $32.5 million of our
investments matured in less than three months. We will continue to invest a
significant portion of our existing cash equivalents in interest bearing,
investment grade securities, with maturities of less than twelve months. We do
not believe that our investments, in the aggregate, have significant exposure
to interest rate risk. Exchange rate risk We currently have operations in the United States, Taiwan and China. The
functional currency of all our operations is the U.S. dollar. Though some
expenses are incurred in local currencies by our Taiwan and China operations,
substantially all of our transactions are made in U.S. dollars, hence, we have
minimal exposure to foreign currency rate fluctuations relating to our
transactions. While we expect our international revenues to continue to be denominated
predominately in U.S. dollars, an increasing portion of our international
revenues may be denominated in foreign currencies in the future. In addition,
we plan to continue to expand our overseas operations. As a result, our
operating results may become subject to significant fluctuations based upon
changes in exchange rates of certain currencies in relation to the U.S. dollar.
We will analyze our exposure to currency fluctuations and may engage in
financial hedging techniques in the future to attempt to minimize the effect of
these potential fluctuations; however, exchange rate fluctuations may adversely
affect our financial results in the future. 30




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Investment risk We are exposed to market risk as it relates to changes in the market value
of our investments in public companies. We invest in equity instruments of
public companies for business and strategic purposes and we have classified
these securities as available-for-sale. These available-for-sale equity
investments, primarily in technology companies, are subject to significant
fluctuations in fair market value due to the volatility of the stock market and
the industries in which these companies participate. As of June 30, 2004, we
had available-for-sale equity investments with a fair market value of $51.8
million relating to shares of UMC. Our objective in managing our exposure to
stock market fluctuations is to minimize the impact of stock market declines to
our earnings and cash flows. There are, however, a number of factors beyond
our control. Continued market volatility, as well as mergers and acquisitions,
have the potential to have a material impact on our results of operations in
future periods. We are also exposed to changes in the value of our investments in
non-public companies, including start-up companies. These long-term equity
investments in technology companies are subject to significant fluctuations in
fair value due to the volatility of the industries in which these companies
participate and other factors. For the twelve months ended June 30, 2004, we
recognized an impairment loss of approximately $769,000 on our investments in
private companies that we concluded was other-than-temporary. As of June 30,
2004, the balance of our long-term equity investments in non-public companies
was approximately $2.7 million. 31




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Item 8. Financial Statements and Supplementary Data  The following documents are filed as a part of this Report: Page Number1.
    
    Financial Statements:Report of Independent Registered Public Accounting Firm
    
    
    33Consolidated Balance Sheet -
As of June 30, 2004 and 2003
    
    
    34Consolidated Statement of Operations -
For the Three Years Ended June 30, 2004
    
    
    35Consolidated Statement of Changes in Stockholders Equity
For the Three Years Ended June 30, 2004
    
    
    36Consolidated Statement of Cash Flows
For the Three Years Ended June 30, 2004
    
    
    37Notes to Consolidated Financial Statements
    
    
    382.
    
    Financial Statement Schedules:II  Valuation and Qualifying Accounts for Each of the Three
Years Ended June 30, 2004
    
    
    56
 32




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Report of Independent Registered Public Accounting Firm 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, of stockholders equity and of cash
flows present fairly, in all material respects, the financial position of
Trident Microsystems, Inc. and its subsidiaries at June 30, 2004 and 2003, and
the results of their operations and their cash flows for each of the three
years in the period ended June 30, 2004, in conformity with accounting
principles generally accepted in the United States of America. 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 the
standards of the Public Company Accounting Oversight Board (United States).
These standards 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 our opinion. PricewaterhouseCoopers LLP
San Jose, California
September 3, 2004 33




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Trident Microsystems, Inc.
Consolidated Balance Sheet June 30,(in thousands, except per share data)
    
    2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    32,488
    
    
    $
    5,085Short-term
investment - UMC
    
    
    51,843
    
    
    
    43,541Short-term
investments - other
    
    
    
    
    
    
    1,241Accounts receivable, net
    
    
    2,436
    
    
    
    4,338Inventories
    
    
    2,737
    
    
    
    2,318Prepaid expenses and other current assets
    
    
    1,087
    
    
    
    734Assets held for sale
    
    
    
    
    
    
    1,800Total current assets
    
    
    90,591
    
    
    
    59,057Property and equipment, net
    
    
    2,372
    
    
    
    2,789Investment - UMC
    
    
    
    
    
    
    4,375Investments - other
    
    
    2,720
    
    
    
    3,569Other assets
    
    
    573
    
    
    
    333Total assets
    
    $
    96,256
    
    
    $
    70,123LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,180
    
    
    $
    7,974Accrued expenses
    
    
    8,287
    
    
    
    8,332Deferred income taxes
    
    
    2,694
    
    
    
    Income taxes payable
    
    
    4,260
    
    
    
    1,580Total current liabilities
    
    
    18,421
    
    
    
    17,886Minority interests in subsidiaries
    
    
    4,023
    
    
    
    77Total liabilities
    
    
    22,444
    
    
    
    17,963Commitments and contingencies (Notes 11 and 12)Stockholders equity:Common stock, $0.001 par value; 60,000 shares
and 30,000 authorized;
22,881 and 20,991 shares issued and outstanding
    
    
    23
    
    
    
    21Additional paid-in capital
    
    
    48,430
    
    
    
    39,779Deferred stock-based compensation
    
    
    (2,687
    )
    
    
    Retained earnings
    
    
    24,159
    
    
    
    14,581Accumulated other comprehensive income (loss)
    
    
    3,887
    
    
    
    (2,221
    )Total stockholders equity
    
    
    73,812
    
    
    
    52,160Total liabilities and stockholders equity
    
    $
    96,256
    
    
    $
    70,123
 The accompanying notes are an integral part of these consolidated financial statements. 34




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Trident Microsystems, Inc.
Consolidated Statement of Operations Year Ended June 30,(in thousands, except per share data)
    
    2004
    
    2003
    
    2002Revenues
    
    $
    52,551
    
    
    $
    52,752
    
    
    $
    105,766Cost of revenues
    
    
    23,674
    
    
    
    37,720
    
    
    
    82,970Gross profit
    
    
    28,877
    
    
    
    15,032
    
    
    
    22,796Research and development expenses
    
    
    11,475
    
    
    
    21,600
    
    
    
    22,218Selling, general and administrative expenses
    
    
    12,968
    
    
    
    11,886
    
    
    
    13,584Income (loss) from operations
    
    
    4,434
    
    
    
    (18,454
    )
    
    
    (13,006
    )Gain (loss) on investments, net
    
    
    9,794
    
    
    
    (4,995
    )
    
    
    (42,715
    )Interest and other income (expense), net
    
    
    (104
    )
    
    
    (269
    )
    
    
    486Minority interests in subsidiaries
    
    
    (1,832
    )
    
    
    
    
    
    
    Income (loss) before income taxes
    
    
    12,292
    
    
    
    (23,718
    )
    
    
    (55,235
    )Provision (benefit) for income taxes
    
    
    2,704
    
    
    
    1,046
    
    
    
    (19,584
    )Net income (loss)
    
    $
    9,588
    
    
    $
    (24,764
    )
    
    $
    (35,651
    )Basic net income (loss) per share
    
    $
    0.43
    
    
    $
    (1.21
    )
    
    $
    (1.77
    )Shares used in computing basic per share amounts
    
    
    22,349
    
    
    
    20,525
    
    
    
    20,129Diluted net income (loss) per share
    
    $
    0.38
    
    
    $
    (1.21
    )
    
    $
    (1.77
    )Shares used in computing diluted per share amounts
    
    
    25,011
    
    
    
    20,525
    
    
    
    20,129
 The accompanying notes are an integral part of these consolidated financial statements. 35




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Trident Microsystems, Inc
Consolidated Statement of Stockholders Equity AccumulatedCommon
    
    Additional
    
    Deferred
    
    
    
    
    
    Other
    
    TotalStock
    
    Paid-in
    
    Stock-based
    
    Retained
    
    Comprehensive
    
    Stockholders
    
    Comprehensive(in thousands)
    
    Shares
    
    Amount
    
    Capital
    
    Compensation
    
    Earnings
    
    Income (Loss)
    
    Equity
    
    Income(Loss)Balance at June 30, 2001
    
    
    19,890
    
    
    $
    20
    
    
    $
    37,134
    
    
    
    
    
    
    $
    74,996
    
    
    $
    (6,784
    )
    
    $
    105,366Issuance of common stock
    
    
    506
    
    
    
    
    
    
    
    1,213
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,213Unrealized gain on short-term
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,728
    
    
    
    19,728
    
    
    $
    19,728Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,651
    )
    
    
    
    
    
    
    (35,651
    )
    
    
    (35,651
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (15,923
    )Balance at June 30, 2002
    
    
    20,396
    
    
    
    20
    
    
    
    38,347
    
    
    
    
    
    
    
    39,345
    
    
    
    12,944
    
    
    
    90,656Issuance of common stock
    
    
    595
    
    
    
    1
    
    
    
    1,432
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,433Unrealized loss on short-term
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,165
    )
    
    
    (15,165
    )
    
    
    15,165
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,764
    )
    
    
    
    
    
    
    (24,764
    )
    
    
    (24,764
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (39,929
    )Balance at June 30, 2003
    
    
    20,991
    
    
    
    21
    
    
    
    39,779
    
    
    
    
    
    
    
    14,581
    
    
    
    (2,221
    )
    
    
    52,160Issuance of common stock, net
    
    
    1,890
    
    
    
    2
    
    
    
    5,358
    
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    5,350Deferred stock-based
compensation in connection
with options in subsidiarys common stock
    
    
    
    
    
    
    
    
    
    
    3,293
    
    
    
    (3,293
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred
stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    606
    
    
    
    
    
    
    
    
    
    
    
    606Unrealized gain on short-term
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,108
    
    
    
    6,108
    
    
    $
    6,108Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,588
    
    
    
    
    
    
    
    9,588
    
    
    
    9,588Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    15,696Balance at June 30, 2004
    
    
    22,881
    
    
    $
    23
    
    
    $
    48,430
    
    
    $
    (2,687
    )
    
    $
    24,159
    
    
    $
    3,887
    
    
    $
    73,812
 The accompanying notes are an integral part of these consolidated financial statements. 36




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Trident Microsystems, Inc.
Consolidated Statement of Cash Flows Year Ended June 30,(in thousands)
    
    2004
    
    2003
    
    2002Cash flows from operating activities:Net income (loss)
    
    $
    9,588
    
    
    $
    (24,764
    )
    
    $
    (35,651
    )Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    1,073
    
    
    
    1,320
    
    
    
    1,551Provision for doubtful accounts and sales returns
    
    
    (309
    )
    
    
    (1,493
    )
    
    
    692(Gain)loss on investments, net
    
    
    (9,794
    )
    
    
    4,995
    
    
    
    42,715Stock-based compensation expense
    
    
    606
    
    
    
    105
    
    
    
    Deferred income taxes, net
    
    
    
    
    
    
    3,642
    
    
    
    (21,351
    )Changes in assets and liabilities:Accounts receivable
    
    
    2,211
    
    
    
    1,439
    
    
    
    4,271Inventories
    
    
    (419
    )
    
    
    872
    
    
    
    7,479Prepaid expenses and other current assets
    
    
    (353
    )
    
    
    719
    
    
    
    1,524Assets held for sale
    
    
    
    
    
    
    (1,800
    )
    
    
    Other assets
    
    
    (240
    )
    
    
    84
    
    
    
    213Accounts payable
    
    
    (4,794
    )
    
    
    1,265
    
    
    
    (5,120
    )Accrued expenses
    
    
    (45
    )
    
    
    (788
    )
    
    
    (2,945
    )Income taxes payable
    
    
    2,680
    
    
    
    (2,400
    )
    
    
    2,940Minority interests in subsidiaries
    
    
    2,223
    
    
    
    (563
    )
    
    
    (428
    )Net cash provided by (used in) operating activities
    
    
    2,427
    
    
    
    (17,367
    )
    
    
    (4,110
    )Cash flows from investing activities:Proceeds from sale of graphics division, net of transaction cost
    
    
    8,427
    
    
    
    
    
    
    
    Proceeds
form sale of minority interests in subsidiaries
    
    
    2,750
    
    
    
    
    
    
    
    Proceeds from sale of short-term investments, net
of transaction cost
    
    
    9,195
    
    
    
    
    
    
    
    Sales of long-term investments
    
    
    
    
    
    
    
    
    
    
    650Purchases of property and equipment
    
    
    (656
    )
    
    
    (458
    )
    
    
    (2,702
    )Purchases of investments
    
    
    (90
    )
    
    
    (111
    )
    
    
    (503
    )Repayment of other current assets
    
    
    
    
    
    
    500
    
    
    
    Net cash provided by (used in) investing activities
    
    
    19,626
    
    
    
    (69
    )
    
    
    (2,555
    )Cash flows from financing activities:Issuance of common stock, net
    
    
    5,350
    
    
    
    1,328
    
    
    
    1,213Principal repayments of capital leases
    
    
    
    
    
    
    
    
    
    
    (32
    )Net cash provided by financing activities
    
    
    5,350
    
    
    
    1,328
    
    
    
    1,181Net increase (decrease) in cash and cash equivalents
    
    
    27,403
    
    
    
    (16,108
    )
    
    
    (5,484
    )Cash and cash equivalents at beginning of year
    
    
    5,085
    
    
    
    21,193
    
    
    
    26,677Cash and cash equivalents at end of year
    
    $
    32,488
    
    
    $
    5,085
    
    
    $
    21,193
 The accompanying notes are an integral part of these consolidated financial statements. 37




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Trident Microsystems, Inc.
Notes to Consolidated Financial Statements  1.
    
    The Company and Summary of Significant Accounting PoliciesThe CompanyTrident Microsystems, Inc. and its subsidiaries (collectively the
Company) designs, develops and markets integrated circuits for
videographics, multimedia and digitally processed television products
for the desktop and notebook PC market and consumer television market.
Our digital media operations are primarily conducted by our
majority-owned subsidiary, Trident Technologies, Inc. (TTI).  On June 12, 2003, the Company announced that it would transfer its graphics
division in Sunnyvale, California to XGI Technology, Inc. (XGI), a company
incorporated in Taiwan, in exchange for stock of XGI. XGI was a newly formed
company to which Silicon Integrated System Corporation, a company incorporated
in Taiwan, transferred its graphics business. The transaction was structured as
two simultaneous transactions, with the Company receiving cash for the assets
of the Graphics Division in one transaction, and simultaneously using that cash
to acquire a 30% equity interest in XGI.  The above transactions closed on July 25, 2003. In addition, on September 30,
2003, the Company sold one third of its investment in XGI to a third party for
cash of $7.5 million. The above transactions resulted in a gain of
approximately $6.6 million being recognized in the first quarter of 2004.
Because XGI was a new company that merged two businesses with an uncertain
future and its equity securities were not traded on a quoted exchange, the
Company recognized a gain on the above transactions based on the actual cash
received and retained by the Company, and no value was attributed to the
Companys remaining 20% equity interest in XGI.  On September 30, 2003, the Company increased its shareholding in TTI from 68%
to 90% and then sold approximately 6.8% of its holding in TTI to a venture
fund and its affiliates for cash of approximately $2.8 million which resulted
in a gain of approximately $1.0 million. The venture fund is the largest
minority investor in TTI and is an affiliate of UMC, a key business partner of
the Company.  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.  On November 5, 2003, the Company announced that its Board of Directors had
approved a three-for-two stock split of the Companys outstanding shares of
common stock to be effected in the form of a 50 percent stock dividend. The
stock split entitled each stockholder of record at the close of business on
November 26, 2003 to receive one additional share for every two outstanding
shares of common stock held on the record date. The additional shares resulting
from the stock split were distributed on December 12, 2003. All share numbers
in this document reflect the capital structure as of the end of the fiscal year
and are therefore on a post-split basis.  Cash Equivalents and Short-Term Investments.Cash equivalents consist of highly
liquid investments in money market accounts and certificates of deposits
purchased with an original maturity of ninety days or less from the date of
purchase. The Company classifies its short-term investments as
available-for-sale. Such investments are recorded at fair value based on quoted
market prices; unrealized gains and losses which are considered to be temporary
are recorded as other comprehensive income or loss. The Company reviews its
investments on a regular basis and considers factors including the operating
results, available
evidence of the market value and economic outlook of the relevant industry
sector. When the Company concludes that an investment has suffered impairment
that is other-than-temporary, the impairment is written off against earnings.  Inventories.Inventories are stated at 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. 38




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Trident Microsystems, Inc.
Notes to Consolidated Financial Statements  Impairment of Long-lived Assets.The Company reviews long-lived assets based on
a gross cash flow basis and will record for impairment whenever events or
changes in circumstances indicate the carrying amount of the assets may not be
fully recoverable. The Company did not have any impairment charge against the
value of the property and equipment during the periods presented.Investments.Equity investments of less than 20% in which the Company does not
have the ability to exert significant influence are accounted for using the
cost method. The Company reviews its investments on a regular basis and
considers factors including the operating results, available evidence of the
market value and economic outlook of the relevant industry sector. When the
Company concludes that an other-than-temporary impairment has resulted, the
difference between the fair value and the carrying value is written off and
recorded in the statement of operations.Revenue Recognition.Revenue from product sales is generally recognized upon
shipment when persuasive evidence of an arrangement exists, title and risk of
loss pass to the customer, the price is fixed or determinable, shipment is made
and collectibility is reasonably assured. Provision is made for expected future
sales returns and allowances when revenue is recognized. The Company has no
obligation to provide any modification or customization upgrades, enhancements
or other post-sale customer support. The Company grants certain distributors
limited rights of return and price protection on unsold products. Product
revenue on shipments to distributors with such rights is deferred until the
products are shipped to end customers by the distributors.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 provision on unremitted earnings of foreign subsidiaries to the
extent that such earnings are considered permanently invested. A valuation
allowance is provided against deferred tax assets unless it is considered to be
more likely than not that they will be realized.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/loss per share is calculated adjusting the net income by the potential
minority interests and using the weighted average number of outstanding shares
of common stock plus potential common stock shares. The calculation of diluted
net income/loss per share excludes potential common stock if the effect is
antidulitive. 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.Stock-based compensation expense for the year ended
June 30, 2004 represents the intrinsic value of stock options issued by TTI to
employees of TTI and certain employees of TMI. The Company accounts for
stock-based employee compensation arrangements in accordance with the
provisions of APB No. 25, Accounting for Stock Issued to Employees and
complies with the disclosure provisions of Statements of SFAS No. 123,
Accounting for Stock-Based Compensation and SFAS No.
148, Accounting for Stock-Based Compensation  Transition and Disclosure.
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.Had compensation cost for the Companys stock-based compensation awards been
determined based on the fair value method consistent with the method prescribed
SFAS No. 123, the Companys net income (loss) and net income (loss) per share
would have been adjusted as follows: 39




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Trident Microsystems, Inc.
Notes to Consolidated Financial Statements Year Ended June 30,(in thousands, except per share data)
    
    2004
    
    2003
    
    2002Net income (loss):Net income (loss) as reported
    
    $
    9,588
    
    
    $
    (24,764
    )
    
    $
    (35,651
    )Add: stock-based employee compensation
included in reported net income (loss)
    
    
    606
    
    
    
    105
    
    
    
    Less: stock-based employee compensation determined
under the fair value based method for all rewards
    
    
    (2,472
    )
    
    
    (2,171
    )
    
    
    (2,444
    )Pro forma net income (loss)
    
    $
    7,722
    
    
    $
    (26,830
    )
    
    $
    (38,095
    )Basic net income (loss) per share:As reported:
    
    $
    0.43
    
    
    $
    (1.21
    )
    
    $
    (1.77
    )Pro forma:
    
    $
    0.35
    
    
    $
    (1.31
    )
    
    $
    (1.89
    )Diluted net income (loss) per share:As reported:
    
    $
    0.38
    
    
    $
    (1.21
    )
    
    $
    (1.77
    )Pro forma:
    
    $
    0.31
    
    
    $
    (1.31
    )
    
    $
    (1.89
    )
  The weighted average fair values of TMI options granted were $6.76, $2.01 and
$2.17 for fiscal years ended June 30, 2004, 2003 and 2002, respectively. The
weighted average fair values of TTI options granted was $0.45 for the year
ended June 30, 2004.  Comprehensive income/loss.The unrealized gains and losses on marketable equity
securities are comprehensive income items applicable to the Company, and are
reported as a separate component of equity as Accumulated other comprehensive
income/loss.  Comparative amounts.Certain comparative amounts have been reclassified to
conform with current years presentation.  Recent Accounting Pronouncements  In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104,
Revenue Recognition, which codifies, revises and rescinds certain sections of
SAB No. 101, Revenue Recognition in Financial Statements, in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The changes noted in SAB No.
104 did not have a material impact on the Companys consolidated results of
operations, consolidated financial position or consolidated cash flows.  In April 2004, the Emerging Issues Task Force issued Statement No. 03-06,
Participating Securities and the Two-Class Method Under FASB Statement No. 128,
Earnings Per Share, (EITF 03-06). EITF 03-06 addresses a number of questions
regarding the computation of earnings per share by companies that have issued
securities other than common stock that contractually entitle the holder to
participate in dividends and earnings of the company when, and if, it declares
dividends on its common stock. The issue also provides further guidance in
applying the two-class method of calculating earnings per share, clarifying
what constitutes a participating security and how to apply the two-class method
of computing earnings per share once it is determined that a security is
participating, including how to allocate undistributed earnings to such a
security. EITF 03-06 is effective for fiscal periods beginning after March 31,
2004. The Company adopted this EITF during the quarter ended June 30, 2004. The
adoption of EITF 03-06 did not have any material impact on the Companys
consolidated financial statements.  At its November 2003 meeting, the EITF reached a consensus on disclosure
guidance previously discussed
under EITF 03-01,The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. The consensus provided for certain
disclosure requirements that were effective for fiscal years ending after
December 15, 2003. At its March 2004 meeting, the EITF reached a consensus on
recognition and measurement guidance previously discussed under EITF 03-01. The
consensus clarifies the meaning of other-than-temporary impairment and its
application to investments classified as either available-for-sale or
held-to-maturity under SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities, and 40




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Trident Microsystems, Inc.
Notes to Consolidated Financial Statements  investments accounted for under the cost method or the equity method. The
recognition and measurement guidance for which the consensus was reached in
the March 2004 meeting is to be applied to other-than-temporary impairment
evaluations in reporting periods beginning after June 15, 2004. The Company
is currently evaluating the effect of adopting EITF 03-01 on its results of
operations.  2.
    
    Balance Sheet Components June 30,(in thousands)
    
    2004
    
    2003Accounts receivable, net:Trade accounts receivable
    
    $
    2,736
    
    
    $
    4,947Less: allowance for doubtful accounts and sales returns
    
    
    (300
    )
    
    
    (609
    )$
    2,436
    
    
    $
    4,338Inventories:Work in process
    
    $
    1,113
    
    
    $
    549Finished goods
    
    
    1,624
    
    
    
    1,769$
    2,737
    
    
    $
    2,318Property and equipment, net:Machinery and equipment
    
    $
    9,778
    
    
    $
    10,264Furniture and fixtures
    
    
    1,583
    
    
    
    1,435Leasehold improvements
    
    
    882
    
    
    
    83812,243
    
    
    
    12,537Less: accumulated depreciation and amortization
    
    
    (9,871
    )
    
    
    (9,748
    )$
    2,372
    
    
    $
    2,789Accrued expenses:Compensation accruals
    
    $
    1,286
    
    
    $
    2,375Professional fee accruals
    
    
    1,679
    
    
    
    1,341Sales rebate accruals
    
    
    383
    
    
    
    464Nonrecurring engineering charges
    
    
    127
    
    
    
    142Dealer commission accruals
    
    
    292
    
    
    
    330Other
    
    
    4,520
    
    
    
    3,680$
    8,287
    
    
    $
    8,332
  3.
    
    Net Income (Loss) Per ShareReconciliations of the numerators and denominators of the basic and
diluted net loss per share calculations are as follows: Year Ended June 30,(in thousands, except per share data)
    
    2004
    
    2003
    
    2002Net income (loss)
    
    $
    9,588
    
    
    $
    (24,764
    )
    
    $
    (35,651
    )Adjustments related to outstanding options in TTI
    
    
    (136
    )
    
    
    
    
    
    
    Net income (loss) used in computing diluted net
income (loss) per share
    
    $
    9,452
    
    
    $
    (24,764
    )
    
    $
    (35,651
    )Shares used in computing basic per share amounts
    
    
    22,349
    
    
    
    20,525
    
    
    
    20,129Dilutive common stock equivalents
    
    
    2,662
    
    
    
    
    
    
    
    Shares used in computing diluted per share amounts
    
    
    25,011
    
    
    
    20,525
    
    
    
    20,129Basic net income (loss) per share
    
    $
    0.43
    
    
    $
    (1.21
    )
    
    $
    (1.77
    )Diluted net income (loss) per share
    
    $
    0.38
    
    
    $
    (1.21
    )
    
    $
    (1.77
    )Common stock equivalents not included in the
calculation because they are antidilutive
    
    
    54
    
    
    
    2,101
    
    
    
    3,605
 41




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Trident Microsystems, Inc.
Notes to Consolidated Financial Statements  4.
    
    Investment in UMCIn August 1995, the Company made an investment of $49.3 million in
United Integrated Circuits Corporation (UICC). On January 3, 2000,
United Microelectronics Corporation (UMC) acquired UICC and, as a
result of this merger, the Company received approximately 46.5 million
shares of UMC. Subsequently, UMC announced 20%, 15%, 15% and 4.01%
stock dividends payable to shareholders of record as of May 2000, July
2001, August 2002 and July 2003. During the fiscal year ended June 30,
2004 the Company sold 7.3 million shares of its investment in UMC for
net proceeds of $7.4 million, resulting in a gain of approximately $2.7
million. As of June 30, 2004, the Company owned approximately 69.5
million shares of UMC, which represents about 0.5% of the outstanding
stock of UMC.  During the fiscal year ended June 30, 2004, approximately 6.4 million shares
with a carrying value of $4.2 million were released from a lock-up restriction
in accordance with an investment agreement entered into with UMC on January 3,
2000. The carrying value of these shares was reclassified to short-term
investments. Shares of the Companys UMC investment are listed on the Taiwan
Stock Exchange. In accordance with SFAS No. 115, 69.5 million shares are
treated as available-for-sale securities and are classified as short-term
investments.  In the quarter ended September 30, 2001, the Company concluded that due to a
substantial decline in the market value of UMCs stock price from March 31,
2001 to September 30, 2001, the continued decline in stock prices of publicly
traded semiconductor companies and the continuing unfavorable outlook for the
semiconductor industry, the decline in the investment value in UMC had become
other-than-temporary. Accordingly, the difference of $40.0 million between the
carrying value on March 31, 2001 and the quoted fair value on September 30,
2001, was written off against earnings as an impairment loss on investments in
accordance with SFAS No. 115 and APB No. 18, for the short-term and long-term
portions of investments, respectively.  Due to a decrease in the market value of UMCs stock price from October 1, 2002
to June 30, 2003, an unrealized loss of $15.2 million was recorded in equity as
accumulated other comprehensive loss in accordance with SFAS No. 130,
Reporting Comprehensive Income. The $15.2 million is equal to a $23.8 million
decrease in market value of our short-term investment in UMC from October 1,
2002 to June 30,
2003, and the reversal of deferred income taxes of $8.6 million relating to the
unrealized gain for the year ended June 30, 2002.  Due to an increase in the market value of UMCs stock price from July 1, 2003
to June 30, 2004, an increase in accumulated other comprehensive income of $6.1
million was recorded in equity as accumulated other comprehensive income in
accordance with SFAS No. 130, Reporting Comprehensive Income. The $6.1
million is equal to a $8.8 million increase in market value of the Companys
short-term investment in UMC from July 1, 2003 to June 30, 2004, less deferred
income taxes of $2.7 million relating to the unrealized gain.  5.
    
    Gain (loss) on investments, net  During the fiscal year ended June 30, 2004 the Company recognized a
net gain on investments totaling $9.8 million as follows (in
thousands): Gain on sale of UMC stock (Note 4)
    
    $
    2,652Gain on sale of graphics division and interests in XGI
    
    
    6,627Gain on sale of 7% interest in TTI
    
    
    1,027Broadband networking company write-off
    
    
    (230
    )Software development company write-off
    
    
    (177
    )Optical applications company write-off
    
    
    (272
    )Gain on sale of investment in a communications company
    
    
    125Gain on sale of investment in a system design software company
    
    
    132Venture capital funds write-down
    
    
    (90
    )Total
    
    $
    9,794
 42




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Trident Microsystems, Inc.
Notes to Consolidated Financial Statements  On June 12, 2003, the Company announced that it would transfer its Graphics
Division in Sunnyvale, California to XGI Technology, Inc. (XGI), a newly
formed company incorporated in Taiwan, in exchange for stock in XGI. Silicon
Integrated Systems Corporation (SIS), a company incorporated in Taiwan and
unrelated to the Company, also transferred its graphics business to XGI. The
transactions were structured to simultaneously close, with the Company
receiving cash for the assets of the Graphics Division in one transaction, and
simultaneously using the cash to acquire a 30% equity interest in XGI.  The above transactions closed on July 25, 2003. In addition, on September 30,
2003, the Company sold one third of its investment in XGI to a third party for
cash of $7.5 million. The above transactions resulted in a gain of
approximately $6.6 million being recognized in the first quarter of 2004.
Because XGI was a new company that merged two businesses with an uncertain
future and its equity securities were not traded on a quoted exchange, the
Company recognized a gain on the above transactions based on the actual cash
received and retained by the Company, and no value was attributed to the
Companys remaining 20% equity interest in XGI.  On September 30, 2003, the Company sold approximately 6.8% of its holding in
TTI to a venture fund and its affiliates for cash of approximately $2.8 million
which resulted in a gain of approximately $1.0 million. The venture fund is the
largest minority investor in TTI and is an affiliate of UMC, a key business
partner of the Company.  In July 2000, the Company invested $1.6 million in a private company engaged in
broadband networking. In the quarter ended March 31, 2003, the Company
determined that the fair value of the shares had decreased significantly.
Therefore, the Company assessed the fair value of its investment based on the
latest financing transaction and concluded that the impairment was
other-than-temporary. Accordingly, $1,370,000 of the investment was written off
against earnings in accordance with APB No. 18. Due to the
continued deterioration of the companys financial position during the year
ended June 30, 2004, the Company concluded that the remaining investment of
$230,000 was impaired and was written off against earnings in accordance with
APB No. 18.  In March 2000, the Company invested $287,000 in a private company engaged in
software development. In the quarter ended March 31, 2003, the Company
determined that revenue growth had not been achieved and the investee companys
financial position had deteriorated significantly. Therefore, the Company
assessed the fair value of its investment based on the investee companys
latest financial position and concluded that the impairment was
other-than-temporary. Accordingly, $110,000 of the investment was written off
against earnings in accordance with APB No. 18. In the quarter ended September
30, 2003, due to further deterioration of financial position of the investee
company, the Company concluded that the remaining investment of $177,000 was
impaired and was written off against earnings in accordance with APB No. 18.  In May 2000, the Company invested $750,000 in a private company engaged in
development of an optical applications technology. In June 2001, an additional
$509,000 was invested in the company. In the quarter ended December 31, 2002,
the Company determined that the fair value of the shares had decreased
significantly. Therefore, the Company assessed the fair value of its investment
based on the latest financing transaction and concluded that the impairment was
other-than-temporary. Accordingly, an amount of the investment of $987,000 was
written off against earnings in accordance with APB No. 18. In the quarter
ended September 30, 2003, due to further deterioration of financial position of
the investee company, the Company concluded that the remaining investment of
$272,000 was impaired and was written off against earnings in accordance with
APB No. 18.  In June 2000, the Company invested $600,000 in a communications company, which
was subsequently acquired by a listed company. On March 31, 2001, the fair
value of the shares of the listed company owned by the Company was $221,000.
Because of the significant losses incurred by this company, the Company
concluded that the decline in value was other-than-temporary. Accordingly, the
difference between the carrying value and the quoted fair value on March 31,
2001 was written off against earnings in accordance with SFAS No. 115. On
September 30, 2001 due to the deteriorating industry outlook and decreasing
value in the companys shares, the difference between the carrying value and
the quoted fair value on September 30, 2001 of $66,000 was considered an
other-than-temporary impairment and was written off against earnings in
accordance with SFAS No. 115. In the year ended June 30, 2004, the Company sold
all of its investment and 43




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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements  recognized a gain of $125,000.  In May 2000, the Company invested $250,000 in a private system design software
company. This company was acquired by a publicly traded design software company
during May 2002. The acquisition resulted in the Company receiving shares of
the acquiring company, which had fair value in excess of the original
investment. Therefore, a gain of $568,000 was recorded in the year ended June
30, 2002. During the year ended June 30, 2003, the Company received additional
shares in the acquiring company upon the achievement of certain milestones, and
accordingly, an additional realized gain of $167,000 was recognized. In May
2004, the Company received a distribution of additional shares upon the
achievement of certain milestones. During the year ended June 30, 2004, the
Company sold all of its investment for a gain of $132,000.  From December 1999 to November 2001, the Company invested a total of $3.4
million in several venture capital funds. During the year ended June 30, 2004,
additional losses were recorded by the funds.
Accordingly, the Company recorded an other-than-temporary impairment of $90,000
based on the latest financial statements.  During the fiscal year ended June 30, 2003 the Company recognized a net loss on
investments totaling $5.0 million as follows (in thousands): Optical applications company
    
    $
    (987
    )Fiber optic technology company
    
    
    (151
    )Circuit design company
    
    
    (500
    )Analog circuit design company
    
    
    (753
    )Optical networking company
    
    
    (831
    )Broadband networking company
    
    
    (1,370
    )Software development company
    
    
    (110
    )Venture capital funds write-down
    
    
    (460
    )System design software company
    
    
    167Total
    
    $
    (4,995
    )
  In May 2000, the Company invested $750,000 in a private company engaged in
optical applications technology. In June 2001, an additional $509,000 was
invested in the company. In the year ended June 30, 2003, the Company
determined that the fair value of the shares had decreased significantly.
Therefore, the Company assessed the fair value of its investment based on the
latest financing transaction and concluded that the impairment was
other-than-temporary. Accordingly, an amount of the investment of $987,000 was
written off against earnings in accordance with APB No. 18.  In June 2000, the Company invested $500,000 in a private company engaged in
fiber optic technology. In the quarter ended June 30, 2002, the Company
recorded an other-than-temporary impairment of $349,000. In the year ended June
30, 2003, the Company further determined that the prospects for recovery of the
investment were unfavorable given the market position of the company and the
companys operating losses. Therefore, the Company concluded that the
impairment was other-than-temporary. Accordingly, the remaining investment of
$151,000 was written off against earnings in accordance with APB No. 18. The
company ceased its operations during the quarter ended March 31, 2003.  In February 2000, the Company invested $500,000 in a private company engaged in
integrated circuit design. In the year ended June 30, 2003, the Company
determined that the prospects for recovery of the investment were unfavorable
given the deteriorating cash position of the company and the companys
operating losses. Accordingly, all of the investment was written off against
earnings in accordance with APB No. 18.  In May 2000 to May 2002, the Company invested $753,000 in a private company
engaged in analog integrated circuit design. In the year ended June 30, 2003,
the Company determined that the cash position of the company was poor and there
was reasonable doubt the company may not be able to raise additional funds.
Therefore, the 44




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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements  Company concluded that the impairment was other-than-temporary. Accordingly,
all of the investment was written off against earnings in accordance with APB
No. 18.  In December 1999 and January 2003, the Company invested a total of $1.1 million
in a private company engaged in optical networking. In the year ended June 30,
2003, the Company determined that the fair value of the shares had decreased
significantly based on the purchase price agreed by an acquiring
company. Therefore, the Company assessed the fair value of its investment and
concluded that the impairment was other-than-temporary. Accordingly, $831,000
of the investment was written off against earnings in accordance with APB No.
18.  In July 2000, the Company invested $1.6 million in a private company engaged in
broadband networking. In the quarter ended March 31, 2003, the Company
determined that the fair value of the shares had decreased significantly.
Therefore, the Company assessed the fair value of its investment based on the
latest financing transaction and concluded that the impairment was
other-than-temporary. Accordingly, $1,370,000 of the investment was written off
against earnings in accordance with APB No. 18.  In March 2000, the Company invested $287,000 in a private company engaged in
software development. In the year ended June 30, 2003, the Company determined
that revenue growth had not been achieved and the investments financial
position had deteriorated significantly. Therefore, the Company assessed the
fair value of its investment based on the investments latest financial
position and concluded that the impairment was other-than-temporary.
Accordingly, $110,000 of the investment was written off against earnings in
accordance with APB No. 18.  From December 1999 to November 2001, the Company invested $3.4 million in
several venture capital funds. In the year ended June 30, 2003, losses of
$460,000 were recorded as an other-than-temporary impairment and written off
against earnings.  In May 2000, the Company invested $250,000 in a private system design software
company. This company was acquired by a publicly traded design software company
during May 2002. The acquisition resulted in the Company receiving shares of
the acquiring company which had fair value in excess of the original
investment. Therefore, a gain of $568,000 was recorded in the year ended June
30, 2002. During the year ended June 30, 2003, the Company received additional
shares in the acquiring company upon the achievement of certain milestones, and
accordingly, an additional realized gain of $167,000 was recognized.  During the fiscal year ended June 30, 2002, the Company recognized net
impairment losses on investments totaling approximately $42.7 million as
follows (thousands): UMC investment write-down (Note 4)
    
    $
    (39,980
    )ADSL company
    
    
    (270
    )Communications company
    
    
    (66
    )Broadband communications company
    
    
    (750
    )Voice over DSL communications company
    
    
    (850
    )Optical networking company
    
    
    (349
    )Broadband server technology company
    
    
    (275
    )Venture capital funds write-down
    
    
    (743
    )System design software company
    
    
    568Net loss
    
    $
    (42,715
    )
  In September 1999, the Company invested $909,000 in an ADSL company for 227,250
shares of preferred stock which were then converted into the same number of
common stock shares upon the companys initial public offering in August 2000.
On March 31, 2001 the fair value of these shares as quoted was $498,000.
Because the company experienced declining earnings in relation to its
competitors in the ADSL market and erosion of its market share, the decline in
value was considered other-than-temporary. Accordingly, the difference between
the carrying value and the quoted fair value on March 31, 2001 was written off
against earnings in accordance with SFAS No. 115. On September 30, 2001, due to
decreasing value in the companys shares, the difference between the carrying
value and the quoted fair value on September 30, 2001 of $270,000 45




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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements  was considered an other-than-temporary impairment and was written off against
earnings in accordance with SFAS No. 115. Due to an increase in the market
value of the ADSL companys stock price from October 1, 2001 to June 30, 2002,
an unrealized gain of $83,000 was recorded in equity as other comprehensive
income. The net gain of $83,000 is equal to a $139,000 increase in market
value of the short-term investment from October 1, 2001 to June 30, 2002, less
deferred taxes relating to the unrealized loss of $55,000.  In June 2000, the Company invested $600,000 in a communications company which
was subsequently acquired by a listed company. On March 31, 2001, the fair
value of the shares of the listed company owned by the Company was $221,000.
Because of the significant losses incurred by this company, the Company
concluded that the decline in value was other-than-temporary. Accordingly, the
difference between the carrying value and the quoted fair value on March 31,
2001 was written off against earnings in accordance with SFAS No. 115. On
September 30, 2001 due to the continued deteriorating industry outlook and
decreasing value in the companys shares, the difference between the carrying
value and the quoted fair value on September 30, 2001 of $66,000 was considered
an other-than-temporary impairment and was written off against earnings in
accordance with SFAS No. 115. Due to a decrease in the market value of the
communications companys stock price from October 1, 2001 to June 30, 2002, an
unrealized loss of $13,000 was recorded in equity as other comprehensive
loss. The net loss of $13,000 is equal to a $21,000 decrease in market value
of the short-term investment from October 1, 2001 to June 30, 2002, less
deferred tax benefits relating to the unrealized loss of $8,000.  In April 2000, the Company invested $650,000 in a private company engaged in
broadband communication technology. In June 2000, an additional $100,000 was
invested in the company. In the quarter ended September 30, 2001, the Company
determined that the prospects for recovery of the investment were unfavorable
given the market position of the company and the companys operating losses.
Therefore, the Company concluded that the impairment was other-than-temporary.
Accordingly, the full investment of $750,000 was written off against earnings
in accordance with APB No. 18.  In September 2000, the Company invested $1,500,000 in a private company engaged
in voice over DSL communication technology. In the quarter ended September
30, 2001, the Company determined that this communications company was in a
product reengineering process. It was considered likely that the company would
cease operations. The Company assessed the estimated cash recoverable from this
investment and concluded that the estimated shortfall was an
other-than-temporary impairment. Accordingly, $1,000,000 of the investment was
written off against earnings in accordance with APB No. 18. In December 2001,
this investment was sold for $650,000 and a gain of $150,000 was recognized as
Gain on investments for the three months ended December 31, 2001.  In June 2000, the Company invested $500,000 in a private company engaged in
fiber optic technology. In the quarter ended June 30, 2002, the Company
determined that the fair value of the shares had decreased significantly.
Therefore, the Company assessed the fair value of the shares and concluded that
the estimated shortfall was an other-than-temporary impairment. Accordingly,
$349,000 of the investment was written off against earnings in accordance with
APB No. 18.  In March 2000, the Company invested $550,000 in a private company engaged in
broadband server technology. In the quarter ended June 30, 2002, the Company
determined that the product outlook and future cash position for this company
was unfavorable. Therefore, the Company assessed the estimated fair value of
the investment held and concluded that the estimated shortfall was an
other-than-temporary impairment. Accordingly, $275,000 of the investment was
written off against earnings in accordance with APB No. 18.  From December 1999 to September 2000, the Company invested a total of
$2,900,000 in several venture
capital funds. In the quarter ended June 30, 2002, substantial losses were
recorded by the funds. Accordingly, the Company recorded an
other-than-temporary impairment of $743,000.  In May 2000, the Company invested $250,000 in a private system design software
company. This company was acquired by a publicly traded design software company
during May 2002. The acquisition resulted in the Company receiving shares of
the acquiring company which had fair value in excess of the original
investment. Therefore, a gain of $568,000 was recorded in the quarter ended
June 30, 2002. Subsequent to the acquisition, and prior to June 30, 2002, the
fair value of the acquiring companys stock decreased, resulting in an
unrealized loss of $99,000 which was recorded in equity as other comprehensive
loss in accordance with SFAS No. 130, 46




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Trident Microsystems, Inc.
Notes to Consolidated Financial Statements  Reporting Comprehensive Income. The net loss of $99,000 is equal to a
$165,000 decrease in market value of the short-term investment on June 30,
2002, less deferred taxes relating to the unrealized loss of $66,000.  6.
    
    Comprehensive Income (Loss)  Under SFAS No. 130, Reporting Comprehensive Income any unrealized
gains or losses on the short-term investments which are classified as
available-for-sale equity securities are to be reported as a separate
adjustment to equity. The components of accumulated other comprehensive
income (loss) as of June 30, 2004 and 2003 are as follows (in
thousands): June 30,2004
    
    2003Unrealized gain (loss) on short-term
investments:UMC
    
    $
    3,887
    
    
    $
    (2,245
    )Other
    
    
    
    
    
    
    24Total
    
    $
    3,887
    
    
    $
    (2,221
    )
  7.
    
    Income TaxesThe components of loss before income taxes are as follows: Year Ended June 30,(in thousands)
    
    2004
    
    2003
    
    2002Income (loss) subject to domestic income taxes only
    
    $
    (879
    )
    
    $
    (4,643
    )
    
    $
    (43,515
    )Income (loss) subject to foreign income taxes, and in
certain cases, domestic income taxes
    
    
    13,171
    
    
    
    (19,075
    )
    
    
    (11,720
    )$
    12,292
    
    
    $
    (23,718
    )
    
    $
    (55,235
    )
  The provision (benefit) for income taxes is comprised of the
following: Year Ended June 30,(in thousands)
    
    2004
    
    2003
    
    2002Current:Federal
    
    $
    2,171
    
    
    $
    
    
    
    $
    (6,722
    )State
    
    
    1
    
    
    
    
    
    
    
    (762
    )Foreign
    
    
    532
    
    
    
    
    
    
    
    $
    2,704
    
    
    $
    
    
    
    $
    (7,484
    )Deferred:Federal
    
    
    
    
    
    
    915
    
    
    
    (9,624
    )State
    
    
    
    
    
    
    131
    
    
    
    (2,476
    )
    
    
    
    1,046
    
    
    
    (12,100
    )$
    2,704
    
    
    $
    1,046
    
    
    $
    (19,584
    )
 47




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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements  The deferred tax assets (liabilities) are
comprised of the following: June 30,(in thousands)
    
    2004
    
    2003Deferred tax assets:Reserves and accruals
    
    $
    1,599
    
    
    $
    2,085Research and development credits
    
    
    11,082
    
    
    
    9,753Net operating losses
    
    
    8,337
    
    
    
    1,784Capital loss
    
    
    
    
    
    
    549Other
    
    
    
    
    
    
    90Deferred tax assets
    
    
    21,018
    
    
    
    14,261Valuation allowance
    
    
    (15,415
    )
    
    
    (12,353
    )Deferred tax assets, net
    
    
    5,603
    
    
    
    1,908Deferred tax liabilities:Capital gains not recognized for tax
    
    
    (2,680
    )
    
    
    Unremitted earnings of foreign subsidiaries
    
    
    (5,603
    )
    
    
    (1,908
    )Other
    
    
    (14
    )
    
    
    Deferred tax liabilities
    
    
    (8,297
    )
    
    
    (1,908
    )$
    (2,694
    )
    
    $
    
  As of June 30, 2004, the Companys federal and state net operating loss
carryforwards for income tax purposes were approximately $21.6 million and
$15.1 million, respectively. Federal and state net operating losses will begin
to expire in fiscal year ending 2019 and 2004, respectively. Federal and state
tax-credit carryforwards were $6.5 million and $4.6 million, respectively.
Federal tax credits will begin to expire in fiscal year ending 2017.  Approximately $7.3 million of the valuation allowance relates to stock option
deductions that, when recognized, will result in a credit to shareholders
equity.  The reconciliation of the income tax provisions computed at the United States
federal statutory rate to the effective tax rate for the recorded provision
for income taxes is as follows: Year ended June 30,2004
    
    2003Federal statutory rate
    
    
    35.0
    %
    
    
    (35.0
    )%State taxes, net of federal
tax benefit
    
    
    5.0
    
    
    
    (5.9
    )Research and development credit
    
    
    (1.0
    )
    
    
    (6.3
    )Foreign rate differential
    
    
    (9.2
    )
    
    
    30.0Valuation allowance
    
    
    (8.1
    )
    
    
    21.6Other
    
    
    0.3
    
    
    
    Effective income tax rate
    
    
    22.0
    %
    
    
    4.4
    %
  The Company has fully provided for U.S. federal income and foreign
withholding taxes on a non-U.S. subsidiarys undistributed earnings as of
June 30, 2004.  8.
    
    Stock-Based Compensation  Stock Purchase Plans.In December 2002, the Board of Directors of
the Company (the Board) adopted the 2002 Employee Stock Purchase Plan
reserving 675,000 shares of the Companys common stock for future
issuance. In October 1998, the Board adopted the 1998 Employee Stock
Purchase Plan under which 500,000 shares of the Companys common stock
may be issued. This
plan replaced the 1992 Employee Stock Purchase Plan which was terminated
on October 30, 1998. Shares are to be purchased from payroll deductions;
employees of the Company who are based outside the United States may
participate by making direct 48




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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements  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 years 2004, 2003 and 2002, 21,000, 219,000 and 150,000 shares
were issued under the 1998 Employee Stock Purchase Plan, respectively.  Stock Options in TMI.The Company grants nonstatutory and incentive stock
options to key employees, directors and consultants. At June 30, 2004, shares
of common stock reserved for issuance upon exercise of the stock options
aggregated 6,313,000. Stock options are granted at prices determined by the
Board. Nonstatutory and incentive stock options may be granted at prices not
less than 85% of the fair market value and at not less than fair market value,
respectively, at the date of grant. Options generally become exercisable one
year after date of grant and vest over a maximum period of five years following
the date of grant. The Company has not granted stock options or equity
instruments to non-employees other than members of its Board of Directors. 49




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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements  The following table summarizes TMIs option activities for the years ended June
30, 2002, 2003 and 2004: Options
    
    
    
    
    
    Weighted Average
    
    OutstandingAvailable for
    
    Number of
    
    Exercise
    
    Price Per(in thousands, except per share data)
    
    Grant
    
    Options
    
    Price
    
    OptionBalance at June 30, 2001
    
    
    1,890
    
    
    
    4,840
    
    
    
    
    
    
    $
    .70
    -
    $
    22.92Additional shares reserved
    
    
    1,665
    
    
    
    Options granted
    
    
    (1,406
    )
    
    
    1,406
    
    
    $
    3.06
    
    
    $
    2.58
    -
    $
    5.17Options exercised
    
    
    
    
    
    
    (356
    )
    
    $
    2.19
    
    
    $
    .70
    -
    $
    3.67Options canceled
    
    
    153
    
    
    
    (153
    )
    
    $
    3.01
    
    
    $
    2.04
    -
    $
    3.93Balance at June 30, 2002
    
    
    2,302
    
    
    
    5,737
    
    
    
    
    
    
    $
    1.75
    -
    $
    22.92Additional shares reserved
    
    
    1,013
    
    
    
    Plan shares expired
    
    
    (368
    )
    
    
    Options granted
    
    
    (1,647
    )
    
    
    1,647
    
    
    $
    2.88
    
    
    $
    1.85
    -
    $
    4.13Options exercised
    
    
    
    
    
    
    (377
    )
    
    $
    2.61
    
    
    $
    1.75
    -
    $
    5.17Options canceled
    
    
    308
    
    
    
    (308
    )
    
    $
    2.83
    
    
    $
    2.33
    -
    $
    6.50Balance at June 30, 2003
    
    
    1,608
    
    
    
    6,699
    
    
    
    
    
    
    $
    1.75
    -
    $
    22.92Additional shares reserved
    
    
    
    
    
    
    Plan shares expired
    
    
    (126
    )
    
    
    Options granted
    
    
    (350
    )
    
    
    350
    
    
    $
    11.86
    
    
    $
    10.43
    -
    $
    13.77Options exercised
    
    
    
    
    
    
    (1,869
    )
    
    $
    2.83
    
    
    $
    1.75
    -
    $
    9.50Options canceled
    
    
    648
    
    
    
    (648
    )
    
    $
    2.94
    
    
    $
    1.85
    -
    $
    9.50Balance at June 30, 2004
    
    
    1,780
    
    
    
    4,532
    
    
    
    
    
    
    $
    1.75
    -
    $
    22.92
  At June 30, 2004, 2003 and 2002, options for 2,874,000, 3,789,000, and
3,294,000 shares of common stock were vested but not exercised, respectively.  The following table summarizes information about TMI stock options
outstanding at June 30, 2004 (in thousands except per share data): Options Outstanding
    
    Options ExercisableWeighted Average
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    Number
    
    Remaining
    
    Average
    
    Number
    
    AverageExercise
Prices
    
    Outstanding
    
    Contractual Life
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$1.75 - $  2.25
    
    
    498
    
    
    
    7.5
    
    
    $
    1.99
    
    
    
    255
    
    
    $
    2.04$2.33 - $  2.33
    
    
    1,048
    
    
    
    4.3
    
    
    $
    2.33
    
    
    
    1,048
    
    
    $
    2.33$2.58 - $  2.93
    
    
    1,092
    
    
    
    6.6
    
    
    $
    2.82
    
    
    
    899
    
    
    $
    2.85$2.97 - $  3.04
    
    
    103
    
    
    
    7.3
    
    
    $
    2.97
    
    
    
    26
    
    
    $
    2.98$3.39 - $22.92
    
    
    1,791
    
    
    
    8.3
    
    
    $
    5.73
    
    
    
    646
    
    
    $
    5.23$1.75 - $22.92
    
    
    4,532
    
    
    
    6.8
    
    
    $
    3.77
    
    
    
    2,874
    
    
    $
    3.13
  As part of the restructuring of its graphics division, on June 11, 2003, the
exercise period of stock options granted to the employees under the graphics
division was extended for several months after their termination effective June
30, 2003. Accordingly, the stock options were subject to remeasurement and the
intrinsic value of $105,000 was charged as stock-based compensation in the year
ended June 30, 2003. 50




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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements  Stock Options in TTI.In August 2003, TTI, a majority-owned subsidiary of
the Company, adopted a stock option plan to grant incentive stock options to
key employees and directors. At June 30, 2004, 16.3 million shares of
common stock were reserved for issuance upon exercise of stock options.
These stock options are granted at the par value of the common stock.
Options generally become exercisable one year or two years after date of
grant and vest over a maximum period of four years following the grant.During the year ended June 30, 2004, 14.2 million options in TTI were
granted to employees of TTI and certain employees of TMI at par value in
accordance with the practice in Taiwan. Accordingly, the intrinsic value of
the stock options at the grant date were recorded as stock-based
compensation and are being amortized over a period of four years. During
the year ended June 30, 2004, amortization of $606,000 was recorded. In
general, employees who received options in TTI also at the same time stopped
vesting and had their remaining unvested options in TMI cancelled.The following table summarizes TTIs options activities for the year ended
June 30, 2004: WeightedOptions
    
    
    
    
    
    AverageAvailable
    
    Number
    
    Exercise(in thousands, except per share data)
    
    for grant
    
    of options
    
    PriceShares reserved
    
    
    16,250
    
    
    
    Options granted
    
    
    (14,194
    )
    
    
    14,194
    
    
    $
    0.29Options canceled
    
    
    96
    
    
    
    (96
    )
    
    
    0.29Balance at June 30, 2004
    
    
    2,152
    
    
    
    14,098
  As of June 30, 2004, no options were vested. The following table
illustrates the years when TTI stock options will become vested: Fiscal Year of
    
    Number of Optionsvesting
    
    (in millions)2005
    
    
    2.82006
    
    
    4.52007
    
    
    3.42008
    
    
    3.4Total
    
    
    14.1
  Under SFAS No. 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 2004, 2003
and 2002, respectively: 51




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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements Year Ended June 30,2004
    
    2003
    
    2002Stock Options PlansExpected dividend yield
    
    
    
    
    
    
    
    
    
    
    Expected stock price volatility
    
    
    69%
    
    
    
    88%
    
    
    
    90%Risk-free interest rate
    
    2.46% to 4.10%
    
    2.34% - 2.92%
    
    3.92% - 4.97%Expected life (years)
    
    
    5
    
    
    
    5
    
    
    
    5Stock Purchase PlanExpected dividend yield
    
    
    
    
    
    
    
    
    
    
    Expected stock price volatility
    
    59% - 71%

    
    78% - 90%
    
    80% - 92%Risk-free interest rate
    
    9.83% to 1.57%
    
    2.24% - 2.67%
    
    4.09% - 5.44%Expected life (years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
  9.
    
    Preferred Rights AgreementOn July 24, 1998, the Board adopted a Preferred Shares Rights Agreement
(Agreement) and pursuant to the Agreement authorized and declared a
dividend of one preferred share purchase right (Right) for each common
share outstanding of the Company on August 14, 1998. The Rights are
designed to protect and maximize the value of the outstanding equity
interests in the Company in the event of an unsolicited attempt by an
acquirer to take over the Company, in a manner or terms not approved by the
Board. Each Right becomes exercisable to purchase one-hundredth of a share
of Series A Preferred Stock of the Company at an exercise price of $33.33
and expire on July 23, 2008. The Company may redeem the Rights at a price
of $0.001 per Right. 52




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Trident Microsystems, Inc.
Notes to Consolidated Financial Statements  10.
    
    Segment InformationSubsequent to the transfer of its graphics division to XGI in July 2003, the
Company operates in only one reportable segment: digital media.
Accordingly, certain comparative amounts were reclassified to conform with
current period presentation.The following is a summary of the Companys segment information (in
thousands): Digital MediaYear Ended June 30, 2004
    
    (TTI)
    
    Graphics
    
    Other
    
    TotalRevenues
    
    $
    50,119
    
    
    $
    
    
    
    $
    2,432
    
    
    $
    52,551Operating income (loss)
    
    
    10,602
    
    
    
    
    
    
    
    (6,168
    )
    
    
    4,434
 Digital MediaYear Ended June 30, 2003
    
    and TTI
    
    Graphics
    
    Other
    
    TotalRevenues
    
    $
    25,875
    
    
    $
    26,247
    
    
    $
    630
    
    
    $
    52,752Operating income (loss)
    
    
    592
    
    
    
    (16,779
    )
    
    
    (10
    )
    
    
    (16,197
    )Unallocated general and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (2,257
    )
    
    
    (2,257
    )
 Digital MediaYear Ended June 30, 2002
    
    and TTI
    
    Graphics
    
    Other
    
    TotalRevenues
    
    $
    6,480
    
    
    $
    98,788
    
    
    $
    498
    
    
    $
    105,766Operating income (loss)
    
    
    (3,924
    )
    
    
    (4,878
    )
    
    
    0
    
    
    
    (8,802
    )Unallocated general and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (4,204
    )
    
    
    (4,204
    )
  In August 2003, the Digital Media operations were transferred to TTI, a
subsidiary of the Company. The Company held a 63% equity interest in TTI as
of June 30, 2003. The equity interest held in TTI increased to 90% in August
2003 after the restructuring of operations and injection of capital by TMI.
The equity interest held decreased to 83% since September 30, 2003 following
the completion of sale of 7% interest to UMC. Dilution of interest would
result upon exercise of stock options by the employees in the future or if
the Company determines to sell further interests in TTI. As of June 30,
2004, 65.0 million shares and options to purchase 14.1 million options were
outstanding for TTI. The options are vested over a period of four years from
the grant date. The equity interest held in TTI would have decreased to 82%
as of June 30, 2004 if all the outstanding options were exercised.  The following is a summary of the Companys geographic operations: (in thousands)
    
    United States
    
    Taiwan
    
    Japan
    
    China
    
    Korea
    
    Others
    
    ConsolidatedFiscal Year 2004:Product sales
    
    $
    213
    
    
    $
    7,492
    
    
    $
    3,567
    
    
    $
    30,465
    
    
    $
    10,012
    
    
    $
    802
    
    
    $
    52,551Long-lived assets
    
    
    285
    
    
    
    419
    
    
    
    
    
    
    
    1,668
    
    
    
    
    
    
    
    
    
    
    
    2,372Fiscal Year 2003:Product sales
    
    $
    67
    
    
    $
    6,768
    
    
    $
    22,803
    
    
    $
    16,287
    
    
    $
    4,077
    
    
    $
    2,750
    
    
    $
    52,752Long-lived assets
    
    
    816
    
    
    
    356
    
    
    
    
    
    
    
    1,617
    
    
    
    
    
    
    
    
    
    
    
    2,789Fiscal Year 2002:Product sales
    
    $
    347
    
    
    $
    30,880
    
    
    $
    61,550
    
    
    $
    5,324
    
    
    $
    1,629
    
    
    $
    6,036
    
    
    $
    105,766Long-lived assets
    
    
    2,339
    
    
    
    499
    
    
    
    
    
    
    
    1,872
    
    
    
    
    
    
    
    
    
    
    
    4,710
  Product sales are attributed to countries based on delivery locations.
Long-lived assets comprise property and equipment. 53




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Trident Microsystems, Inc.
Notes to Consolidated Financial Statements  11.
    
    Commitments and Concentration of Sales and Credit RiskBuilding Leases.The Company leases facilities under noncancelable
operating lease agreements, which expire at various dates through 2008.
Rental expense for the years ended June 30, 2004, 2003 and 2002 was $2.5
million, $2.3 million and $2.5 million, respectively. Future minimum lease
payments under non-cancelable operating leases at June 30, 2004 were as
follows (in thousands): Years ending June 30:2005
    
    $
    2,4002006
    
    
    2,2002007
    
    
    7002008
    
    
    100Total minimum lease payments
    
    $
    5,400
  Concentration of Sales and Credit Risks.Sales to 3 customers, Skyworth and
Konka (television manufacturers located in China) and Samsung, accounted for
approximately 23%, 16% and 15% of revenues, respectively, for fiscal 2004.
Sales to two customers, Inno Micro, which is a supplier of Toshiba, and
Skyworth, a television original equipment manufacturer located in China,
accounted for approximately 43% and 11% of revenue, respectively, for the
fiscal 2003. Product sales to one customer, Inno Micro, accounted for 58%
of product sales for the fiscal 2002.Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash
equivalents, and trade accounts receivable. The Company places its cash and
cash equivalents primarily in market rate accounts. The Company offers
credit terms on the sale of its products to certain customers. The Company
performs ongoing credit evaluations of its customers financial condition
and, generally, requires no collateral from its customers. The Company
maintains an allowance for uncollectible accounts receivable based upon the
expected collectibility of all accounts receivable.In addition to cash equivalents and short-term investments, the Companys
financial instruments include accounts receivable and accounts payable,
which are carried at cost. This approximates the fair value because of the
short-term maturity of these instruments.12.
    
    ContingenciesOn December 14, 1998, NeoMagic Corporation (NeoMagic) filed a patent
infringement action against the Company in the United States District Court
for the District of Delaware, Case No. 98-CV-699. On January 25, 1999, the
Company answered the complaint and filed a counterclaim alleging violation
of Section 2 of the Sherman Act. The antitrust counterclaim was stayed by
the Court pending the outcome of NeoMagics patent infringement claim. The
parties filed motions for summary judgment and after several years of legal
action, the Court issued its Order on May 9, 2003, granting Tridents motion
for summary judgment of non-infringement and denying NeoMagics motion for
summary judgment of infringement. NeoMagic appealed this decision, however,
on August 5, 2004, the Federal Circuit issued a unanimous decision affirming
summary judgment in the Companys favor. Tridents counterclaim against
NeoMagic for violation of Section 2 of the Sherman Act, attempted
monopolization arising out of NeoMagics prosecution of the patent
infringement action against Trident, remains pending in Delaware federal
district court.The results of any litigation matters are inherently uncertain. In the
event of an adverse decision in the described legal actions or disputes, or
any other related litigation with third parties that could arise in the
future with respect to patents or other intellectual property rights
relevant to the Companys products, the Company could be required to pay
damages and other expenses, to cease the manufacture, use and sale of
infringing products, to expend significant resources to develop
non-infringing technology or to obtain licenses to the infringing
technology. The Company cannot make any assurance that these matters will
not materially and adversely affect the Companys business, financial
condition, operating results, or cash flows. 54




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Trident Microsystems, Inc.
Notes to Consolidated Financial Statements Interim Financial Information (Unaudited)  The following table contains selected unaudited consolidated statements of
operations data for each quarter of fiscal years 2004 and 2003. See Note 1
to the Consolidated Financial Statements for an explanation of the
computation of basic and diluted net income (loss) per share. SUPPLEMENTAL AND QUARTERLY CONSOLIDATED FINANCIAL DATA FISCAL 2004 QUARTER ENDED(in thousands, except per share data)
    
    JUNE 30
    
    MARCH 31
    
    DECEMBER 31
    
    SEPTEMBER 30Revenues
    
    $
    12,646
    
    
    $
    13,846
    
    
    $
    16,227
    
    
    $
    9,832Gross profit
    
    
    7,148
    
    
    
    7,832
    
    
    
    8,924
    
    
    
    4,973Income (loss) from operations
    
    
    810
    
    
    
    1,181
    
    
    
    2,575
    
    
    
    (132
    )Net Income
    
    
    989
    
    
    
    2,489
    
    
    
    1,431
    
    
    
    4,679Net income
per share - basic
    
    
    0.04
    
    
    
    0.11
    
    
    
    0.06
    
    
    
    0.22Net income
per share - diluted
    
    
    0.04
    
    
    
    0.10
    
    
    
    0.06
    
    
    
    0.19
 FISCAL 2003 QUARTER ENDED(in thousands, except per share data)
    
    JUNE 30
    
    MARCH 31
    
    DECEMBER 31
    
    SEPTEMBER 30Revenues
    
    $
    14,620
    
    
    $
    11,614
    
    
    $
    13,283
    
    
    $
    13,235Gross profit
    
    
    2,890
    
    
    
    4,183
    
    
    
    4,081
    
    
    
    3,878Loss from operations
    
    
    (4,462
    )
    
    
    (4,264
    )
    
    
    (4,918
    )
    
    
    (4,810
    )Net loss
    
    
    (4,589
    )
    
    
    (7,543
    )
    
    
    (6,802
    )
    
    
    (5,830
    )Net loss per
share - basic and diluted
    
    
    (0.22
    )
    
    
    (0.37
    )
    
    
    (0.33
    )
    
    
    (0.29
    )
 55




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##### Table of Contents



Trident Microsystems, Inc.
Notes to Consolidated Financial Statements Schedule II Valuation and Qualifying Accounts
(in thousands)  Allowance for doubtful accounts and sales returns: Sales ReturnsBalance at
    
    Charged to
    
    
    
    
    
    Balance atFor the
    
    Beginning
    
    Costs and
    
    
    
    
    
    EndYear Ended
    
    Of Period
    
    Expenses
    
    Deductions
    
    Of PeriodJune 30, 2002
    
    $
    1,410
    
    
    
    911
    
    
    
    219
    
    
    $
    2,102June 30, 2003
    
    
    2,102
    
    
    
    99
    
    
    
    1,592
    
    
    
    609June 30, 2004
    
    
    609
    
    
    
    
    
    
    
    309
    
    
    
    300
 56




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Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure None. 
 Item 9A. Controls and Procedures  (a) Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of
1934, as amended. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this annual report.  (b) Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting
during the quarter ended June 30, 2004 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting. 
 Item 9B. Other Information Our Insider Trading Policy allows stock trading plans pursuant to Rule
10b5-1 promulgated under the Securities Exchange Act of 1934 (Rule 10b5-1).
In August 2004, our Chief Executive Officer, Mr. Frank Lin, established a Rule
10b5-1 sales plan which specifies the trading period, the number of shares of
common stock to be sold and the prices and conditions under which such shares
may be sold. Under the trading plan, Mr. Lin may sell up to an aggregate of up
to approximately 58% of his combined holdings and options of approximately
2,750,000 shares, or 1,600,000 shares half of which are held long and half of
which are acquirable under options to purchase common stock. The plan will
begin to trade shares above certain price levels in November 2004, and extend
over one year, subject to certain limits established in terms of a maximum
number of shares that can be sold in any one month. Under the trading plan, an
independent broker will execute the trades pursuant to specific selling
instructions provided by Mr. Lin at the time the plan was established. Subject
to certain procedures and limitations, the plan may also be modified or
extended by Mr. Lin in the future. As of September 1, 2004, Mr. Lin is the only Company employee or director
to have established a Rule 10b5-1 trading plan. However, we believe that
additional directors, officers and certain key employees may establish trading
plans under Rule 10b5-1 in the future. We do not undertake any obligation to
update or revise our disclosure regarding plans currently in effect, or plans
which may be modified in the future or to identify other individuals who may
enter into trading plans under Rule 10b5-1 in the future.Item 9A. Controls and
Procedures 
 PART III 
 Item 10. Directors and Executive Officers of the Registrant The information required by Item 401 of Regulation S-K is incorporated by
reference from the definitive proxy statement for the Companys 2004 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 report (the Proxy Statement) under the caption INFORMATION
ABOUT TRIDENT MICROSYSTEMS, INC.  Management. Information relating to our
executive officers is set forth in Part I of this report under the caption
Executive Officers of the Registrant. The information required by Item 405 of Regulation S-K is incorporated by
reference from the Proxy Statement under the caption EXECUTIVE COMPENSATION
AND OTHER MATTERSSection 16(a) Beneficial Ownership Reporting Compliance. 57




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##### Table of Contents



The information required by Item 406 of Regulation S-K is incorporated by
reference from the Proxy Statement under the caption INFORMATION ABOUT TRIDENT
MICROSYSTEMS, INC.  Committee Charters and Other Corporate Governance
Materials. 
 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 EQUITY COMPENSATION PLAN INFORMATION We currently maintain four compensation plans that provide for the
issuance of our Common Stock to officers, directors, other employees or
consultants. These consist of the 1992 Stock Option Plan (the 1992 Plan),
1994 Outside Directors Stock Option Plan (the 1994 Plan), 2002 Stock Option
Plan (the 2002 Plan) and 2001 Employee Stock Purchase Plan (the Purchase
Plan), which have been approved by stockholders, and the 1996 Nonstatutory
Stock Option Plan (the 1996 Plan), which has not been approved by
stockholders. The following table sets forth information regarding outstanding
options and shares reserved for future issuance under the foregoing plans as of
June 30, 2004: Number of sharesremaining availablefor future issuanceNumber of shares to
    
    
    
    
    
    under equitybe issued upon
    
    Weighted-average
    
    compensation plansexercise of
    
    exercise price of
    
    (excluding sharesoutstanding options,
    
    outstanding options,
    
    reflected inwarrants and rights
    
    warrants and rights
    
    column (a))Plan Category
    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
stockholders
    
    
    2,406,167
    (1)
    
    $
    3.82
    
    
    
    1,320,139
    (2)Equity compensation
plans not approved
by stockholders(3)
    
    
    2,127,076
    
    
    $
    3.71
    
    
    
    917,211Total
    
    
    4,533,243
    
    
    $
    3.77
    
    
    
    2,237,350
   (1)
    
    These shares include 2,053,000 shares that are reserved and
issuable upon exercise of outstanding options under the 1992 Plan which
expired on October 16, 2002 and 203,167 shares that will be issued upon
exercise of outstanding options under the 1994 Plan which expired on
January 13, 2004 and 150,000 shares that are reserved and issuable upon
exercise of outstanding options under the 2002 Plan.  (2)
    
    These shares include 457,639 shares reserved for issuance under the
Purchase Plan and 862,500 shares reserved under the 2002 Plan, but
exclude 126,234 shares which ceased to be so reserved when the 1994
Plan expired on January 13, 2004.  (3)
    
    Consists of shares subject to options that are outstanding or may
be issued pursuant to the 1996 Plan. Material Features of the 1996 Nonstatutory Stock Option Plan As of June 30, 2004, we had reserved an aggregate of 6,150,000 shares of Common
Stock for issuance under the 1996 Plan, of which 917,211 shares remained
available for future grant on such date. The 1996 Plan provides for the
granting of nonstatutory stock options to employees and consultants who are not 58




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##### Table of Contents



officers or directors of the Company, with exercise prices per share equal to
no less than 85% of the fair market value of our Common Stock on the date of
grant. Options granted under the 1996 Plan generally have a 10-year term and
vest at the rate of 25% of the shares subject to the option on each of the
first four anniversaries of the date of grant. The vesting of options granted
under the 1996 Plan will be accelerated in full in the event of a merger of the
Company with or into another corporation in which the outstanding options are
neither assumed nor replaced by equivalent options granted by the successor
corporation or a parent or subsidiary of the successor corporation. The 1996
Plan is not required to be and has not been approved by the Companys
stockholders. Material Features of the Director Options As of June 30, 2003, Millard Phelps held a nonstatutory stock option to
purchase 5,000 shares of Common Stock at a price of $13.875 per share granted
to him by the Compensation Committee of the Board of Directors in April 1996,
while Glen Antle held a nonstatutory stock option to purchase 6,250 shares of
Common Stock at a price of $3.375 per share granted to him by the Compensation
Committee in October 1998. The exercise price of each
option is equal to the per share closing price of the Common Stock on the date
of grant. Each option has a term of 10 years measured from the date of grant
and became exercisable in full one year after the date of grant. The information required by Item 403 of Regulation S-K is incorporated by
reference from the Proxy Statement under the caption INFORMATION ABOUT TRIDENT
MICROSYSTEMS, INC.  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. 
 Item 14. Principal Accountant Fees and Services The information required by this Item is incorporated by reference from
the Proxy Statement under the caption RATIFICATION OF APPOINTMENT OF
INDEPENDENT AUDITORS  Principal Accountant Fees and Services and Policy on
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors. The following is a summary of the fees billed by PricewaterhouseCoopers LLP for
professional services rendered for the fiscal years ended June 30, 2004 and
2003 (in thousands): 2004
    
    2003Audit
    
    $
    292
    
    
    $
    206Audit-related
    
    
    22
    
    
    
    36Tax
    
    
    122
    
    
    
    141All other fees
    
    
    
    
    
    
    Total fees
    
    $
    436
    
    
    $
    383
 Audit Fees. Consist of fees billed for professional services rendered for the
audit of the Companys consolidated financial statements and review of the
interim consolidated financial statements included in quarterly reports and
services that are normally provided by PricewaterhouseCoopers LLP in connection
with statutory and regulatory filings or engagements. 59




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##### Table of Contents



Audit-Related Fees. Consists of fees, billed for assurance and related
services that are reasonably related to the performance of the audit or review
of Companys consolidated financial statements and are not reported under Audit
Fees. These services include accounting consultations in connection with
restructuring, attest services that are not required by state or regulation and
consultations concerning financial accounting and reporting standards. Tax Fees. Consists of fees billed for professional services for tax
compliance, tax advice and tax planning. These services include assistance
regarding federal, state and international tax compliance, tax audit defense,
customs and duties, mergers and acquisitions, and international tax planning. All Other fees. Consists of fees for products and services other than the
services reported above. No such services were rendered by
PricewaterhouseCoopers LLP during the periods presented. Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Registered Public Accounting Firm. The Audit Committees policy is to pre-approve all audit and permissible
non-audit services provided by the independent Registered Public Accounting
Firm. These services may include audit services, audit-related services, tax
services and other services. Pre-approval is generally provided for up to one
year and any pre-approval is detailed as to the particular service or category
of services and is generally subject to a specific budget. The independent
Registered Public Accounting Firm and management are required to periodically
report to the Audit Committee regarding the extent of services provided by the
independent Registered Public Accounting Firm in accordance with this
pre-approve particular services on a case-by-case basis. 60




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##### Table of Contents



PART IV 
 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as part of this report: Page Number1. Financial Statements:Report of Independent Registered Public Accounting Firm
    
    
    33Consolidated Balance Sheet - As of June 30, 2004 and 2003
    
    
    34Consolidated Statement of Operations - For the Three Years Ended June 30, 2004
    
    
    35Consolidated Statement of Changes
in Stockholders Equity For the Three Years Ended June 30, 2004
    
    
    36Consolidated Statement of Cash Flows For the Three Years Ended June 30, 2004
    
    
    37Notes to Consolidated Financial Statements
    
    
    382. Financial Statement Schedules:II  Valuation and Qualifying Accounts for Each of the Three Years Ended June 30, 2004
    
    
    56
 61




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##### Table of Contents



3.
    
    Exhibits: Exhibit
    
    Description2.1
    
    Securities Purchase Agreement between XGI Technology Inc. and Trident Microsystems (Far
East) Ltd. (10)2.2
    
    Amendment to Securities Purchase Agreement between XGI Technology Inc. and Trident
Microsystems (Far East) Ltd. (10)2.3
    
    Share Subscription Agreement between XGI Technology Inc. and Trident Microsystems (Far
East) Ltd. (10)2.4
    
    Asset Purchase Agreement between XGI Cayman Ltd. and Trident Microsystems (Far East) Ltd.
(10)2.5
    
    Amendment to Asset Purchase Agreement between XGI Cayman Ltd. and Trident Microsystems (Far
East) Ltd. (10)2.6
    
    License Agreement between Trident Microsystems, Inc. and XGI Cayman Ltd. (10)2.7
    
    Capitalization Agreement between XGI Technology Inc. and Trident Microsystems (Far East)
Ltd. (10)3.1
    
    Restated Certificate of Incorporation.(1)3.2
    
    Certificate of Amendment of Restated Certificate of Incorporation.(13)3.3
    
    Amended and Restated Bylaws.(12)4.1
    
    Reference is made to Exhibits 3.1, 3.2 and 3.3.4.2
    
    Specimen Common Stock Certificate.(2)4.3
    
    Form of Rights Agreement between the Company and ChaseMellon Shareholder Services, LLC, as
Rights Agent (including as Exhibit A the form of Certificates of Designation, Preferences
and Rights of the Terms of the Series A Preferred Stock, as Exhibit B the form of Right
Certificate, and as Exhibit C the Summary of Terms of Rights Agreement).(3)10.5(*)
    
    1990 Stock Option Plan, together with forms of Incentive Stock Option Agreement and
Non-statutory Stock Option Agreement.(2)10.6(*)
    
    Form of the Companys Employee Stock Purchase Plan.(2)10.7(*)
    
    Summary description of the Companys Fiscal 1992 Bonus Plan.(2)10.8(*)
    
    Form of the Companys Fiscal 1993 Bonus Plan.(2)10.9(*)
    
    Summary description of the Companys 401(k) plan.(2)10.10(*)
    
    Form of Indemnity Agreement for officers, directors and agents.(2)10.12(*)
    
    Form of Non-statutory Stock Option Agreement between the Company and Frank C. Lin.(4)10.13(*)
    
    Form of 1992 Stock Option Plan amending and restating the 1990 Stock Option Plan included as
Exhibit 10.5.(2)10.14
    
    Lease Agreement dated May 16, 2001 between the Company and iStar Financial , Inc. for the
Companys principal offices located at 1090 East Arques Avenue, Sunnyvale, California.(9)10.15(*)
    
    Form of Change of Control Agreement between the Company and Frank C. Lin.(9)10.16
    
    Foundry Venture Agreement dated August 18, 1995 by and between the Company and United
Microelectronics Corporation.(5)(8)10.17(*)
    
    Form of 1998 Stock Option Plan which replaces the 1992 Stock Option Plan.(6)10.18(*)
    
    Form of Nonstatutory Stock Option Agreement for non-plan grants to directors.(11)10.19(+)
    
    Form of 1996 Nonstatutory Stock Option Plan.(11)21.1
    
    List of Subsidiaries.(7)23.1
    
    Consent of Independent Registered Public Accounting Firm.(7)24.1
    
    Power of Attorney(7)31.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer(7)31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer(7)32.1
    
    Section 1350 Certification of Chief Executive Officer(7)32.2
    
    Section 1350 Certification of Chief Financial Officer(7)
   1.
    
    Incorporated by reference from exhibit of the same number to the
Companys Annual Report on Form 10-K for the year ended June 30, 1993.2.
    
    Incorporated by reference from exhibit of the same number to the
Companys Registration Statement on Form S-1 (File No. 33-53768),
except that Exhibit 3.2 is incorporated from Exhibit 3.4. 62




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3.
    
    Incorporated by reference from exhibit 99.1 to the Companys
Current Report on Form 8-K filed August 21, 1998.4.
    
    Incorporated by reference from exhibit of the same number to the
Companys Quarterly Report on Form 10-Q for the quarter ended March 31,
1999.5.
    
    Incorporated by reference from exhibit of the same number to the
Companys Annual Report on Form 10-K for the year ended June 30, 1995.6.
    
    Incorporated by reference to the Companys 1998 Employee Stock
Purchase Plan Individual Stock Option Agreements and 1996 Nonstatutory
Stock Option Plan on Form S-8 filed April 23, 1999 (File No.
333-76895).7.
    
    Filed herewith.8.
    
    Confidential treatment has been requested for a portion of this
document.9.
    
    Incorporated by reference from exhibit of the same number to the
Companys Annual Report on Form 10-K for the year ended June 30, 200110.
    
    Incorporated by reference from the Companys Current Report on Form
8-K dated July 25, 2003.11.
    
    Incorporated by reference from exhibit of the same number to the
Companys Quarterly Report on Form 10-Q for the quarter ended September
30, 2002.12.
    
    Incorporated by reference from exhibit of the same number to the
Companys Form 10-Q dated December 31, 2003.13.
    
    Incorporated by reference from exhibit of the same number to the
Companys Form 10-Q dated March 31, 2004. (*) Management contracts or compensatory plans or arrangements covering
executive officers or directors of the Company. (+) Compensatory plans, contracts or arrangements adopted without the approval
of security holders pursuant to which equity may be awarded.  (b)
    
    Reports on Form 8-K:Report Furnished  We furnished a Current Report on Form 8-K, dated April 22,
2004, pursuant to Item 7 and Item 12 to report that the
Company issued a press release announcing its financial
results for the quarter ended March 31, 2004.  (c)
    
    Report Filed  We filed a Current Report on Form 8-K, dated June 14, 2004, pursuant to Item 5
and Item 7 to report that the Company issued a press release announcing the
appointment of John S. Edmunds as Chief Financial Officer. 63




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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 Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. TRIDENT MICROSYSTEMS, INC.Dated: September 13, 2004
    
    /s/ FRANK C. LINFrank C. LinChief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on September 13, 2004 by the following persons on
behalf of the registrant and in the capacities indicated. Signature
    
    Title/s/ Frank C. Lin
(Frank C. Lin)
    
    President, Chief Executive Officer and Chairman of
the Board (Principal Executive Officer)/s/ John S. Edmunds
(John S. Edmunds)
    
    Chief Financial Officer/s/ Peter Jen
(Peter Jen)
    
    Senior Vice President, Asia Operations and Chief
Accounting Officer/s/ Glen M. Antle
(Glen M. Antle)
    
    Director/s/ Yasushi Chikagami
(Yasushi Chikagami)
    
    Director/s/ John Luke
(John Luke)
    
    Director/s/ Millard Phelps
(Millard Phelps)
    
    Director
 64




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##### Table of Contents



INDEX TO EXHIBITS FILED TOGETHER WITH THIS ANNUAL REPORT Exhibit
    
    Description2.1
    
    Securities Purchase Agreement between XGI Technology Inc. and Trident Microsystems (Far
East) Ltd. (10)2.2
    
    Amendment to Securities Purchase Agreement between XGI Technology Inc. and Trident
Microsystems (Far East) Ltd. (10)2.3
    
    Share Subscription Agreement between XGI Technology Inc. and Trident Microsystems (Far
East) Ltd. (10)2.4
    
    Asset Purchase Agreement between XGI Cayman Ltd. and Trident Microsystems (Far East) Ltd.
(10)2.5
    
    Amendment to Asset Purchase Agreement between XGI Cayman Ltd. and Trident Microsystems (Far
East) Ltd. (10)2.6
    
    License Agreement between Trident Microsystems, Inc. and XGI Cayman Ltd. (10)2.7
    
    Capitalization Agreement between XGI Technology Inc. and Trident Microsystems (Far East)
Ltd. (10)3.1
    
    Restated Certificate of Incorporation.(1)3.2
    
    Certificate of Amendment of Restated Certificate of Incorporation.(13)3.3
    
    Amended and Restated Bylaws.(12)4.1
    
    Reference is made to Exhibits 3.1, 3.2 and 3.3.4.2
    
    Specimen Common Stock Certificate.(2)4.3
    
    Form of Rights Agreement between the Company and ChaseMellon Shareholder Services, LLC, as
Rights Agent (including as Exhibit A the form of Certificates of Designation, Preferences
and Rights of the Terms of the Series A Preferred Stock, as Exhibit B the form of Right
Certificate, and as Exhibit C the Summary of Terms of Rights Agreement).(3)10.5(*)
    
    1990 Stock Option Plan, together with forms of Incentive Stock Option Agreement and
Non-statutory Stock Option Agreement.(2)10.6(*)
    
    Form of the Companys Employee Stock Purchase Plan.(2)10.7(*)
    
    Summary description of the Companys Fiscal 1992 Bonus Plan.(2)10.8(*)
    
    Form of the Companys Fiscal 1993 Bonus Plan.(2)10.9(*)
    
    Summary description of the Companys 401(k) plan.(2)10.10(*)
    
    Form of Indemnity Agreement for officers, directors and agents.(2)10.12(*)
    
    Form of Non-statutory Stock Option Agreement between the Company and Frank C. Lin.(4)10.13(*)
    
    Form of 1992 Stock Option Plan amending and restating the 1990 Stock Option Plan included as
Exhibit 10.5.(2)10.14
    
    Lease Agreement dated May 16, 2001 between the Company and iStar Financial , Inc. for the
Companys principal offices located at 1090 East Arques Avenue, Sunnyvale, California.(9)10.15(*)
    
    Form of Change of Control Agreement between the Company and Frank C. Lin.(9)10.16
    
    Foundry Venture Agreement dated August 18, 1995 by and between the Company and United
Microelectronics Corporation.(5)(8)10.17(*)
    
    Form of 1998 Stock Option Plan which replaces the 1992 Stock Option Plan.(6)10.18(*)
    
    Form of Nonstatutory Stock Option Agreement for non-plan grants to directors.(11)10.19(+)
    
    Form of 1996 Nonstatutory Stock Option Plan.(11)21.1
    
    List of Subsidiaries.(7)23.1
    
    Consent of Independent Registered Public Accounting Firm.(7)24.1
    
    Power of Attorney(7)31.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer(7)31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer(7)32.1
    
    Section 1350 Certification of Chief Executive Officer(7)32.2
    
    Section 1350 Certification of Chief Financial Officer(7)
   1.
    
    Incorporated by reference from exhibit of the same number to the
Companys Annual Report on Form 10-K for the year ended June 30, 1993.2.
    
    Incorporated by reference from exhibit of the same number to the
Companys Registration Statement on Form S-1 (File No. 33-53768),
except that Exhibit 3.2 is incorporated from Exhibit 3.4. 65




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##### Table of Contents



3.
    
    Incorporated by reference from exhibit 99.1 to the Companys
Current Report on Form 8-K filed August 21, 1998.4.
    
    Incorporated by reference from exhibit of the same number to the
Companys Quarterly Report on Form 10-Q for the quarter ended March 31,
1999.5.
    
    Incorporated by reference from exhibit of the same number to the
Companys Annual Report on Form 10-K for the year ended June 30, 1995.6.
    
    Incorporated by reference to the Companys 1998 Employee Stock
Purchase Plan Individual Stock Option Agreements and 1996 Nonstatutory
Stock Option Plan on Form S-8 filed April 23, 1999 (File No.
333-76895).7.
    
    Filed herewith.8.
    
    Confidential treatment has been requested for a portion of this
document.9.
    
    Incorporated by reference from exhibit of the same number to the
Companys Annual Report on Form 10-K for the year ended June 30, 200110.
    
    Incorporated by reference from the Companys Current Report on Form
8-K dated July 25, 2003.11.
    
    Incorporated by reference from exhibit of the same number to the
Companys Quarterly Report on Form 10-Q for the quarter ended September
30, 2002.12.
    
    Incorporated by reference from exhibit of the same number to the
Companys Form 10-Q dated December 31, 2003.13.
    
    Incorporated by reference from exhibit of the same number to the
Companys Form 10-Q dated March 31, 2004. (*) Management contracts or compensatory plans or arrangements covering
executive officers or directors of the Company. (+) Compensatory plans, contracts or arrangements adopted without the approval
of security holders pursuant to which equity may be awarded. 66