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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended June 30, 2006
 OR
 o
    
    TRANSITION REPORTING PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transition period from  to
 Commission File Number: 0-20784
 TRIDENT MICROSYSTEMS, INC.
  Delaware
    
    77-0156584(State or other jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification Number)3408 Garrett Drive, Santa Clara, California
    
    95054-2803(Address of principal executive offices)
    
    (Zip Code)
 (408) 764-8808
 Securities registered pursuant to Section 12(b) of the Act:
 Title of each class
    
    Name of each exchange on which registeredCommon Stock, $0.001 par value
    
    NASDAQ Global Market
 Securities registered pursuant to Section 12(g) of the Act: None
 þ o
 o þ
 o þ
 o
  þ o o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



TRIDENT MICROSYSTEMS, INC.
TABLE OF CONTENTS
 PageExplanatory Note Regarding Restatement
    
    
    3PART IItem 1. Business
    
    
    6Item 1A. Risk Factors
    
    
    14Item 1B Unresolved Staff Comments
    
    
    24Item 2. Properties
    
    
    24Item 3. Legal Proceedings
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    27PART
IIItem 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    28Item 6. Selected Financial Data
    
    
    30Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    33Item 7A. Quantitative and Qualitative Disclosure About Market Risk
    
    
    74Item 8. Financial Statements and Supplementary Data
    
    
    75Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    122Item 9A. Controls and Procedures
    
    
    122Item 9B Other Information
    
    
    125PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    126Item 11. Executive Compensation
    
    
    134Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    137Item 13. Certain Relationships and Related Transactions
    
    
    141Item 14. Principal Accountant Fees and Services
    
    
    141PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    143Power of Attorney
    
    
    146Signatures
    
    
    146EXHIBIT 21.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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FORWARD-LOOKING STATEMENTS
 This Annual Report on Form 10-K contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 which provides a safe harbor for statements
about future events, products and future financial performance that are based on the beliefs of,
estimates made by and information currently available to the management of Trident Microsystems,
Inc. (we, our, Trident or the Company). The outcome of the events described in these
forward-looking statements is subject to risks and uncertainties. Actual results and the outcome or
timing of certain events may differ significantly from those projected in these forward-looking
statements due to the factors listed under Risk Factors, and from time to time in our other
filings with the Securities and Exchange Commission, or SEC. For this purpose, statements
concerning industry or market segment outlook; market acceptance of or transition to new products;
revenues, earnings growth, other financial results and any statements using the terms believe,
expect, expectation, anticipate, can, should, would, could, estimate, appear,
based on, may, intended, potential, are emerging and possible or similar statements are
forward-looking statements that involve risks and uncertainties that could cause our actual results
and the outcome and timing of certain events to differ materially from those projected or
managements current expectations. By making forward-looking statements, we have not assumed any
obligation to, and you should not expect us to, update or revise those statements because of new
information, future events or otherwise, except as required by law.
 
 EXPLANATORY NOTE REGARDING RESTATEMENT
    3




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Accounting for Stock Issued to Employees Accounting for Certain Transactions Involving Stock Compensation,
 Issues Related to the Accounting for Stock
Compensation under APB Opinion No. 25 and
FASB Interpretation No. 44
    4




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Accounting for Stock-Based
Compensation Accounting for Stock-Based Compensation  Transition
and Disclosure
   Stock-based
    
    
    Minority
    
    
    Income TaxCompensation
    
    
    Interest
    
    
    Expense
    
    
    NetFiscal Years Ended June 30,
    
    Expense
    
    
    (Benefit) (1)
    
    
    (Benefit)
    
    
    Adjustment1993
    
    $
    221
    
    
    $
    
    
    
    $
    (84
    )
    
    $
    1371994
    
    
    402
    
    
    
    
    
    
    
    (133
    )
    
    
    2691995
    
    
    512
    
    
    
    
    
    
    
    (156
    )
    
    
    3561996
    
    
    900
    
    
    
    
    
    
    
    (221
    )
    
    
    6791997
    
    
    3,776
    
    
    
    
    
    
    
    (1,205
    )
    
    
    2,5711998
    
    
    3,365
    
    
    
    
    
    
    
    1,133
    
    
    
    4,4981999
    
    
    2,851
    
    
    
    
    
    
    
    
    
    
    
    2,8512000
    
    
    2,905
    
    
    
    
    
    
    
    (1,083
    )
    
    
    1,8222001
    
    
    1,894
    
    
    
    
    
    
    
    (489
    )
    
    
    1,4052002
    
    
    1,692
    
    
    
    
    
    
    
    (565
    )
    
    
    1,1272003
    
    
    1,338
    
    
    
    
    
    
    
    25
    
    
    
    1,363Cumulative 1993-2003 impact
    
    
    19,856
    
    
    
    
    
    
    
    (2,778
    )
    
    
    17,0782004
    
    
    16,217
    
    
    
    (1,034
    )
    
    
    
    
    
    
    15,1832005
    
    
    20,986
    
    
    
    (1,337
    )
    
    
    
    
    
    
    19,6492006
    
    
    3,897
    
    
    
    
    
    
    
    
    
    
    
    3,897Total cumulative impact
    
    $
    60,956
    
    
    $
    (2,371
    )
    
    $
    (2,778
    )
    
    $
    55,807
 
 (1)
    
    Includes $124,000 of additional payroll tax expense in fiscal
2004.  5




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PART I
 
 ITEM
1. BUSINESS
 Overview
 TM TM
     6




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Markets and Applications
 TM
  Product Family
    
    Description
    
    MarketsDPTVTM
    
    Integrated
multi-standard video
decoding, format
conversion, and image
enhancement processors
    
    Advanced TV including
cathode ray tube, or
CRT, plasma, LCD,
rear-projection and
front-projection display
types, AV Notebook PC,
Multi-function LCD
Monitors.HiDTVTM
    
    Integrated ATSC/DVB
(MPEG2) decoding, format
conversion, and image
enhancement processors
    
    Digital TV including
CRT, plasma, LCD,
rear-projection and
front-projection display
types.TDM
    
    Demodulation for ATSC,
DVB-C, DVB-T IF signals
    
    Digital TV including
CRT, plasma, LCD,
rear-projection and
front-projection display
types.
 7




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Current Digital Media Products:
 TM TM
 DCRe TM . TM
 SVP TM PX. TM TM TM TM TM TM TM
 SVP-LX.
 SVP-CX.
 SVP-EX.
 8




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HiDTV TM . TM TM TM
 TM TM
 HiDTV TM PRO. TM TM TM TM TM
 HiDTV LX.
 HiDTV Pro PX/LX .
 TAFE.
 Current PCTV Application Products:
 TV Master TM TM6000. TM TM TM TM
 9




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TV Master TM TM5600. TM
 Trident and TrueVideo, DCRe TM , SVP TM PX, SVP-LX, SVP-CX,
HiDTV TM , HiDTV TM PRO, HiDTV LX, HiDTV Pro CX/LX, TAFE, and TV Master TM are our registered trademarks as of June 30, 2006. Other trademarks used in this report
are the property of their respective owners.
 Sales, Marketing and Distribution
   TM
   Competition
  10




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Research and Development
   Manufacturing
   11




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Backlog
  Seasonality
  Patent and Proprietary Rights
   12




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Employees
  Available Information
   13




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ITEM 1A. RISK FACTORS
  Our operating results for fiscal 2006 and prior periods have been adversely impacted by our
restatement of financial results due to the findings of the investigation of our historical stock
option grant practices and related issues.
    We face risks related to possible SEC, Department of Justice, or DOJ, and other regulatory actions
regarding our historical stock option grant practices and related issues, which could require
significant management time and attention, and could require us to pay fines or other penalties.
  14




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We have been named as a party to derivative action lawsuits, and we may be named in additional
litigation, all of which will require significant management time and attention and result in
significant legal expenses and may result in an unfavorable outcome which could have a material
adverse effect on our business, financial condition, results of operations and cash flows.
 In re
Trident Microsystems Inc. Derivative Litigation Limke v. Lin et al
 We are subject to the risks of additional lawsuits in connection with our historical stock option
grant practices and related issues, the resulting restatements, and the remedial measures we have
taken.
  The operation of our business could be adversely affected by the departure of certain executives
and the search for a permanent Chief Executive Officer.
  We are exposed to increased costs and risks associated with complying with increasing and new
regulation of corporate governance and disclosure standards.
  15




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We have material weaknesses in internal control over financial reporting and cannot assure you that
additional material weaknesses will not be identified in the future. If our internal control over
financial reporting or disclosure controls and procedures are not effective, there may be errors in
our financial statements that could require a restatement or our filings may not be timely.
     16




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Due to the failure to meet continued listing standards, we may be delisted from the Nasdaq Global
Market, which could adversely affect our stock price and our ability to raise capital.
     Our success depends upon the digital media market and we must continue to develop new products and
to enhance our existing products.
  17




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We depend on a small number of large customers for a significant portion of our sales. The loss of,
or a significant reduction or cancellation in sales to, any key customer would significantly reduce
our revenues.
    
    
    substantially all of our sales are made on a purchase order basis, which permits our
customers to cancel, change or delay product purchase commitments with little or no notice
to us and without penalty;
    
    our customers may develop their own solutions;
    
    our customers may purchase integrated circuits from our competitors; or
    
    our customers may discontinue sales or lose market share in the markets for which they
purchase our products.
 We currently rely on certain international customers for a substantial portion of our revenue and
are subject to risks inherent in conducting business outside of the United States.
  
    
    exchange rate variations, tariffs, import restrictions and other trade barriers;
    
    difficulties in collecting accounts receivable;
    
    difficulties in managing distributors or representatives;
    
    political and economic instability, civil unrest, war or terrorist activities that
impact international commerce;
    
    potential adverse tax consequences;
    
    difficulties in protecting intellectual property rights, particularly in countries where
the laws and practices do not protect proprietary rights to as great an extent as do the
laws and practices of the United States; and
 18




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
    
    unexpected changes in regulatory requirements.
  Our dependence on sales to distributors increases the risks of managing our supply chain and may
result in excess inventory or inventory shortages.
  The cyclical nature of the semiconductor industry may lead to significant variances in the demand
for our products.
  Intense competition exists in the market for digital media products.
 TM TM
  19




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The average selling prices of our products may decline over relatively short periods.
  We do not have long-term commitments from our customers, and plan purchases based upon our
estimates of customer demand, which may require us to contract for the manufacture of our products
based on inaccurate estimates.
  If we do not achieve additional design wins in the future, our ability to sell additional products
could be adversely affected.
  We have had fluctuations in quarterly results in the past and may continue to experience such
fluctuations in the future.
  
    
    uncertain demand in the digital media 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;
 20




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
    
    our ability to develop, introduce, ship and support new products and product
enhancements and to manage product transitions;
    
    new product introductions by our competitors;
    
    seasonality, particularly in the third quarter of each fiscal year (March quarter), due
to the extended holidays relating to 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;
    
    the mix of products sold and the mix of distribution channels through which they are sold; and
    
    unexpected costs associated with our investigation of our historical stock option grant
practices and related issues, and any related litigation or regulatory actions.
  We are vulnerable to undetected product problems.
  Our reliance upon independent foundries could make it difficult to maintain product flow and affect
our sales.
   21




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If we have to qualify a new contract manufacturer or foundry for any of our products, we may
experience delays that result in lost revenues and damaged customer relationships.
  The market price of our common stock has been, and may continue to be volatile.
  Our success depends to a significant degree on the continued employment of key personnel.
  Our success depends in part on our ability to protect our intellectual property rights, which may
be difficult.
  22




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We have been involved in intellectual property infringement claims, and may be involved in others
in the future, which can be costly.
  Our operations are vulnerable to interruption or loss due to natural disasters, power loss, strikes
and other events beyond our control, which would adversely affect our business
  23




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The effect of terrorism or an outbreak of epidemic diseases may negatively affect sales and hinder
our operations
  Changes in our business organization will affect our operations.
 TM
 
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
   
 ITEM 3. LEGAL PROCEEDINGS
 Shareholder Derivative Litigation
 In re
Trident Microsystems Inc. Derivative Litigation Limke v. Lin et al
 24




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Intellectual Property Litigation
   Regulatory Actions
  Nasdaq Proceedings
  25




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Indemnification Obligations
   26




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
    For
    
    29,997,617Against
    
    16,092,009Abstain
    
    42,887Unvoted
    
    10,995,212
 27




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Part II
 
 ITEM 5.
    
    MARKET FOR THE REGISTRANTS COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
      28




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High
    
    LowFiscal Year 2006First Quarter
    
    $
    18.59
    
    
    $
    11.23Second Quarter
    
    $
    21.38
    
    
    $
    13.95Third Quarter
    
    $
    31.14
    
    
    $
    18.55Fourth Quarter
    
    $
    31.49
    
    
    $
    16.87Fiscal Year 2005First Quarter
    
    $
    7.54
    
    
    $
    4.79Second Quarter
    
    $
    8.60
    
    
    $
    5.04Third Quarter
    
    $
    9.50
    
    
    $
    7.28Fourth Quarter
    
    $
    11.68
    
    
    $
    7.90
 Approximate Number of Stockholders
  Dividends
  Issuer Repurchases of Equity Securities
  29




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ITEM 6. SELECTED FINANCIAL DATA
   30




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Fiscal Years(In millions, except per share amounts)
    

2006 (3)
    
    2005 (1)
    
    2004 (1)
    
    2003 (1)(2)
    
    2002 (1)(2)(As Previously
    
    (As Previously
    
    (As Previously
    
    (As PreviouslyReported)
    
    Reported)
    
    Reported)
    
    Reported)Summary of Operations:Revenues
    
    $
    171.4
    
    
    $
    69.0
    
    
    $
    52.6
    
    
    $
    52.8
    
    
    $
    105.8Income (loss) from operations
    
    
    28.4
    
    
    
    (8.9
    )
    
    
    4.4
    
    
    
    (18.5
    )
    
    
    (13.0
    )Net income (loss)
    
    
    26.2
    
    
    
    (10.5
    )
    
    
    10.4
    
    
    
    (24.8
    )
    
    
    (35.7
    )Net income (loss) per share - Basic
    
    
    0.48
    
    
    
    (0.22
    )
    
    
    0.23
    
    
    
    (0.60
    )
    
    
    (0.89
    )Net income (loss) per share - Diluted
    
    
    0.42
    
    
    
    (0.22
    )
    
    
    0.21
    
    
    
    (0.60
    )
    
    
    (0.89
    )Financial Position at Fiscal Year End:Cash, cash equivalents,
and short-term investments
    
    $
    152.7
    
    
    $
    92.2
    
    
    $
    84.3
    
    
    $
    49.9
    
    
    $
    84.0Working capital
    
    
    125.3
    
    
    
    78.1
    
    
    
    73.0
    
    
    
    41.2
    
    
    
    73.8Total assets
    
    
    207.2
    
    
    
    134.9
    
    
    
    96.3
    
    
    
    70.1
    
    
    
    118.5Stockholders equity
    
    
    153.7
    
    
    
    109.4
    
    
    
    74.6
    
    
    
    52.2
    
    
    
    90.7
 Fiscal Years(In millions, except per share amounts)
    

2006 (3)
    
    2005 (1)
    
    2004 (1)
    
    2003 (1)(2)
    
    2002 (1)(2)Adjustments
    
    Adjustments
    
    Adjustments
    
    AdjustmentsSummary of Operations:Revenues
    
    
    N/A
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Income (loss) from operations
    
    
    N/A
    
    
    
    (21.0
    )
    
    
    (16.3
    )
    
    
    (1.3
    )
    
    
    (1.7
    )Net income (loss)
    
    
    N/A
    
    
    
    (19.7
    )
    
    
    (15.2
    )
    
    
    (1.3
    )
    
    
    (1.1
    )Net income (loss) per share - Basic
    
    
    N/A
    
    
    
    (0.42
    )
    
    
    (0.34
    )
    
    
    (0.04
    )
    
    
    (0.02
    )Net income (loss) per share - Diluted
    
    
    N/A
    
    
    
    (0.42
    )
    
    
    (0.32
    )
    
    
    (0.04
    )
    
    
    (0.02
    )Financial Position at Fiscal Year End:Cash, cash equivalents,
and short-term investments
    
    
    N/A
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Working capital
    
    
    N/A
    
    
    
    3.5
    
    
    
    2.5
    
    
    
    
    
    
    
    Total assets
    
    
    N/A
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity
    
    
    N/A
    
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    
    
    
    
    
 Fiscal Years(In millions, except per share amounts)
    

2006 (3)
    
    2005 (1)
    
    2004 (1)
    
    2003 (1)(2)
    
    2002 (1)(2)(As Restated)
    
    (As Restated)
    
    (As Restated)
    
    (As Restated)Summary of Operations:Revenues
    
    $
    171.4
    
    
    $
    69.0
    
    
    $
    52.6
    
    
    $
    52.8
    
    
    $
    105.8Income (loss) from operations
    
    
    28.4
    
    
    
    (29.9
    )
    
    
    (11.9
    )
    
    
    (19.8
    )
    
    
    (14.7
    )Net income (loss)
    
    
    26.2
    
    
    
    (30.2
    )
    
    
    (4.8
    )
    
    
    (26.1
    )
    
    
    (36.8
    )Net income (loss) per share - Basic
    
    
    0.48
    
    
    
    (0.64
    )
    
    
    (0.11
    )
    
    
    (0.64
    )
    
    
    (0.91
    )Net income (loss) per share - Diluted
    
    
    0.42
    
    
    
    (0.64
    )
    
    
    (0.11
    )
    
    
    (0.64
    )
    
    
    (0.91
    )Financial Position at Fiscal Year End:Cash, cash equivalents,
and short-term investments
    
    $
    152.7
    
    
    $
    92.2
    
    
    $
    84.3
    
    
    $
    49.9
    
    
    $
    84.0Working capital
    
    
    125.3
    
    
    
    81.6
    
    
    
    75.5
    
    
    
    41.2
    
    
    
    73.8Total assets
    
    
    207.2
    
    
    
    135.0
    
    
    
    96.3
    
    
    
    70.1
    
    
    
    118.5Stockholders equity
    
    
    153.7
    
    
    
    109.3
    
    
    
    74.4
    
    
    
    52.2
    
    
    
    90.7
 (1)
    
    For additional information regarding the restatement, see Managements Discussion and
Analysis of Financial Condition and Results of Operations and Note 3, Restatement of
Consolidated Financial Statements and Special Committee and Company Findings, to the
Consolidated Financial Statements.(2)
    
    The statements of operations for the years ended June 30, 2002 and 2003 included the graphics
division, which was transferred to XGI Technology, Inc. in July 2003.(3)
    
    Effective July 1, 2005, we adopted SFAS No. 123(R), Share-Based Payment, which requires the
measurement and recognition of compensation expense for all stock-based payment awards made to
employees and directors, including stock options, based on their fair values.
 31




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RECONCILIATION OF CONSOLIDATED STATEMENTS OF OPERATIONS FOR FISCAL 2003 AND 2002
 Year Ended June 30, 2003
    
    
    Year Ended June 30, 2002(In thousands, except per share data)
    
    As Reported
    
    
    Adjustments
    
    
    As Restated
    
    
    As Reported
    
    
    Adjustments
    
    
    As RestatedRevenues
    
    $
    52,752
    
    
    $
    
    
    
    $
    52,752
    
    
    $
    105,766
    
    
    $
    
    
    
    $
    105,766Cost of revenues
    
    
    37,720
    
    
    
    76
    
    
    
    37,796
    
    
    
    82,970
    
    
    
    110
    
    
    
    83,080Gross profit
    
    
    15,032
    
    
    
    (76
    )
    
    
    14,956
    
    
    
    22,796
    
    
    
    (110
    )
    
    
    22,686Operating expenses:Research and development
    
    
    21,600
    
    
    
    778
    
    
    
    22,378
    
    
    
    22,218
    
    
    
    952
    
    
    
    23,170Selling, general and administrative
    
    
    11,886
    
    
    
    484
    
    
    
    12,370
    
    
    
    13,584
    
    
    
    630
    
    
    
    14,214Total operating expenses
    
    
    33,486
    
    
    
    1,262
    
    
    
    34,748
    
    
    
    35,802
    
    
    
    1,582
    
    
    
    37,384Loss from operations
    
    
    (18,454
    )
    
    
    (1,338
    )
    
    
    (19,792
    )
    
    
    (13,006
    )
    
    
    (1,692
    )
    
    
    (14,698
    )Interest income
    
    
    194
    
    
    
    
    
    
    
    194
    
    
    
    594
    
    
    
    
    
    
    
    594Loss on investments, net
    
    
    (4,995
    )
    
    
    
    
    
    
    (4,995
    )
    
    
    (42,715
    )
    
    
    
    
    
    
    (42,715
    )Other expense, net
    
    
    (463
    )
    
    
    
    
    
    
    (463
    )
    
    
    (108
    )
    
    
    
    
    
    
    (108
    )Loss before income taxes
    
    
    (23,718
    )
    
    
    (1,338
    )
    
    
    (25,056
    )
    
    
    (55,235
    )
    
    
    (1,692
    )
    
    
    (56,927
    )Provision for (benefit from) income taxes
    
    
    1,046
    
    
    
    25
    
    
    
    1,071
    
    
    
    (19,584
    )
    
    
    (565
    )
    
    
    (20,149
    )Net income (loss)
    
    $
    (24,764
    )
    
    $
    (1,363
    )
    
    $
    (26,127
    )
    
    $
    (35,651
    )
    
    $
    (1,127
    )
    
    $
    (36,778
    )Basic net loss per share
    
    $
    (0.60
    )
    
    $
    (0.04
    )
    
    $
    (0.64
    )
    
    $
    (0.89
    )
    
    $
    (0.02
    )
    
    $
    (0.91
    )Diluted net loss per share
    
    $
    (0.60
    )
    
    $
    (0.04
    )
    
    $
    (0.64
    )
    
    $
    (0.89
    )
    
    $
    (0.02
    )
    
    $
    (0.91
    )Shares used in computing basic per share amounts

    
    41,050
    
    
    
    
    
    
    
    41,050
    
    
    
    40,258
    
    
    
    
    
    
    
    40,258Shares used in computing diluted per share amounts

    
    41,050
    
    
    
    
    
    
    
    41,050
    
    
    
    40,258
    
    
    
    
    
    
    
    40,258The following table presents details of the total stock-based compensation expense that is included in each functional line item in the
consolidated statements of operations above:Supplemental
dataCost of revenues
    
    
    19
    
    
    
    76
    
    
    
    95
    
    
    
    
    
    
    
    110
    
    
    
    110Research and development
    
    
    76
    
    
    
    778
    
    
    
    854
    
    
    
    
    
    
    
    952
    
    
    
    952Selling, general and administrative
    
    
    10
    
    
    
    484
    
    
    
    494
    
    
    
    
    
    
    
    630
    
    
    
    630Total stock-based compensation expense
    
    $
    105
    
    
    $
    1,338
    
    
    $
    1,443
    
    
    $
    
    
    
    $
    1,692
    
    
    $
    1,692
 32




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-Looking Statements
 This Annual Report on Form 10-K contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 which provides a safe harbor for statements
about future events, products and future financial performance that are based on the beliefs of,
estimates made by and information currently available to the management of Trident Microsystems,
Inc. (we, our or the Company). The outcome of the events described in these forward-looking
statements is subject to risks and uncertainties. Actual results and the outcome or timing of
certain events may differ significantly from those projected in these forward-looking statements
due to the factors listed under Risk Factors, and from time to time in our other filings with the
Securities and Exchange Commission, or SEC. For this purpose, statements concerning industry or
market segment outlook; market acceptance of or transition to new products; revenues, earnings
growth, other financial results and any statements using the terms believe, expect,
expectation, anticipate, can, should, would, could, estimate, appear, based on,
may, intended, potential, are emerging and possible or similar statements are
forward-looking statements that involve risks and uncertainties that could cause our actual results
and the outcome and timing of certain events to differ materially from those projected or
managements current expectations. By making forward-looking statements, we have not assumed any
obligation to, and you should not expect us to, update or revise those statements because of new
information, future events or otherwise.
  Restatement of Consolidated Financial Statements
 Special Committee Investigation of Historical Stock Option Grant Practices and Related Issues
    33




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##### Table of Contents



Findings and Remedial Actions
 Accounting for Certain Transactions Involving Stock
Compensation,
 Issues Related to the Accounting for Stock
Compensation under APB Opinion No. 25 and FASB
Interpretation No. 44
   34




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##### Table of Contents



Details of Stock Option Investigation and Restatement
     
    
    New Hire Grants.During the Review Period, we granted
options to purchase a total of 14.2 million shares to
newly-hired employees or newly-retained consultants. During the Review Period, our prior
internal practice for the grant of options to newly-hired employees was to grant options with
an exercise price set at the lower of the closing
 35




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##### Table of Contents



price of our common stock on the date of the
letter extending the offer of employment, or the date the person commenced employment. Even
when consistently followed, this practice had accounting consequences that were not correctly
reflected in our accounting records, as it resulted in the grant of some stock options using a
grant date that was prior to the date that an employee started working for us. However, we
did not consistently follow this practice. We determined that, in numerous cases, offer
letters were prepared and dated with a date that did not correspond to the date on which an
offer was initially made or the date on which the letter was signed or sent to the prospective
employee. Some offer letters were dated with the benefit of hindsight, so that the dates of
such letters corresponded to dates on which our stock closed at favorable prices. We also
determined that certain offer letters were prepared with a date chosen to allow the grant of
options from our 1996 Stock Option Plan, which at the time of preparing the letters was
believed by us to have expired, although in fact the 1996 Stock Option
Plan had not expired. The 1996 Stock Option Plan was terminated on
June 19, 2007. As to options to newly-hired employees that required the approval of the
Compensation Committee, such grants were typically approved by unanimous written consents and
generally we could not locate documents that demonstrated contemporaneous approval by the
members of the Compensation Committee on the date used as the effective date for the unanimous
written consent approving such grant. We also identified instances in which we provided new
hires with grants that were recorded as of the date of a favorable price in our stock after
their employment began rather than the date of their offer letter or commencement of
employment. We also concluded that we did not properly account for all grants to consultants
or for later modifications to grants made to certain newly-hired employees.
 Due to the errors described above, we modified measurement dates with respect to grants of
options to purchase approximately 9.7 million shares, or 68% of all new hire grants made during the Review Period,
which resulted in additional cumulative stock-based compensation
expense of approximately $4.6
million through June 30, 2006. Of this amount, approximately $1.3 million related to grants
made to 16 non-employee consultants, including grants of options to purchase TTI stock, which
were subsequently converted into options for Tridents common stock described below, that also
had not originally been accounted for as grants to consultants requiring the fair values of
grants to these consultants be remeasured at each reporting date until vested or forfeited.
    
    Grants to Executive Officers Approved By the Compensation Committee or Board of Directors,
and to Directors Approved by the Board of Directors.Options to purchase a total of 10.5
million shares were granted to executive officers and directors during the Review Period.
During the Review Period, stock option grants to our officers were approved by the
Compensation Committee or the Board of Directors, and stock option grants to our directors
were approved by the Board of Directors. Prior to 2001, these grants were typically approved
by unanimous written consent of the members of the Compensation Committee or Board of
Directors rather than at a meeting in person or by telephone conference call. Some of these
written consents were deemed effective as of a date earlier than when the consents were sent
to or signed by the directors. Generally, with respect to most grants made by unanimous
written consent, documents were not located that demonstrated contemporaneous approval by the
directors on the date used as the effective date. We found evidence that the unanimous
written consents approving some grants were made effective as of dates prior to the actual
date that such consents were fully signed. In some cases the deemed effective dates
represented the date of a relatively low closing price of our common stock, and although the
evidence did not show a consistent practice such as that described below concerning our
periodic grants to non-officer employees, the evidence suggests that the effective date on
some written consents was chosen in order to obtain a favorable exercise price for the grants.Generally, after 2001, stock option grants to our officers and directors were typically approved
at in-person or telephonic meetings of the Compensation Committee or the Board of Directors. We
did not modify the measurement date of most grants made at meetings of the Compensation
Committee or Board of Directors. In one instance, however, we determined that we had used
incorrect measurement dates in connection with stock option grants to executive officers
approved at an in person meeting and a subsequent telephonic meeting of the Compensation
Committee in 1997. The evidence relating to this grant suggests that final approval of the
grants was obtained at a date later than the date of the meeting at which the grants were
recorded as having been approved.We also found that approximately 1.8 million shares (of
the total 10.5 million shares) granted on repricings on
July 14, 1993 and July 25, 1996 were remeasured to a later
date based upon approval by the former Chief Executive Officer or fax
confirmation if approval by the Board of Directors. This comprised $0.8 million of the expense in
the Officers and Directors category.As a result of these findings relating to grants made to our executive officers and directors,
we modified measurement dates of option grants to executive officers
to purchase approximately 7 million shares approved by the
 36




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##### Table of Contents



Compensation Committee or the Board of Directors, representing
approximately 67% of all grants to executive officers during the Review Period. This
modification to the measurement dates resulted in the recognition of additional stock-based
compensation expense of approximately $5.3 million through June 30, 2006.
 We determined that certain technical errors were made in the accounting for stock option grants
made to four directors in October 1998 as well as one grant made to a newly appointed director
in January 1999, resulting in additional compensation expense of
approximately $81,000. Other
than these grants to these five directors, we did not modify the measurement dates of any option
grants to non-employee members of our Board of Directors.
    
    Periodic Grants to Non-Officer Employees.Options to
purchase a total of 16.4 million shares were granted to
non-officer employees during the Review Period, often in connection with an annual review
process. The Special Committee found evidence that the administration of stock option grants
to our employees in the United States and in our foreign subsidiaries was conducted primarily
under the direction and supervision of our former Chief Executive Officer. Periodic grants to
non-officer employees were approved by our former Chief Executive Officer pursuant to his
delegated authority to the extent each individual grant did not exceed 90,000 shares. The
contemporaneous evidence available regarding when the grants were determined and when the
allocations to specific employees were finalized did not support the recorded measurement
dates with respect to nearly all of these grants made during the Review Period. The Special
Committee also found evidence that we had a pervasive practice of selecting grant dates and
exercise prices with the benefit of hindsight, using dates when our closing stock price had
been at or near an absolute low for a quarter. Grants frequently occurred at favorable
prices, particularly in the period between 1996 and 2000 and in certain dates during 2003 and
2004. For example, during the period between 1996 and 2000, we made grants to non-officer
employees at one of the lowest three prices for our stock in 18 out of 20 quarters.As a result of the investigation, the Special Committee found evidence that in connection with
periodic or annual grants to existing non-officer employees, pools of shares had been set
aside and recorded as comprising stock options granted to employees on a specific date. The
administration of these pools was conducted under the supervision of our Chief Executive
Officer. Often, the number of shares comprising each individual option grant and the actual
allocation of each grant to specific individuals was not determined until months after the
recorded grant date and in some instances a couple of years after the recorded grant date.
Shares from some pools were allocated and granted to employees over extended periods, but
reflected the original recorded grant date, and in some cases the total number of shares
comprising the pool was later modified. In order to reflect these pools in our records,
grants were initially recorded in the names of current employees who had not yet been granted
options or in amounts greater than the amounts eventually allocated to these employees. These
initial entries were modified or deleted when the options were later granted to other employees,
with the later grants made at the original grant date and exercise price. The Special Committee
also found evidence to indicate that grant documents were sometimes modified to remove
indications that the grant date, recipient, or the amount of shares had not been finalized as of
the date that was used for purposes of our records. In the course of the investigation, the
Special Committee also found evidence to suggest that at times false
or inaccurate information concerning our stock option grants was provided to our
auditors.Separately, before April 30, 1996, the equity award program that we used did not have a feature
that allowed us to accurately track record added dates, and thus, entry dates were not available
for grants made before this date. To the extent that we used a date other than the date on
which information about a grant was initially entered into the database, a new measurement date
was determined by examining all of the facts and circumstances surrounding the grant to identify
or estimate the most likely date on which the requirements of APB 25 were met. As a result, we
have revised the measurement dates for options to purchase approximately 1.5 million shares that had been granted at
low prices between December 1992 and April 1996. For these grants we established a new
measurement date by selecting the highest closing sales price of our common stock between the
original grant date and the end of the quarter in which the original grant date occurred. This
resulted in $1.3 million of additional stock compensation expense being recorded. We also
adjusted the measurement date on approximately 1.3 million shares from pre-April 1996 grants to
the signature date on the grant, which resulted
in an additional stock compensation expense of $0.7 million being recorded. After reviewing
information connected with the periodic grants described above, we determined that the recorded
grant date for nearly all
 37




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##### Table of Contents



grants in this category should be modified, resulting in the
adjustment of the measurement dates for grants of approximately 16.4 million shares,
representing approximately 99% of grants made to existing non-officer employees during the
Review Period. This resulted in additional stock-based compensation expense of $13.3 million.
 
    
    Grants by our Taiwanese and Chinese Subsidiaries.In 1999, our Taiwanese subsidiary,
Trident Technology, Inc., or TTI, set up a stock purchase plan, structured in a fashion
similar to a U.S.-styled stock option plan. In 2000, our Chinese subsidiary, Trident
Multimedia Technologies (Shanghai) Co., Ltd., or TMT, set up a stock option plan. Because the
TMT option agreements contained repurchase clauses, variable accounting should have been
applied. In addition, employees with unvested TMT options were granted replacement
options to purchase a combination of Trident stock and TTI stock, within 6 months of
cancellation of their TMT option shares. Under FIN 44, these options are deemed to have been
issued in exchange for cancellation of TMT options. In June 2003, TTI was
recapitalized, and stock purchase plan participants were given the opportunity to either fully
purchase their vested TTI shares or sell them back. Employees with an aggregate of 0.3
million unvested stock purchase plan shares were granted warrants, referred to below as
options, to purchase TTI stock within 6 months of cancellation of their TTI stock purchase
plan shares. These options are deemed to have been issued in exchange for cancellation of the
stock purchase plan shares. As a result, under FIN 44 we were required to apply variable
accounting in determining the stock based compensation expense attributable to such shares
through June 30, 2005.Between 2003 and 2005, our Taiwanese subsidiary, TTI, also granted options to purchase
approximately 18.5 million shares of its common stock to officers, employees and consultants in
connection with the recapitalization of TTI. Approximately 67% of these options were granted in
August 2003. During the course of its investigation, the Special Committee reviewed the manner
in which these options were granted. We reviewed the evidence presented by the Special
Committee, and the accounting that had been applied to such options. Options had been granted,
contingent upon repurchase clauses included therein, not only to TTI employees, but also to
certain of our employees and certain employees of our other
subsidiaries. All of the TTI options were subject to variable
accounting either because the option was modified, the exercise price
was denominated in a currency other than that of the primary economic
environment of TTI or the option holders, the option agreements
contained repurchase clauses, or the options were deemed to have been
issued in exchange for cancellation of previously issued options or
stock purchase plan shares. This resulted in additional compensation
expense totaling approximately $23.7 million through
June 30, 2006. This accounting error did not stem from
inappropriate stock administration practices, however, we identified approximately 17 instances
of modifications to TTI option grants that increased or decreased the number of shares, and
these modifications would have required the application of variable accounting for the
underlying options in any event.In March 2005, we acquired the minority interest in TTI, which resulted in our owning
approximately 99.9% of the outstanding equity interests in TTI. As part of this acquisition, we
converted all outstanding options to acquire TTI common stock into options to acquire our common
stock, which included options granted to our executive officers, employees, prospective
employees and consultants.The Special Committee also found evidence that, subsequent to the conversion of the TTI options,
previously executed offer letters for a limited number of recently-hired or prospective
personnel were altered by modifying references to the terms of TTI option grants to be made to
such personnel, including references to the number of option shares granted. These letters were
modified to conform to the terms reflected in the final list of TTI options provided to the
Compensation Committee in connection with the conversion. The modified letters retained the
dates set forth in the original offer letters that were provided to the affected prospective
employees.Based upon additional information obtained in the Special Committees investigation, we
determined that TTI set aside for two former members of our Board of Directors options to
acquire up to 80,000 and 60,000 shares
of TTI common stock, which represent 32,000 and 24,000 shares of our
common stock on an as-converted
basis, respectively. Half of those options were exercised prior to conversion
 38




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##### Table of Contents



for these two directors; however, none of the underlying shares were
ever sold, and we do not believe that title to the underlying shares was conveyed to either
director. These transactions were not disclosed to our Board of Directors. After reviewing
information relating to these grants, the Board of Directors concluded that a conflict of
interest may have arisen between Trident and each of such directors, individually, in their
capacity as directors. While the Board of Directors did not make any findings of wrongdoing,
the independent members of the Board of Directors and each of the two directors concluded that
it would be in the best interests of Trident and its stockholders for them to resign from their
positions as members of our Board of Directors. Both directors resigned on May 1, 2007.
 
    
    Option Repricings. The Board of Directors approved option
repricings on four dates between 1992 and 1998. No modifications
to measurement dates or related accounting were necessary for the
two repricings that were made in 1998. We determined different
measurement dates should be used for the two repricings in 1993
and 1996 due to our failure to obtain all of the necessary
paperwork implementing the repricing prior to the originally
recorded measurement dates. The cumulative effect of the change
in measurement dates related to the 1993 and 1996 repricings through June
30, 2006 was $1.5 million.
    
    Modifications of Existing Options and Other Issues.The Special
Committee found evidence that the terms of certain outstanding
options had been modified at various times between 1993 and 2006
at the direction of our former Chief Executive Officer. At the
time of the modifications, we did not make the necessary
adjustments in our financial statements to account for these
modifications. As a result, we are recording additional
stock-based compensation expense, before income taxes, of
approximately $12.2 million through June 30, 2006. Approximately
$7.4 million of this amount results from the application of
variable accounting due to the modification of options to purchase
approximately 1 million shares that occurred after December 31,
1998, as required by FIN 44. Approximately $2.4 million was
primarily the result of extensions to the exercisability period or
accelerated vesting following termination of employment, or the
change of status from employee to consultant. The remaining $2.4
million related to cancellation of options granted by one of our
other subsidiaries and issuance of new options to purchase our
common stock within six months of such cancellation, resulting in
the application of variable accounting.
    
    Option Exercises.The Special Committee examined whether cash
exercises by officers and employees were properly recorded. Since
many of our option grants were of non-qualified stock options,
exercise of the option triggers a tax liability on the part of the
individual optionee, based upon the difference between the
exercise price and the fair market value of our stock on the date of exercise.
Cash exercises prior to 1998 often occurred at low prices. In a
small number of cases, including one that involved our former
Chief Executive Officer, the Special Committee concluded that the
actual exercise date was different than the date recorded in our
equity award program database, and may have been chosen, or in
certain cases changed, to take advantage of a low market
value of our common stock on the date of exercise to decrease the amount of the tax
liability. While the individual option holders may have tax
liabilities associated with these events, we believe that any
liability of the Company is immaterial.
  (i)
    
    initially granted,(ii)
    
    realized through exercise or(iii)
    
    still available in outstanding options We are showing this breakdown for all employees and separately for
officers and directors only. All employees (including officers and directors): (in thousands)Grant-date intrinsic value
    
    $
    50,138Realized value (exercised options)
    
    $
    12,637Unrealized
value (options outstanding at June 30, 2006)
    
    $
    13,018
 Officers and directors only: (in thousands)Grant-date intrinsic value
    
    $
    6,688Realized value (exercised options)
    
    $
    1,776Unrealized
value (options outstanding at June 30, 2006)
    
    $
    265
 To measure the grant-date intrinsic value during the Review
Period, we calculated the difference between the original exercise
price and the market value of the options on the remeasurement date.
Using this measurement differential multiplied by the number of
shares granted, we determined the aggregate grant-date intrinsic
value. For the realized intrinsic value, we used the same calculation
as above but excluded the impact of those options that had not been
exercised, either because they were cancelled pursuant to an employee
termination or an option repricing, or because the options are still
outstanding. We also included the additional intrinsic value that may
have come from any post grant date modifications. The amounts related to the realized intrinsic values are
only for those options that had initial intrinsic value were later
modified to add intrinsic value and were also
exercised at some point by the option holder. We have also shown the
unrealized intrinsic value on the same basis as the realized
intrinsic value but based on options that were still
outstanding as of June 30, 2007, both vested and unvested. With
respect to the realized and unrealized value by our officers and
directors for the three categories identified above, totaling $6.7 million, $1.8 million, $0.3 million
respectively, approximately $2.2 million, $0.8 million and
none relate to grants to our former Chief Executive Officer
respectively, approximately $3.5 million, $0.6 million and
$0.3 million relate to other former officers and directors
respectively, and the remaining $1.0 million, $0.4 million
and none relate to grants to a current officer and directors,
respectively.
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Tax Impact of Restatement Items








40




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##### Table of Contents



Impact on SFAS 123 Disclosure
  Restatements and Impact on the Consolidated Financial Statements
   Impact of the Additional Stock-Based Compensation Expense-Related Adjustments on the Consolidated
Financial Statements
 Total
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Pretax
    
    
    Minority
    
    
    Income Tax
    
    
    After TaxPeriodic
    
    
    Directors
    
    
    Option
    
    
    Option
    
    
    Compensation
    
    
    Interest
    
    
    Expense
    
    
    CompensationFiscal Years Ended June 30,
    
    New Hires
    
    
    Repricings
    
    
    Grants
    
    
    & Officers
    
    
    Modifications
    
    
    Accounting
    
    
    Expense
    
    
    (Benefit) (1)
    
    
    (Benefit)
    
    
    Expense1993
    
    $
    
    
    
    $
    
    
    
    $
    1
    
    
    $
    220
    
    
    $
    
    
    
    $
    
    
    
    $
    221
    
    
    $
    
    
    
    $
    (84
    )
    
    $
    1371994
    
    
    
    
    
    
    107
    
    
    
    50
    
    
    
    245
    
    
    
    
    
    
    
    
    
    
    
    402
    
    
    
    
    
    
    
    (133
    )
    
    
    2691995
    
    
    29
    
    
    
    81
    
    
    
    328
    
    
    
    74
    
    
    
    
    
    
    
    
    
    
    
    512
    
    
    
    
    
    
    
    (156
    )
    
    
    3561996
    
    
    126
    
    
    
    70
    
    
    
    581
    
    
    
    123
    
    
    
    
    
    
    
    
    
    
    
    900
    
    
    
    
    
    
    
    (221
    )
    
    
    6791997
    
    
    1,252
    
    
    
    561
    
    
    
    1,142
    
    
    
    798
    
    
    
    23
    
    
    
    
    
    
    
    3,776
    
    
    
    
    
    
    
    (1,205
    )
    
    
    2,5711998
    
    
    1,061
    
    
    
    352
    
    
    
    1,098
    
    
    
    854
    
    
    
    
    
    
    
    
    
    
    
    3,365
    
    
    
    
    
    
    
    1,133
    
    
    
    4,4981999
    
    
    809
    
    
    
    229
    
    
    
    1,035
    
    
    
    778
    
    
    
    
    
    
    
    
    
    
    
    2,851
    
    
    
    
    
    
    
    
    
    
    
    2,8512000
    
    
    618
    
    
    
    140
    
    
    
    1,197
    
    
    
    840
    
    
    
    3
    
    
    
    107
    
    
    
    2,905
    
    
    
    
    
    
    
    (1,083
    )
    
    
    1,8222001
    
    
    (53
    )
    
    
    (33
    )
    
    
    525
    
    
    
    800
    
    
    
    39
    
    
    
    616
    
    
    
    1,894
    
    
    
    
    
    
    
    (489
    )
    
    
    1,4052002
    
    
    262
    
    
    
    
    
    
    
    793
    
    
    
    410
    
    
    
    120
    
    
    
    107
    
    
    
    1,692
    
    
    
    
    
    
    
    (565
    )
    
    
    1,1272003
    
    
    176
    
    
    
    
    
    
    
    646
    
    
    
    127
    
    
    
    368
    
    
    
    21
    
    
    
    1,338
    
    
    
    
    
    
    
    25
    
    
    
    1,363Cumulative 1993-2003 impact
    
    
    4,280
    
    
    
    1,507
    
    
    
    7,396
    
    
    
    5,269
    
    
    
    553
    
    
    
    851
    
    
    
    19,856
    
    
    
    
    
    
    
    (2,778
    )
    
    
    17,0782004
    
    
    75
    
    
    
    
    
    
    
    1,910
    
    
    
    
    
    
    
    3,459
    
    
    
    10,773
    
    
    
    16,217
    
    
    
    (1,034
    )
    
    
    
    
    
    
    15,1832005
    
    
    44
    
    
    
    
    
    
    
    1,932
    
    
    
    
    
    
    
    7,314
    
    
    
    11,696
    
    
    
    20,986
    
    
    
    (1,337
    )
    
    
    
    
    
    
    19,6492006
    
    
    160
    
    
    
    
    
    
    
    2,102
    
    
    
    
    
    
    
    826
    
    
    
    809
    
    
    
    3,897
    
    
    
    
    
    
    
    
    
    
    
    3,897Total cumulative impact - 1993 - 2006
    
    $
    4,559
    
    
    $
    1,507
    
    
    $
    13,340
    
    
    $
    5,269
    
    
    $
    12,152
    
    
    $
    24,129
    
    
    $
    60,956
    
    
    $
    (2,371
    )
    
    $
    (2,778
    )
    
    $
    55,807
 
 (1)
    
    Includes $124,000 of additional payroll tax expense in fiscal
2004. 41




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##### Table of Contents



RECONCILIATION OF CONSOLIDATED STATEMENTS OF OPERATIONS FOR FISCAL 2005 AND 2004
 Year Ended June 30, 2005
    
    
    Year Ended June 30, 2004(In thousands, except per share data)
    
    As Reported
    
    
    Adjustments
    
    
    As Restated
    
    
    As Reported
    
    
    Adjustments
    
    
    As RestatedRevenues
    
    $
    69,011
    
    
    $
    
    
    
    $
    69,011
    
    
    $
    52,551
    
    
    $
    
    
    
    $
    52,551Cost of revenues
    
    
    32,150
    
    
    
    412
    
    
    
    32,562
    
    
    
    23,674
    
    
    
    84
    
    
    
    23,758Gross profit
    
    
    36,861
    
    
    
    (412
    )
    
    
    36,449
    
    
    
    28,877
    
    
    
    (84
    )
    
    
    28,793Operating expenses:Research and development
    
    
    26,088
    
    
    
    11,207
    
    
    
    37,295
    
    
    
    11,475
    
    
    
    8,142
    
    
    
    19,617Selling,
general and administrative
    
    
    14,503
    
    
    
    9,367
    
    
    
    23,870
    
    
    
    12,968
    
    
    
    8,115
    
    
    
    21,083In-process
research and development
    
    
    5,171
    
    
    
    
    
    
    
    5,171
    
    
    
    
    
    
    
    
    
    
    
    Total
operating expenses
    
    
    45,762
    
    
    
    20,574
    
    
    
    66,336
    
    
    
    24,443
    
    
    
    16,257
    
    
    
    40,700Income (loss) from operations
    
    
    (8,901
    )
    
    
    (20,986
    )
    
    
    (29,887
    )
    
    
    4,434
    
    
    
    (16,341
    )
    
    
    (11,907
    )Interest income
    
    
    546
    
    
    
    
    
    
    
    546
    
    
    
    158
    
    
    
    
    
    
    
    158Gain on investments, net
    
    
    330
    
    
    
    
    
    
    
    330
    
    
    
    10,584
    
    
    
    
    
    
    
    10,584Other income (expense), net
    
    
    95
    
    
    
    
    
    
    
    95
    
    
    
    (262
    )
    
    
    
    
    
    
    (262
    )Minority interests in subsidiaries
    
    
    (1,179
    )
    
    
    1,337
    
    
    
    158
    
    
    
    (1,832
    )
    
    
    1,158
    
    
    
    (674
    )Income (loss) before income taxes
    
    
    (9,109
    )
    
    
    (19,649
    )
    
    
    (28,758
    )
    
    
    13,082
    
    
    
    (15,183
    )
    
    
    (2,101
    )Provision for income taxes
    
    
    1,426
    
    
    
    
    
    
    
    1,426
    
    
    
    2,704
    
    
    
    
    
    
    
    2,704Net income (loss)
    
    $
    (10,535
    )
    
    $
    (19,649
    )
    
    $
    (30,184
    )
    
    $
    10,378
    
    
    $
    (15,183
    )
    
    $
    (4,805
    )Basic net income (loss) per share
    
    $
    (0.22
    )
    
    $
    (0.42
    )
    
    $
    (0.64
    )
    
    $
    0.23
    
    
    $
    (0.34
    )
    
    $
    (0.11
    )Diluted net income (loss) per share
    
    $
    (0.22
    )
    
    $
    (0.42
    )
    
    $
    (0.64
    )
    
    $
    0.21
    
    
    $
    (0.32
    )
    
    $
    (0.11
    )Shares used in computing basic per share amounts
    
    
    47,418
    
    
    
    
    
    
    
    47,418
    
    
    
    44,698
    
    
    
    
    
    
    
    44,698Shares used in computing diluted per share amounts
    
    
    47,418
    
    
    
    
    
    
    
    47,418
    
    
    
    50,022
    
    
    
    (5,324
    )
    
    
    44,698The following table presents details of the total stock-based compensation expense that is included in each functional line item in the
consolidated statements of operations above:Supplemental
dataCost of revenues
    
    
    
    
    
    
    412
    
    
    
    412
    
    
    
    
    
    
    
    84
    
    
    
    84Research and development
    
    
    5,482
    
    
    
    13,807
    
    
    
    19,289
    
    
    
    124
    
    
    
    8,471
    
    
    
    8,595Selling, general and administrative
    
    
    4,032
    
    
    
    6,767
    
    
    
    10,799
    
    
    
    482
    
    
    
    7,662
    
    
    
    8,144Total stock-based compensation expense
    
    $
    9,514
    
    
    $
    20,986
    
    
    $
    30,500
    
    
    $
    606
    
    
    $
    16,217
    
    
    $
    16,823
 42




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##### Table of Contents



RECONCILIATION OF CONSOLIDATED STATEMENTS OF OPERATIONS FOR FISCAL 2003 AND 2002
 Year Ended June 30, 2003
    
    
    Year Ended June 30, 2002(In thousands, except per share data)
    
    As Reported
    
    
    Adjustments
    
    
    As Restated
    
    
    As Reported
    
    
    Adjustments
    
    
    As RestatedRevenues
    
    $
    52,752
    
    
    $
    
    
    
    $
    52,752
    
    
    $
    105,766
    
    
    $
    
    
    
    $
    105,766Cost of revenues
    
    
    37,720
    
    
    
    76
    
    
    
    37,796
    
    
    
    82,970
    
    
    
    110
    
    
    
    83,080Gross profit
    
    
    15,032
    
    
    
    (76
    )
    
    
    14,956
    
    
    
    22,796
    
    
    
    (110
    )
    
    
    22,686Operating expenses:Research and development
    
    
    21,600
    
    
    
    778
    
    
    
    22,378
    
    
    
    22,218
    
    
    
    952
    
    
    
    23,170Selling,
general and administrative
    
    
    11,886
    
    
    
    484
    
    
    
    12,370
    
    
    
    13,584
    
    
    
    630
    
    
    
    14,214Total
operating expenses
    
    
    33,486
    
    
    
    1,262
    
    
    
    34,748
    
    
    
    35,802
    
    
    
    1,582
    
    
    
    37,384Loss from operations
    
    
    (18,454
    )
    
    
    (1,338
    )
    
    
    (19,792
    )
    
    
    (13,006
    )
    
    
    (1,692
    )
    
    
    (14,698
    )Interest income
    
    
    194
    
    
    
    
    
    
    
    194
    
    
    
    594
    
    
    
    
    
    
    
    594Loss on investments, net
    
    
    (4,995
    )
    
    
    
    
    
    
    (4,995
    )
    
    
    (42,715
    )
    
    
    
    
    
    
    (42,715
    )Other expense, net
    
    
    (463
    )
    
    
    
    
    
    
    (463
    )
    
    
    (108
    )
    
    
    
    
    
    
    (108
    )Loss before income taxes
    
    
    (23,718
    )
    
    
    (1,338
    )
    
    
    (25,056
    )
    
    
    (55,235
    )
    
    
    (1,692
    )
    
    
    (56,927
    )Provision for (benefit from) income taxes
    
    
    1,046
    
    
    
    25
    
    
    
    1,071
    
    
    
    (19,584
    )
    
    
    (565
    )
    
    
    (20,149
    )Net income (loss)
    
    $
    (24,764
    )
    
    $
    (1,363
    )
    
    $
    (26,127
    )
    
    $
    (35,651
    )
    
    $
    (1,127
    )
    
    $
    (36,778
    )Basic net loss per share
    
    $
    (0.60
    )
    
    $
    (0.04
    )
    
    $
    (0.64
    )
    
    $
    (0.89
    )
    
    $
    (0.02
    )
    
    $
    (0.91
    )Diluted net loss per share
    
    $
    (0.60
    )
    
    $
    (0.04
    )
    
    $
    (0.64
    )
    
    $
    (0.89
    )
    
    $
    (0.02
    )
    
    $
    (0.91
    )Shares used in computing basic per share amounts
    
    
    41,050
    
    
    
    
    
    
    
    41,050
    
    
    
    40,258
    
    
    
    
    
    
    
    40,258Shares used in computing diluted per share amounts
    
    
    41,050
    
    
    
    
    
    
    
    41,050
    
    
    
    40,258
    
    
    
    
    
    
    
    40,258
  Supplemental
data
 Cost of revenues
    
    
    19
    
    
    
    76
    
    
    
    95
    
    
    
    
    
    
    
    110
    
    
    
    110Research and development
    
    
    76
    
    
    
    778
    
    
    
    854
    
    
    
    
    
    
    
    952
    
    
    
    952Selling, general and administrative
    
    
    10
    
    
    
    484
    
    
    
    494
    
    
    
    
    
    
    
    630
    
    
    
    630Total stock-based compensation expense
    
    $
    105
    
    
    $
    1,338
    
    
    $
    1,443
    
    
    $
    
    
    
    $
    1,692
    
    
    $
    1,692
 43




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##### Table of Contents



RECONCILIATION OF CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2005
 June 30, 2005(In thousands)
    
    As Reported
    
    
    Adjustments
    
    
    As RestatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    37,598
    
    
    $
    
    
    
    $
    37,598Investments
    
    
    54,555
    
    
    
    
    
    
    
    54,555Accounts receivable, net
    
    
    6,317
    
    
    
    
    
    
    
    6,317Inventories
    
    
    2,735
    
    
    
    
    
    
    
    2,735Deferred income tax assets
    
    
    
    
    
    
    107
    
    
    
    107Prepaid expenses and other current assets
    
    
    2,307
    
    
    
    
    
    
    
    2,307Total current assets
    
    
    103,512
    
    
    
    107
    
    
    
    103,619Property and equipment, net
    
    
    2,154
    
    
    
    
    
    
    
    2,154Intangible assets, net
    
    
    24,621
    
    
    
    
    
    
    
    24,621Other assets
    
    
    4,597
    
    
    
    
    
    
    
    4,597Total assets
    
    $
    134,884
    
    
    $
    107
    
    
    $
    134,991LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    
    6,678
    
    
    
    
    
    
    
    6,678Accrued expenses
    
    
    10,009
    
    
    
    125
    
    
    
    10,134Income taxes payable
    
    
    5,181
    
    
    
    
    
    
    
    5,181Deferred income tax liabilities
    
    
    3,561
    
    
    
    (3,561
    )
    
    
    Total current liabilities
    
    
    25,429
    
    
    
    (3,436
    )
    
    
    21,993Deferred income tax liabilities
    
    
    
    
    
    
    3,668
    
    
    
    3,668Minority interests in subsidiary
    
    
    20
    
    
    
    (10
    )
    
    
    10Total liabilities
    
    
    25,449
    
    
    
    222
    
    
    
    25,671Commitments and contingenciesStockholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    52
    
    
    
    
    
    
    
    52Additional paid-in capital
    
    
    125,907
    
    
    
    38,703
    
    
    
    164,610Deferred stock-based compensation
    
    
    (36,280
    )
    
    
    13,093
    
    
    
    (23,187
    )Retained earnings (accumulated deficit)
    
    
    14,415
    
    
    
    (51,911
    )
    
    
    (37,496
    )Accumulated other comprehensive income
    
    
    5,341
    
    
    
    
    
    
    
    5,341Total stockholders equity
    
    
    109,435
    
    
    
    (115
    )
    
    
    109,320Total liabilities and stockholders equity
    
    $
    134,884
    
    
    $
    107
    
    
    $
    134,991
 44




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##### Table of Contents



RECONCILIATION OF CONSOLIDATED STATEMENTS OF CASH FLOWS FOR FISCAL 2005 AND 2004
 Year Ended June 30, 2005
    
    
    Year Ended June 30, 2004(In thousands, except per share data)
    
    As Reported
    
    
    Adjustments
    
    
    As Restated
    
    
    As Reported
    
    
    Adjustments
    
    
    As RestatedCash flows from operating activities:Net income (loss)
    
    $
    (10,535
    )
    
    $
    (19,649
    )
    
    $
    (30,184
    )
    
    $
    10,378
    
    
    $
    (15,183
    )
    
    $
    (4,805
    )Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:Stock-based compensation expense
    
    
    9,514
    
    
    
    20,986
    
    
    
    30,500
    
    
    
    606
    
    
    
    16,217
    
    
    
    16,823Depreciation and amortization
    
    
    1,010
    
    
    
    
    
    
    
    1,010
    
    
    
    1,073
    
    
    
    
    
    
    
    1,073Loss on disposal of property and equipment
    
    
    253
    
    
    
    
    
    
    
    253
    
    
    
    460
    
    
    
    
    
    
    
    460Provision for doubtful accounts and sales returns
    
    
    113
    
    
    
    
    
    
    
    113
    
    
    
    (309
    )
    
    
    
    
    
    
    (309
    )(Gain)loss on investments, net
    
    
    (331
    )
    
    
    
    
    
    
    (331
    )
    
    
    (10,584
    )
    
    
    
    
    
    
    (10,584
    )Amortization of intangible assets
    
    
    1,155
    
    
    
    
    
    
    
    1,155
    
    
    
    
    
    
    
    
    
    
    
    Minority interests in subsidiaries
    
    
    1,179
    
    
    
    (1,337
    )
    
    
    (158
    )
    
    
    2,223
    
    
    
    (1,158
    )
    
    
    1,065In-process research and development
    
    
    5,171
    
    
    
    
    
    
    
    5,171
    
    
    
    
    
    
    
    
    
    
    
    Changes in assets and liabilities, net of effects of business
combination:Accounts receivable
    
    
    (3,994
    )
    
    
    
    
    
    
    (3,994
    )
    
    
    2,211
    
    
    
    
    
    
    
    2,211Inventories
    
    
    368
    
    
    
    
    
    
    
    368
    
    
    
    (419
    )
    
    
    
    
    
    
    (419
    )Prepaid expenses and other current assets
    
    
    (1,221
    )
    
    
    
    
    
    
    (1,221
    )
    
    
    (353
    )
    
    
    
    
    
    
    (353
    )Accounts payable
    
    
    3,213
    
    
    
    
    
    
    
    3,213
    
    
    
    (4,794
    )
    
    
    
    
    
    
    (4,794
    )Accrued expenses
    
    
    2,581
    
    
    
    
    
    
    
    2,581
    
    
    
    (45
    )
    
    
    124
    
    
    
    79Income taxes payable
    
    
    818
    
    
    
    
    
    
    
    818
    
    
    
    2,680
    
    
    
    
    
    
    
    2,680Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net cash provided by operating activities
    
    
    9,294
    
    
    
    
    
    
    
    9,294
    
    
    
    3,127
    
    
    
    
    
    
    
    3,127Cash flows from investing activities:Proceeds from sale of graphics division, net of transaction cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,427
    
    
    
    
    
    
    
    8,427Proceeds from sale of minority intersts in subsidiaries
    
    
    877
    
    
    
    
    
    
    
    877
    
    
    
    2,750
    
    
    
    
    
    
    
    2,750Proceeds from sale of other long-term investments
    
    
    22
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from sale of short-term investments, net
of transaction cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,195
    
    
    
    
    
    
    
    9,195Other assets
    
    
    (824
    )
    
    
    
    
    
    
    (824
    )
    
    
    (240
    )
    
    
    
    
    
    
    (240
    )Purchases of property and equipment
    
    
    (1,045
    )
    
    
    
    
    
    
    (1,045
    )
    
    
    (1,116
    )
    
    
    
    
    
    
    (1,116
    )Purchases of investments
    
    
    (1,012
    )
    
    
    
    
    
    
    (1,012
    )
    
    
    (90
    )
    
    
    
    
    
    
    (90
    )Purchase of minority interests in subsidiary
    
    
    (6,145
    )
    
    
    
    
    
    
    (6,145
    )
    
    
    
    
    
    
    
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (8,127
    )
    
    
    
    
    
    
    (8,127
    )
    
    
    18,926
    
    
    
    
    
    
    
    18,926Cash flows from financing activities:Proceeds from exercise of TTI options
    
    
    690
    
    
    
    
    
    
    
    690
    
    
    
    
    
    
    
    
    
    
    
    Proceeds form issuance of common stock upon exercise of stock options
    
    
    3,253
    
    
    
    
    
    
    
    3,253
    
    
    
    5,350
    
    
    
    
    
    
    
    5,350Net cash provided by financing activities
    
    
    3,943
    
    
    
    
    
    
    
    3,943
    
    
    
    5,350
    
    
    
    
    
    
    
    5,350Net increase in cash and cash equivalents
    
    
    5,110
    
    
    
    
    
    
    
    5,110
    
    
    
    27,403
    
    
    
    
    
    
    
    27,403Cash and cash equivalents at beginning of year
    
    
    32,488
    
    
    
    
    
    
    
    32,488
    
    
    
    5,085
    
    
    
    
    
    
    
    5,085Cash and cash equivalents at end of year
    
    $
    37,598
    
    
    $
    
    
    
    $
    37,598
    
    
    $
    32,488
    
    
    $
    
    
    
    $
    32,488Supplemental disclosure of cash flow information:Trident Microsystems, Inc. common stock
issued in connection with the purchase of TTI minority interests
    
    $
    31,146
    
    
    
    
    
    
    $
    31,146
    
    
    $
    
    
    
    
    
    
    
    $
    Cash paid for income taxes
    
    $
    553
    
    
    
    
    
    
    $
    553
    
    
    $
    
    
    
    
    
    
    
    $
    
 45




---



##### Table of Contents



Stock-Based Compensation ExpenseAs Reported
    
    
    Adjustments
    
    
    As Restated(In thousands)Fiscal year ended June 30,1993
    
    
    606
    
    
    
    221
    
    
    
    8271994
    
    
    364
    
    
    
    402
    
    
    
    7661995
    
    
    268
    
    
    
    512
    
    
    
    7801996
    
    
    253
    
    
    
    900
    
    
    
    1,1531997
    
    
    
    
    
    
    3,776
    
    
    
    3,7761998
    
    
    
    
    
    
    3,365
    
    
    
    3,3651999
    
    
    
    
    
    
    2,851
    
    
    
    2,8512000
    
    
    
    
    
    
    2,905
    
    
    
    2,9052001
    
    
    
    
    
    
    1,894
    
    
    
    1,8942002
    
    
    
    
    
    
    1,692
    
    
    
    1,6922003
    
    
    105
    
    
    
    1,338
    
    
    
    1,4432004
    
    
    606
    
    
    
    16,217
    
    
    
    16,8232005
    
    
    9,514
    
    
    
    20,986
    
    
    
    30,5002006
    
    
    9,286
    
    
    
    3,897
    
    
    
    13,183Total cumulative impact
    
    $
    21,002
    
    
    $
    60,956
    
    
    $
    81,958
 Cost of Restatement and Legal Activities
   46




---



##### Table of Contents



Overview
   TM
  Critical Accounting Estimates
  Revenue Recognition
 Revenue Recognition
 47




---



##### Table of Contents



Stock-based Compensation Expense
 Share-Based Payment Accounting for Stock Issued to
Employees
 Accounting for Stock-Based Compensation
    Accounting
for Stock-Based Compensation.
 48




---



##### Table of Contents



Investments
  Allowance for Sales Returns
  Inventories
  Intangible Assets
  Business
Combinations Goodwill and Other
 49




---



##### Table of Contents



Intangible Assets
 Product Warranty
  Income Taxes
 Accounting for Income
Taxes
  Litigation and Other Loss Contingencies
 Accounting
for Contingencies
 50




---



##### Table of Contents



Critical Accounting Policies and Estimates Applied to the Restatement of Tridents Consolidated
Financial Statements
      51




---



##### Table of Contents




    
    First, we considered as an alternative, a measurement date that was approximately
two weeks prior to the date of the initial entry of grant data into the equity award
database. We chose this date after reviewing our database records, and determining
that, in some instances, option grants could have been entered into the equity award
database within the two weeks after the measurement date criteria of APB 25 had been
met. Had we used the date that was two weeks prior to the date that data was initially
entered into the equity award database, rather than the actual initial entry dates into
the equity award database, the total additional stock based compensation expense for
the equity award database record added date driven measurement dates would have been
approximately $2.5 million lower;
    
    Second, we considered as an alternative a measurement date determined in most cases
based on the date on which the highest market price occurred between the stated grant
date and the end of the quarter in which the stated grant had been made. In some
cases, we adjusted to the highest price over a longer period of time that would also
include the entry date into the equity award database. Had we used this highest
price approach, rather than the initial database entry dates, the total additional
stock-based compensation expense for the equity award database record added date driven
measurement dates would have been approximately $1.0 million higher.
   Results of Operations
  52




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##### Table of Contents



Financial Data for Fiscal Years Ended June 30, 2006, 2005 and 2004
 Revenues
 Revenues by sales classification
    
    Fiscal Years(Dollars in millions)
    
    2006
    
    
    % Change
    
    
    2005
    
    
    % Change
    
    
    2004Digital media product
    
    $
    171.3
    
    
    
    150
    %
    
    $
    68.5
    
    
    
    32
    %
    
    $
    51.9Other
    
    
    0.1
    
    
    
    (84
    %)
    
    
    0.5
    
    
    
    (27
    %)
    
    
    0.7Total Revenues
    
    $
    171.4
    
    
    
    148
    %
    
    $
    69.0
    
    
    
    31
    %
    
    $
    52.6Digital media product as a percentage of total revenues
    
    
    99
    %
    
    
    
    
    
    
    99
    %
    
    
    
    
    
    
    99
    %Other as a percentage of total revenues
    
    
    1
    %
    
    
    
    
    
    
    1
    %
    
    
    
    
    
    
    1
    %
    Revenues by region
    
    Fiscal Years(Dollars in millions)
    
    2006
    
    
    % Change
    
    
    2005
    
    
    % Change
    
    
    2004Japan
    
    $
    66.7
    
    
    
    215
    %
    
    $
    21.2
    
    
    
    494
    %
    
    $
    3.6South Korea
    
    
    55.7
    
    
    
    433
    %
    
    
    10.4
    
    
    
    4
    %
    
    
    10.0China
    
    
    27.6
    
    
    
    (9
    %)
    
    
    30.2
    
    
    
    (1
    %)
    
    
    30.5Taiwan
    
    
    12.5
    
    
    
    135
    %
    
    
    5.3
    
    
    
    (29
    %)
    
    
    7.5Rest of world
    
    
    8.9
    
    
    
    379
    %
    
    
    1.9
    
    
    
    84
    %
    
    
    1.0Total revenues
    
    $
    171.4
    
    
    
    148
    %
    
    $
    69.0
    
    
    
    31
    %
    
    $
    52.6
 
 (1)
    
    Revenues by region were classified based on the locations of the customers headquarters, not
the shipping destinations of the products.  53




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##### Table of Contents



Gross Margin
 Fiscal Years(Dollars in millions)
    
    2006
    
    % Change
    
    2005
    
    % Change
    
    2004(As restated)
    
    
    
    
    
    (As restated)Gross profit
    
    $
    88.4
    
    
    
    142
    %
    
    $
    36.5
    
    
    
    27
    %
    
    $
    28.8Gross margin
    
    
    51.6
    %
    
    
    
    
    
    
    52.9
    %
    
    
    
    
    
    
    54.8
    %
      54




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##### Table of Contents



Research and Development
 Fiscal Years(Dollars in millions)
    
    2006
    
    % Change
    
    2005
    
    % Change
    
    2004(As restated)
    
    
    
    
    
    (As restated)Research and development
    
    $
    33.8
    
    
    
    (9
    )%
    
    $
    37.3
    
    
    
    90
    %
    
    $
    19.6As a percentage of total revenues
    
    
    20
    %
    
    
    
    
    
    
    54
    %
    
    
    
    
    
    
    37
    %
    Selling, General and Administrative
 Fiscal Years(Dollars in millions)
    
    2006
    
    % Change
    
    2005
    
    % Change
    
    2004(As restated)
    
    
    
    
    
    (As restated)Sales, general and administrative
    
    $
    26.2
    
    
    
    10
    %
    
    $
    23.9
    
    
    
    13
    %
    
    $
    21.1As a percentage of total revenues
    
    
    15
    %
    
    
    
    
    
    
    35
    %
    
    
    
    
    
    
    40
    %
   55




---



##### Table of Contents



In-Process Research and Development
 Fiscal Years(Dollars in millions)
    
    2006
    
    % Change
    
    2005
    
    % Change
    
    2004In-process research and development
    
    $
    
    
    
    
    (100
    )%
    
    $
    5.2
    
    
    
    100
    %
    
    $
    As a percentage of total revenues
    
    
    
    
    
    
    
    
    
    
    7
    %
    
    
    
    
    
    
    
  Interest Income
 Fiscal Years(Dollars in millions)
    
    2006
    
    % Change
    
    2005
    
    % Change
    
    2004Interest income
    
    $
    2.3
    
    
    
    320
    %
    
    $
    0.5
    
    
    
    246
    %
    
    $
    0.2As a percentage of total revenues
    
    
    1
    %
    
    
    
    
    
    
    1
    %
    
    
    
    
    
    
    
  Gain (Loss) on Investments, net
 Fiscal Years(Dollars in millions)
    
    2006
    
    % Change
    
    2005
    
    % Change
    
    2004Gain (loss) on investments, net
    
    $
    (0.6
    )
    
    
    (269
    )%
    
    $
    0.3
    
    
    
    (97
    )%
    
    $
    10.6As a percentage of total revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
    %
  Gain on sale of UMC common stock (Note 4)
    
    $
    2,652Gain on sale of graphics division and interests in XGI
    
    
    6,627Gain on sale of 7% interest in TTI
    
    
    1,817Write-off of investments in privately held companies
    
    
    (679
    )Gain on sale of investments in privately held companies
    
    
    257Venture capital funds write-down
    
    
    (90
    )Total
    
    $
    10,584
  56




---



##### Table of Contents



Minority Interests in Subsidiaries
 Fiscal Years(Dollars in millions)
    
    2006
    
    % Change
    
    2005
    
    % Change
    
    2004(As restated)
    
    
    
    
    
    (As restated)Minority interests in subsidiaries
    
    $
    
    
    
    
    (100
    )%
    
    $
    0.2
    
    
    
    123
    %
    
    $
    (0.7
    )As a percentage of total revenues
    
    
    
    
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    (1
    )%
  Provision for Income Taxes
 Fiscal Years2006
    
    Change
    
    2005
    
    Change
    
    2004(As restated)
    
    
    
    
    
    (As restated)Effective tax rate
    
    
    21
    %
    
    
    26
    %
    
    
    (5
    )%
    
    
    124
    %
    
    
    (129
    )%
  Cumulative Effect of Change in Accounting Principle
 Fiscal Years2006
    

% Change
    
    2005
    

% Change
    
    2004Cumulative effect of change in
accounting principle, net of tax
    
    $
    1.8
    
    
    
    100
    %
    
    $
    
    
    
    
    
    
    
    $
    
  Financial Data for Interim Periods of Fiscal Years 2006 and 2005
    57




---



##### Table of Contents



CONSOLIDATED STATEMENTS OF OPERATIONS FOR INTERIM PERIODS OF FISCAL 2006 AND 2005
 Three Months Ended
    
    
    Three Months Ended(In thousands, except per share data)
    
    September 30,
    
    
    December 31,
    
    
    March 31,
    
    
    June 30
    
    
    September 30,
    
    
    December 31,
    
    
    March 31,
    
    
    June 302005
    
    
    2005
    
    
    2006
    
    
    2006
    
    
    2004
    
    
    2004
    
    
    2005
    
    
    2005(As Restated)
    
    
    (As Restated)
    
    
    (As Restated)
    
    
    
    
    
    
    (As Restated)
    
    
    (As Restated)
    
    
    (As Restated)
    
    
    (As Restated)Revenues
    
    $
    33,203
    
    
    $
    40,614
    
    
    $
    44,743
    
    
    $
    52,882
    
    
    $
    16,602
    
    
    $
    15,387
    
    
    $
    16,136
    
    
    $
    20,886Cost of revenues
    
    
    15,652
    
    
    
    19,731
    
    
    
    21,953
    
    
    
    25,725
    
    
    
    7,505
    
    
    
    7,058
    
    
    
    7,215
    
    
    
    10,784Gross profit
    
    
    17,551
    
    
    
    20,883
    
    
    
    22,790
    
    
    
    27,157
    
    
    
    9,097
    
    
    
    8,329
    
    
    
    8,921
    
    
    
    10,102Operating expenses:Research and development
    
    
    7,326
    
    
    
    8,359
    
    
    
    8,627
    
    
    
    9,497
    
    
    
    7,324
    
    
    
    9,350
    
    
    
    10,288
    
    
    
    10,333Selling, general and administrative
    
    
    5,794
    
    
    
    6,177
    
    
    
    7,072
    
    
    
    7,135
    
    
    
    5,827
    
    
    
    6,134
    
    
    
    6,325
    
    
    
    5,584In-process research and development

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    585
    
    
    
    4,586
    
    
    
    Total operating expenses
    
    
    13,120
    
    
    
    14,536
    
    
    
    15,699
    
    
    
    16,632
    
    
    
    13,151
    
    
    
    16,069
    
    
    
    21,199
    
    
    
    15,917Income (loss) from operations
    
    
    4,431
    
    
    
    6,347
    
    
    
    7,091
    
    
    
    10,525
    
    
    
    (4,054
    )
    
    
    (7,740
    )
    
    
    (12,278
    )
    
    
    (5,815
    )Interest income
    
    
    254
    
    
    
    483
    
    
    
    604
    
    
    
    952
    
    
    
    91
    
    
    
    126
    
    
    
    144
    
    
    
    185Gain (loss) on investments, net
    
    
    (100
    )
    
    
    (167
    )
    
    
    (242
    )
    
    
    (51
    )
    
    
    400
    
    
    
    (70
    )
    
    
    
    
    
    
    Other income (expense), net
    
    
    258
    
    
    
    159
    
    
    
    (34
    )
    
    
    164
    
    
    
    8
    
    
    
    1
    
    
    
    65
    
    
    
    21Minority interests in subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99
    
    
    
    61
    
    
    
    5
    
    
    
    (7
    )Income (loss) before income taxes
    
    
    4,843
    
    
    
    6,822
    
    
    
    7,419
    
    
    
    11,590
    
    
    
    (3,456
    )
    
    
    (7,622
    )
    
    
    (12,064
    )
    
    
    (5,616
    )Provision for income taxes
    
    
    1,020
    
    
    
    (371
    )
    
    
    1,831
    
    
    
    3,837
    
    
    
    617
    
    
    
    (102
    )
    
    
    420
    
    
    
    491Income (loss) before cumulative effect of
change in accounting principle
    
    
    3,823
    
    
    
    7,193
    
    
    
    5,588
    
    
    
    7,753
    
    
    
    (4,073
    )
    
    
    (7,520
    )
    
    
    (12,484
    )
    
    
    (6,107
    )Cumulative effect of change in accounting principle
    
    
    1,819
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    5,642
    
    
    $
    7,193
    
    
    $
    5,588
    
    
    $
    7,753
    
    
    $
    (4,073
    )
    
    $
    (7,520
    )
    
    $
    (12,484
    )
    
    $
    (6,107
    )Net income (loss) per share - basic:Income (loss) before change in accounting principle
    
    
    0.08
    
    
    
    0.13
    
    
    
    0.10
    
    
    
    0.14
    
    
    
    (0.09
    )
    
    
    (0.17
    )
    
    
    (0.27
    )
    
    
    (0.12
    )Cumulative effect of change in accounting principle
    
    
    0.03
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) per share - basic
    
    $
    0.11
    
    
    $
    0.13
    
    
    $
    0.10
    
    
    $
    0.14
    
    
    $
    (0.09
    )
    
    $
    (0.17
    )
    
    $
    (0.27
    )
    
    $
    (0.12
    )Net income (loss) per share - diluted:Income (loss) before change in accounting principle
    
    
    0.06
    
    
    
    0.12
    
    
    
    0.09
    
    
    
    0.12
    
    
    
    (0.09
    )
    
    
    (0.17
    )
    
    
    (0.27
    )
    
    
    (0.12
    )Cumulative effect of change in accounting principle
    
    
    0.03
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) per share - diluted
    
    $
    0.09
    
    
    $
    0.12
    
    
    $
    0.09
    
    
    $
    0.12
    
    
    $
    (0.09
    )
    
    $
    (0.17
    )
    
    $
    (0.27
    )
    
    $
    (0.12
    )Shares used in computing basic per share amounts
    
    
    52,560
    
    
    
    53,591
    
    
    
    56,025
    
    
    
    57,160
    
    
    
    45,828
    
    
    
    45,572
    
    
    
    46,680
    
    
    
    51,100Shares used in computing diluted per share amounts
    
    
    62,049
    
    
    
    62,418
    
    
    
    63,716
    
    
    
    63,738
    
    
    
    45,828
    
    
    
    45,572
    
    
    
    46,680
    
    
    
    51,100The following table presents details of the total
stock-based compensation expense that is included in each
functional line item in the consolidated statements of
operations above:Supplemental
dataCost of revenues
    
    
    6
    
    
    
    34
    
    
    
    39
    
    
    
    34
    
    
    
    87
    
    
    
    170
    
    
    
    45
    
    
    
    110Research and development
    
    
    1,650
    
    
    
    2,354
    
    
    
    2,595
    
    
    
    2,312
    
    
    
    3,214
    
    
    
    5,043
    
    
    
    5,935
    
    
    
    5,099Selling, general and administrative
    
    
    864
    
    
    
    1,127
    
    
    
    1,157
    
    
    
    1,010
    
    
    
    3,057
    
    
    
    2,870
    
    
    
    3,077
    
    
    
    1,794Total stock-based compensation expense

    
    2,520
    
    
    
    3,515
    
    
    
    3,791
    
    
    
    3,356
    
    
    
    6,358
    
    
    
    8,083
    
    
    
    9,057
    
    
    
    7,003
 58




---



##### Table of Contents



CONSOLIDATED BALANCE SHEETS FOR INTERIM PERIODS OF FISCAL 2006 AND 2005
 September 30,
    
    
    December 31,
    
    
    March 31,
    
    
    June 30
    
    
    September 30,
    
    
    December 31,
    
    
    March 31,
    
    
    June 302005
    
    
    2005
    
    
    2006
    
    
    2006
    
    
    2004
    
    
    2004
    
    
    2005
    
    
    2005(In thousands)
    
    (As Restated)
    
    
    (As Restated)
    
    
    (As Restated)
    
    
    
    
    
    
    (As Restated)
    
    
    (As Restated)
    
    
    (As Restated)
    
    
    (As Restated)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    52,871
    
    
    $
    68,665
    
    
    $
    83,388
    
    
    $
    103,046
    
    
    $
    35,405
    
    
    $
    34,561
    
    
    $
    32,971
    
    
    $
    37,598Investments
    
    
    53,143
    
    
    
    46,916
    
    
    
    52,295
    
    
    
    49,612
    
    
    
    45,331
    
    
    
    48,487
    
    
    
    45,454
    
    
    
    54,555Accounts receivable, net
    
    
    6,092
    
    
    
    4,430
    
    
    
    7,325
    
    
    
    4,278
    
    
    
    2,508
    
    
    
    2,007
    
    
    
    3,959
    
    
    
    6,317Inventories
    
    
    5,006
    
    
    
    4,369
    
    
    
    6,635
    
    
    
    14,641
    
    
    
    2,317
    
    
    
    2,508
    
    
    
    2,838
    
    
    
    2,735Prepaid expenses and other current assets

    
    2,439
    
    
    
    2,892
    
    
    
    3,550
    
    
    
    5,037
    
    
    
    1,945
    
    
    
    2,201
    
    
    
    2,400
    
    
    
    2,307Deferred income tax assets
    
    
    107
    
    
    
    1,618
    
    
    
    1,618
    
    
    
    622
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    107Total current assets
    
    
    119,658
    
    
    
    128,890
    
    
    
    154,811
    
    
    
    177,236
    
    
    
    87,506
    
    
    
    89,764
    
    
    
    87,622
    
    
    
    103,619Deferred income tax assets
    
    
    
    
    
    
    632
    
    
    
    632
    
    
    
    947
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Property and equipment, net
    
    
    2,675
    
    
    
    2,831
    
    
    
    2,943
    
    
    
    3,451
    
    
    
    2,349
    
    
    
    2,096
    
    
    
    1,990
    
    
    
    2,154Intangible assets, net
    
    
    23,429
    
    
    
    22,231
    
    
    
    20,714
    
    
    
    19,190
    
    
    
    
    
    
    
    3,735
    
    
    
    26,029
    
    
    
    24,621Other assets
    
    
    4,517
    
    
    
    5,944
    
    
    
    5,720
    
    
    
    6,366
    
    
    
    3,960
    
    
    
    5,054
    
    
    
    4,762
    
    
    
    4,597Total assets
    
    $
    150,279
    
    
    $
    160,528
    
    
    $
    184,820
    
    
    $
    207,190
    
    
    $
    93,815
    
    
    $
    100,649
    
    
    $
    120,403
    
    
    $
    134,991LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    12,645
    
    
    $
    11,493
    
    
    $
    13,252
    
    
    $
    19,472
    
    
    $
    4,045
    
    
    $
    6,461
    
    
    $
    5,583
    
    
    
    6,678Accrued expenses
    
    
    11,097
    
    
    
    14,455
    
    
    
    16,892
    
    
    
    21,332
    
    
    
    7,601
    
    
    
    8,663
    
    
    
    9,074
    
    
    
    10,134Income taxes payable
    
    
    6,586
    
    
    
    8,363
    
    
    
    9,766
    
    
    
    11,125
    
    
    
    4,868
    
    
    
    4,759
    
    
    
    5,187
    
    
    
    5,181Deferred income tax liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total current liabilities
    
    
    30,328
    
    
    
    34,311
    
    
    
    39,910
    
    
    
    51,929
    
    
    
    16,514
    
    
    
    19,883
    
    
    
    19,844
    
    
    
    21,993Deferred income tax liabilities
    
    
    2,932
    
    
    
    441
    
    
    
    2,592
    
    
    
    1,604
    
    
    
    89
    
    
    
    1,352
    
    
    
    
    
    
    
    3,668Minority interests in subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,957
    
    
    
    2,998
    
    
    
    11
    
    
    
    10Total liabilities
    
    
    33,260
    
    
    
    34,752
    
    
    
    42,502
    
    
    
    53,533
    
    
    
    20,560
    
    
    
    24,233
    
    
    
    19,855
    
    
    
    25,671Commitments and contingenciesStockholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    54
    
    
    
    54
    
    
    
    57
    
    
    
    57
    
    
    
    46
    
    
    
    46
    
    
    
    50
    
    
    
    52Additional paid-in capital
    
    
    144,582
    
    
    
    149,881
    
    
    
    157,606
    
    
    
    162,801
    
    
    
    108,094
    
    
    
    115,547
    
    
    
    157,911
    
    
    
    164,610Deferred stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,690
    )
    
    
    (21,354
    )
    
    
    (25,033
    )
    
    
    (23,187
    )Accumulated deficits
    
    
    (31,854
    )
    
    
    (24,660
    )
    
    
    (19,073
    )
    
    
    (11,320
    )
    
    
    (12,175
    )
    
    
    (19,696
    )
    
    
    (32,181
    )
    
    
    (37,496
    )Accumulated other comprehensive income


    4,237
    
    
    
    501
    
    
    
    3,728
    
    
    
    2,119
    
    
    
    (20
    )
    
    
    1,873
    
    
    
    (199
    )
    
    
    5,341Total stockholders equity
    
    
    117,019
    
    
    
    125,776
    
    
    
    142,318
    
    
    
    153,657
    
    
    
    73,255
    
    
    
    76,416
    
    
    
    100,548
    
    
    
    109,320Total liabilities and stockholders equity
    
    $
    150,279
    
    
    $
    160,528
    
    
    $
    184,820
    
    
    $
    207,190
    
    
    $
    93,815
    
    
    $
    100,649
    
    
    $
    120,403
    
    
    $
    134,991
 59




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##### Table of Contents



RECONCILIATION OF CONSOLIDATED STATEMENTS OF OPERATIONS FOR INTERIM PERIODS OF FISCAL 2006
 September 30, 2005
    
    
    December 31, 2005
    
    
    March 31, 2006
    
    
    June 30, 2006(In thousands, except pershare data)
    
    As Reported
    
    
    Adjustments
    
    
    As Restated
    
    
    As Reported
    
    
    Adjustments
    
    
    As Restated
    
    
    As Reported
    
    
    Adjustments
    
    
    As RestatedRevenues
    
    $
    33,203
    
    
    $
    
    
    
    $
    33,203
    
    
    $
    40,614
    
    
    $
    
    
    
    $
    40,614
    
    
    $
    44,743
    
    
    $
    
    
    
    $
    44,743
    
    
    $
    52,882Cost of revenues
    
    
    15,646
    
    
    
    6
    
    
    
    15,652
    
    
    
    19,697
    
    
    
    34
    
    
    
    19,731
    
    
    
    21,914
    
    
    
    39
    
    
    
    21,953
    
    
    
    25,725Gross profit
    
    
    17,557
    
    
    
    (6
    )
    
    
    17,551
    
    
    
    20,917
    
    
    
    (34
    )
    
    
    20,883
    
    
    
    22,829
    
    
    
    (39
    )
    
    
    22,790
    
    
    
    27,157Operating expenses:Research and development
    
    
    7,357
    
    
    
    (31
    )
    
    
    7,326
    
    
    
    8,166
    
    
    
    193
    
    
    
    8,359
    
    
    
    8,644
    
    
    
    (17
    )
    
    
    8,627
    
    
    
    9,497Selling, general and administrative
    
    
    4,817
    
    
    
    977
    
    
    
    5,794
    
    
    
    5,098
    
    
    
    1,079
    
    
    
    6,177
    
    
    
    5,612
    
    
    
    1,460
    
    
    
    7,072
    
    
    
    7,135Total operating expenses

    
    12,174
    
    
    
    946
    
    
    
    13,120
    
    
    
    13,264
    
    
    
    1,272
    
    
    
    14,536
    
    
    
    14,256
    
    
    
    1,443
    
    
    
    15,699
    
    
    
    16,632Income (loss) from operations
    
    
    5,383
    
    
    
    (952
    )
    
    
    4,431
    
    
    
    7,653
    
    
    
    (1,306
    )
    
    
    6,347
    
    
    
    8,573
    
    
    
    (1,482
    )
    
    
    7,091
    
    
    
    10,525Interest income
    
    
    254
    
    
    
    
    
    
    
    254
    
    
    
    483
    
    
    
    
    
    
    
    483
    
    
    
    604
    
    
    
    
    
    
    
    604
    
    
    
    952Gain (loss) on investments, net
    
    
    (101
    )
    
    
    1
    
    
    
    (100
    )
    
    
    (167
    )
    
    
    
    
    
    
    (167
    )
    
    
    (242
    )
    
    
    
    
    
    
    (242
    )
    
    
    (51
    )Other income (expense), net
    
    
    258
    
    
    
    
    
    
    
    258
    
    
    
    159
    
    
    
    
    
    
    
    159
    
    
    
    (34
    )
    
    
    
    
    
    
    (34
    )
    
    
    164Income (loss) before income taxes
    
    
    5,794
    
    
    
    (951
    )
    
    
    4,843
    
    
    
    8,128
    
    
    
    (1,306
    )
    
    
    6,822
    
    
    
    8,901
    
    
    
    (1,482
    )
    
    
    7,419
    
    
    
    11,590Provision for income taxes
    
    
    1,201
    
    
    
    (181
    )
    
    
    1,020
    
    
    
    (414
    )
    
    
    43
    
    
    
    (371
    )
    
    
    1,919
    
    
    
    (88
    )
    
    
    1,831
    
    
    
    3,837Income (loss) before cumulative effect of
change in accounting principle
    
    
    4,593
    
    
    
    (770
    )
    
    
    3,823
    
    
    
    8,542
    
    
    
    (1,349
    )
    
    
    7,193
    
    
    
    6,982
    
    
    
    (1,394
    )
    
    
    5,588
    
    
    
    7,753Cumulative effect of change in accounting principle
    
    
    171
    
    
    
    1,648
    
    
    
    1,819
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    4,764
    
    
    $
    878
    
    
    $
    5,642
    
    
    $
    8,542
    
    
    $
    (1,349
    )
    
    $
    7,193
    
    
    $
    6,982
    
    
    $
    (1,394
    )
    
    $
    5,588
    
    
    $
    7,753Net income (loss) per share - basic:Income (loss) before change in accounting principle
    
    
    0.09
    
    
    
    (0.01
    )
    
    
    0.08
    
    
    
    0.16
    
    
    
    (0.03
    )
    
    
    0.13
    
    
    
    0.12
    
    
    
    (0.02
    )
    
    
    0.10
    
    
    
    0.14Cumulative effect of change in accounting principle
    
    
    
    
    
    
    0.03
    
    
    
    0.03
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) per share - basic
    
    $
    0.09
    
    
    $
    0.02
    
    
    $
    0.11
    
    
    $
    0.16
    
    
    $
    (0.03
    )
    
    $
    0.13
    
    
    $
    0.12
    
    
    $
    (0.02
    )
    
    $
    0.10
    
    
    $
    0.14Net income (loss) per share - diluted:Income (loss) before change in accounting principle
    
    
    0.08
    
    
    
    (0.02
    )
    
    
    0.06
    
    
    
    0.14
    
    
    
    (0.02
    )
    
    
    0.12
    
    
    
    0.11
    
    
    
    (0.02
    )
    
    
    0.09
    
    
    
    0.12Cumulative effect of change in accounting principle
    
    
    
    
    
    
    0.03
    
    
    
    0.03
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) per share - diluted
    
    $
    0.08
    
    
    $
    0.01
    
    
    $
    0.09
    
    
    $
    0.14
    
    
    $
    (0.02
    )
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    (0.02
    )
    
    $
    0.09
    
    
    $
    0.12Shares used in computing basic per share amounts
    
    
    52,560
    
    
    
    
    
    
    
    52,560
    
    
    
    53,591
    
    
    
    
    
    
    
    53,591
    
    
    
    56,025
    
    
    
    
    
    
    
    56,025
    
    
    
    57,160Shares used in computing diluted per share amounts
    
    
    60,440
    
    
    
    1,609
    
    
    
    62,049
    
    
    
    60,842
    
    
    
    1,576
    
    
    
    62,418
    
    
    
    62,729
    
    
    
    987
    
    
    
    63,716
    
    
    
    63,738The following table presents details of the total stock-based
compensation expense that is included in each functional line
item in the consolidated statements of operations above:Supplemental
dataCost of revenues
    
    
    
    
    
    
    6
    
    
    
    6
    
    
    
    
    
    
    
    34
    
    
    
    34
    
    
    
    
    
    
    
    39
    
    
    
    39
    
    
    
    34Research and development
    
    
    1,001
    
    
    
    649
    
    
    
    1,650
    
    
    
    1,495
    
    
    
    859
    
    
    
    2,354
    
    
    
    1,621
    
    
    
    974
    
    
    
    2,595
    
    
    
    2,312Selling, general and administrative
    
    
    567
    
    
    
    297
    
    
    
    864
    
    
    
    714
    
    
    
    413
    
    
    
    1,127
    
    
    
    688
    
    
    
    469
    
    
    
    1,157
    
    
    
    1,010Total stock-based compensation expense
    
    
    1,568
    
    
    
    952
    
    
    
    2,520
    
    
    
    2,209
    
    
    
    1,306
    
    
    
    3,515
    
    
    
    2,309
    
    
    
    1,482
    
    
    
    3,791
    
    
    
    3,356
 60




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##### Table of Contents



RECONCILIATION OF CONSOLIDATED STATEMENTS OF OPERATIONS FOR INTERIM PERIODS OF FISCAL 2005
 September 30, 2004
    
    
    December 31, 2004
    
    
    March 31, 2005
    
    
    June 30, 2005(In thousands, except per share data)
    
    AsReported
    
    
    Adjustments
    
    
    AsRestated
    
    
    AsReported
    
    
    Adjustments
    
    
    AsRestated
    
    
    AsReported
    
    
    Adjustments
    
    
    AsRestated
    
    
    AsReported
    
    
    Adjustments
    
    
    AsRestatedRevenues
    
    $
    16,602
    
    
    $
    
    
    
    $
    16,602
    
    
    $
    15,387
    
    
    $
    
    
    
    $
    15,387
    
    
    $
    16,136
    
    
    $
    
    
    
    $
    16,136
    
    
    $
    20,886
    
    
    $
    
    
    
    $
    20,886Cost of revenues
    
    
    7,418
    
    
    
    87
    
    
    
    7,505
    
    
    
    6,888
    
    
    
    170
    
    
    
    7,058
    
    
    
    7,170
    
    
    
    45
    
    
    
    7,215
    
    
    
    10,674
    
    
    
    110
    
    
    
    10,784Gross profit
    
    
    9,184
    
    
    
    (87
    )
    
    
    9,097
    
    
    
    8,499
    
    
    
    (170
    )
    
    
    8,329
    
    
    
    8,966
    
    
    
    (45
    )
    
    
    8,921
    
    
    
    10,212
    
    
    
    (110
    )
    
    
    10,102Operating expenses:Research and development
    
    
    4,738
    
    
    
    2,586
    
    
    
    7,324
    
    
    
    5,559
    
    
    
    3,791
    
    
    
    9,350
    
    
    
    5,481
    
    
    
    4,807
    
    
    
    10,288
    
    
    
    10,310
    
    
    
    23
    
    
    
    10,333Selling, general and administrative
    
    
    2,358
    
    
    
    3,469
    
    
    
    5,827
    
    
    
    2,733
    
    
    
    3,401
    
    
    
    6,134
    
    
    
    2,940
    
    
    
    3,385
    
    
    
    6,325
    
    
    
    6,472
    
    
    
    (888
    )
    
    
    5,584In-process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    585
    
    
    
    
    
    
    
    585
    
    
    
    4,586
    
    
    
    
    
    
    
    4,586
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    7,096
    
    
    
    6,055
    
    
    
    13,151
    
    
    
    8,877
    
    
    
    7,192
    
    
    
    16,069
    
    
    
    13,007
    
    
    
    8,192
    
    
    
    21,199
    
    
    
    16,782
    
    
    
    (865
    )
    
    
    15,917Income (loss) from operations
    
    
    2,088
    
    
    
    (6,142
    )
    
    
    (4,054
    )
    
    
    (378
    )
    
    
    (7,362
    )
    
    
    (7,740
    )
    
    
    (4,041
    )
    
    
    (8,237
    )
    
    
    (12,278
    )
    
    
    (6,570
    )
    
    
    755
    
    
    
    (5,815
    )Interest income
    
    
    91
    
    
    
    
    
    
    
    91
    
    
    
    126
    
    
    
    
    
    
    
    126
    
    
    
    144
    
    
    
    
    
    
    
    144
    
    
    
    185
    
    
    
    
    
    
    
    185Gain (loss) on investments, net
    
    
    400
    
    
    
    
    
    
    
    400
    
    
    
    (70
    )
    
    
    
    
    
    
    (70
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income (expense), net
    
    
    8
    
    
    
    
    
    
    
    8
    
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    65
    
    
    
    
    
    
    
    65
    
    
    
    21
    
    
    
    
    
    
    
    21Minority interests in subsidiaries
    
    
    (589
    )
    
    
    688
    
    
    
    99
    
    
    
    (327
    )
    
    
    388
    
    
    
    61
    
    
    
    (263
    )
    
    
    268
    
    
    
    5
    
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )Income (loss) before income taxes
    
    
    1,998
    
    
    
    (5,454
    )
    
    
    (3,456
    )
    
    
    (648
    )
    
    
    (6,974
    )
    
    
    (7,622
    )
    
    
    (4,095
    )
    
    
    (7,969
    )
    
    
    (12,064
    )
    
    
    (6,364
    )
    
    
    748
    
    
    
    (5,616
    )Provision for income taxes
    
    
    617
    
    
    
    
    
    
    
    617
    
    
    
    (102
    )
    
    
    
    
    
    
    (102
    )
    
    
    420
    
    
    
    
    
    
    
    420
    
    
    
    491
    
    
    
    
    
    
    
    491Net income (loss)
    
    $
    1,381
    
    
    $
    (5,454
    )
    
    $
    (4,073
    )
    
    $
    (546
    )
    
    $
    (6,974
    )
    
    $
    (7,520
    )
    
    $
    (4,515
    )
    
    $
    (7,969
    )
    
    $
    (12,484
    )
    
    $
    (6,855
    )
    
    $
    748
    
    
    $
    (6,107
    )Basic net income (loss) per share
    
    $
    0.03
    
    
    $
    (0.12
    )
    
    $
    (0.09
    )
    
    $
    (0.01
    )
    
    $
    (0.16
    )
    
    $
    (0.17
    )
    
    $
    (0.10
    )
    
    $
    (0.17
    )
    
    $
    (0.27
    )
    
    $
    (0.13
    )
    
    $
    0.01
    
    
    $
    (0.12
    )Diluted net income (loss) per share
    
    $
    0.03
    
    
    $
    (0.12
    )
    
    $
    (0.09
    )
    
    $
    (0.01
    )
    
    $
    (0.16
    )
    
    $
    (0.17
    )
    
    $
    (0.10
    )
    
    $
    (0.17
    )
    
    $
    (0.27
    )
    
    $
    (0.13
    )
    
    $
    0.01
    
    
    $
    (0.12
    )Shares used in computing basic per share amounts
    
    
    45,828
    
    
    
    
    
    
    
    45,828
    
    
    
    45,572
    
    
    
    
    
    
    
    45,572
    
    
    
    46,680
    
    
    
    
    
    
    
    46,680
    
    
    
    51,100
    
    
    
    
    
    
    
    51,100Shares used in computing diluted per share amounts
    
    
    50,384
    
    
    
    (4,556
    )
    
    
    45,828
    
    
    
    45,572
    
    
    
    
    
    
    
    45,572
    
    
    
    46,680
    
    
    
    
    
    
    
    46,680
    
    
    
    51,100
    
    
    
    
    
    
    
    51,100The following table presents details of the total stock-based
compensation expense that is included in each functional line
item in the consolidated statements of operations above:Supplemental
dataCost of revenues
    
    
    
    
    
    
    87
    
    
    
    87
    
    
    
    
    
    
    
    170
    
    
    
    170
    
    
    
    
    
    
    
    45
    
    
    
    45
    
    
    
    
    
    
    
    110
    
    
    
    110Research and development
    
    
    84
    
    
    
    3,130
    
    
    
    3,214
    
    
    
    486
    
    
    
    4,557
    
    
    
    5,043
    
    
    
    543
    
    
    
    5,392
    
    
    
    5,935
    
    
    
    4,369
    
    
    
    728
    
    
    
    5,097Selling, general and administrative
    
    
    132
    
    
    
    2,925
    
    
    
    3,057
    
    
    
    235
    
    
    
    2,635
    
    
    
    2,870
    
    
    
    277
    
    
    
    2,800
    
    
    
    3,077
    
    
    
    3,388
    
    
    
    (1,593
    )
    
    
    1,795Total
stock-based compensation expense
    
    
    216
    
    
    
    6,142
    
    
    
    6,358
    
    
    
    721
    
    
    
    7,362
    
    
    
    8,083
    
    
    
    820
    
    
    
    8,237
    
    
    
    9,057
    
    
    
    7,757
    
    
    
    (755
    )
    
    
    7,002
 Quarterly Results of Operations
  Quarter Ended March 31, 2006 vs. Quarter Ended March 31, 2005
 Three months ended March 31,(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    % change(As Restated)
    
    
    (As Restated)Revenues
    
    $
    44,743
    
    
    $
    16,136
    
    
    
    177
    %Cost of revenues
    
    
    21,953
    
    
    
    7,215
    
    
    
    204
    %Gross profit
    
    
    22,790
    
    
    
    8,921
    
    
    
    155
    %Research and development expenses
    
    
    8,627
    
    
    
    10,288
    
    
    
    (16
    %)Sales, general and administrative expenses
    
    
    7,072
    
    
    
    6,325
    
    
    
    12
    %In-process research and development expenses
    
    
    
    
    
    
    4,586
    
    
    
    (100
    %)Income (loss) from operations
    
    $
    7,091
    
    
    $
    (12,278
    )
    
    
    158
    %
 61




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##### Table of Contents



Revenues
    Gross Margin
    Research and Development
  62




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##### Table of Contents



Selling, General and Administrative
  In-Process Research and Development
  Interest and Other Income and Expense, Net
  Provision for Income Taxes
  63




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##### Table of Contents



Quarter Ended December 31, 2005 vs. Quarter Ended December 31, 2004
 Three months ended December 31,(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    % change(As Restated)
    
    
    (As Restated)Revenues
    
    $
    40,614
    
    
    $
    15,387
    
    
    
    164
    %Cost of revenues
    
    
    19,731
    
    
    
    7,058
    
    
    
    180
    %Gross profit
    
    
    20,883
    
    
    
    8,329
    
    
    
    151
    %Research and development expenses
    
    
    8,359
    
    
    
    9,350
    
    
    
    (11
    %)Sales, general and administrative expenses
    
    
    6,177
    
    
    
    6,134
    
    
    
    1
    %In-process research and development expenses
    
    
    
    
    
    
    585
    
    
    
    (100
    )%Income (loss) from operations
    
    $
    6,347
    
    
    $
    (7,740
    )
    
    
    182
    %
 Revenues
    Gross Margin
   64




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##### Table of Contents



Research and Development
  Selling, General and Administrative
  In-Process Research and Development
  Interest and Other Income and Expense, Net
  65




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##### Table of Contents



Provision for Income Taxes
  Quarter Ended September 30, 2005 vs. Quarter Ended September 30, 2004
 Three months ended September 30,(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    % change(As Restated)
    
    
    (As Restated)Revenues
    
    $
    33,203
    
    
    $
    16,602
    
    
    
    100
    %Cost of revenues
    
    
    15,652
    
    
    
    7,505
    
    
    
    109
    %Gross profit
    
    
    17,551
    
    
    
    9,097
    
    
    
    93
    %Research and development expenses
    
    
    7,326
    
    
    
    7,324
    
    
    
    0
    %Sales, general and administrative expenses
    
    
    5,794
    
    
    
    5,827
    
    
    
    (1
    %)Income from operations
    
    $
    4,431
    
    
    $
    (4,054
    )
    
    
    209
    %
 Revenues
    66




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##### Table of Contents



Gross Margin
  Research and Development
  Selling, General and Administrative
  Interest and Other Income and Expense, Net
  Provision for Income Taxes
  Stock-Based Compensation Expense Computed in Accordance with SFAS 123
  67




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##### Table of Contents



RECONCILIATION OF FAS 123 STOCK-BASED COMPENSATION EXPENSE FOR FISCAL 2005 AND 2004
 Year Ended June 30, 2005
    
    
    Year Ended June 30, 2004(In thousands except per share data)
    
    As Reported
    
    
    Adjustments
    
    
    As Restated
    
    
    As Reported
    
    
    Adjustments
    
    
    As RestatedNet income (loss)  as reported
    
    $
    (10,535
    )
    
    $
    (19,649
    )
    
    $
    (30,184
    )
    
    $
    10,378
    
    
    $
    (15,183
    )
    
    $
    (4,805
    )Add: stock-based employee compensation
included in reported net income (loss), net
of related tax benefit
    
    
    9,514
    
    
    
    20,986
    
    
    
    30,500
    
    
    
    606
    
    
    
    16,217
    
    
    
    16,823Less: stock-based employee compensation
determined under the fair value based method
for all awards, net of related tax benefit
    
    
    (4,089
    )
    
    
    (3,672
    )
    
    
    (7,761
    )
    
    
    (2,472
    )
    
    
    (3,110
    )
    
    
    (5,582
    )Pro forma net income (loss)
    
    $
    (5,110
    )
    
    $
    (2,335
    )
    
    $
    (7,445
    )
    
    $
    8,512
    
    
    $
    (2,076
    )
    
    $
    6,436Basic net income (loss) per share:As reported
    
    $
    (0.22
    )
    
    $
    (0.42
    )
    
    $
    (0.64
    )
    
    $
    0.23
    
    
    $
    (0.34
    )
    
    $
    (0.11
    )Pro forma
    
    $
    (0.11
    )
    
    $
    (0.05
    )
    
    $
    (0.16
    )
    
    $
    0.19
    
    
    $
    (0.05
    )
    
    $
    0.14Diluted net income (loss) per share:As reported
    
    $
    (0.22
    )
    
    $
    (0.42
    )
    
    $
    (0.64
    )
    
    $
    0.21
    
    
    $
    (0.32
    )
    
    $
    (0.11
    )Pro forma
    
    $
    (0.11
    )
    
    $
    (0.05
    )
    
    $
    (0.16
    )
    
    $
    0.17
    
    
    $
    (0.04
    )
    
    $
    0.13Basic shares
    
    
    47,418
    
    
    
    
    
    
    
    47,418
    
    
    
    44,698
    
    
    
    
    
    
    
    44,698Diluted shares
    
    
    47,418
    
    
    
    
    
    
    
    47,418
    
    
    
    50,022
    
    
    
    (747)
    
    
    
    49,275
 RECONCILIATION OF FAS 123 STOCK-BASED COMPENSATION EXPENSE FOR INTERIM PERIODS OF FISCAL 2005
 September 30, 2004
    
    
    December 31, 2004
    
    
    March 31, 2005
    
    
    June 30, 2005(in thousands except per share data)
    
    As Reported
    
    
    Adjustments
    
    
    As Restated
    
    
    As Reported
    
    
    Adjustments
    
    
    As Restated
    
    
    As Reported
    
    
    Adjustments
    
    
    As Restated
    
    
    As Reported
    
    
    Adjustments
    
    
    As RestatedNet income (loss)  as reported
    
    $
    1,381
    
    
    $
    (5,454
    )
    
    $
    (4,073
    )
    
    $
    (546
    )
    
    $
    (6,974
    )
    
    $
    (7,520
    )
    
    $
    (4,515
    )
    
    $
    (7,969
    )
    
    $
    (12,484
    )
    
    $
    (6,855
    )
    
    $
    748
    
    
    $
    (6,107
    )Add: stock-based employee compensation
included in reported net income (loss), net
of related tax benefit
    
    
    216
    
    
    
    6,142
    
    
    
    6,358
    
    
    
    721
    
    
    
    7,362
    
    
    
    8,083
    
    
    
    820
    
    
    
    8,237
    
    
    
    9,057
    
    
    
    7,757
    
    
    
    (755
    )
    
    
    7,002Less: stock-based employee compensation
determined under the fair value based method
for all awards, net of related tax benefit
    
    
    (728
    )
    
    
    (1,227
    )
    
    
    (1,955
    )
    
    
    (895
    )
    
    
    (739
    )
    
    
    (1,634
    )
    
    
    (1,247
    )
    
    
    (789
    )
    
    
    (2,036
    )
    
    
    (1,219
    )
    
    
    (917
    )
    
    
    (2,136
    )Pro forma net income (loss)
    
    $
    869
    
    
    $
    (539
    )
    
    $
    330
    
    
    $
    (720
    )
    
    $
    (351
    )
    
    $
    (1,071
    )
    
    $
    (4,942
    )
    
    $
    (521
    )
    
    $
    (5,463
    )
    
    $
    (317
    )
    
    $
    (924
    )
    
    $
    (1,241
    )Basic net income (loss) per share:As reported
    
    $
    0.03
    
    
    $
    (0.12
    )
    
    $
    (0.09
    )
    
    $
    (0.01
    )
    
    $
    (0.15
    )
    
    $
    (0.16
    )
    
    $
    (0.10
    )
    
    $
    (0.18
    )
    
    $
    (0.28
    )
    
    $
    (0.13
    )
    
    $
    0.01
    
    
    $
    (0.12
    )Pro forma
    
    $
    0.02
    
    
    $
    (0.01
    )
    
    $
    0.01
    
    
    $
    (0.02
    )
    
    $
    
    
    
    $
    (0.02
    )
    
    $
    (0.11
    )
    
    $
    (0.01
    )
    
    $
    (0.12
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )Diluted net income (loss) per share:As reported
    
    $
    0.03
    
    
    $
    (0.12
    )
    
    $
    (0.09
    )
    
    $
    (0.01
    )
    
    $
    (0.15
    )
    
    $
    (0.16
    )
    
    $
    (0.10
    )
    
    $
    (0.18
    )
    
    $
    (0.28
    )
    
    $
    (0.13
    )
    
    $
    0.01
    
    
    $
    (0.12
    )Pro forma
    
    $
    0.02
    
    
    $
    (0.01
    )
    
    $
    0.01
    
    
    $
    (0.02
    )
    
    $
    
    
    
    $
    (0.02
    )
    
    $
    (0.11
    )
    
    $
    (0.01
    )
    
    $
    (0.12
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )Basic shares
    
    
    45,828
    
    
    
    
    
    
    
    45,828
    
    
    
    45,572
    
    
    
    
    
    
    
    45,572
    
    
    
    46,680
    
    
    
    
    
    
    
    46,680
    
    
    
    51,100
    
    
    
    
    
    
    
    51,100Diluted shares
    
    
    50,834
    
    
    
    34
    
    
    
    50,868
    
    
    
    45,572
    
    
    
    
    
    
    
    45,572
    
    
    
    46,680
    
    
    
    
    
    
    
    46,680
    
    
    
    51,100
    
    
    
    
    
    
    
    51,100
 68




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##### Table of Contents



Liquidity and Capital Resources
  (In millions)
    
    June 30, 2006
    
    
    June 30, 2005Cash and cash equivalents and short-term investments:Cash and cash equivalents
    
    $
    103.0
    
    
    $
    37.6Short-term investments
    
    
    49.6
    
    
    
    54.6Total
    
    $
    152.6
    
    
    $
    92.2
  Years Ended June 30,(In millions)
    
    2006
    
    
    2005
    
    
    2004Net cash flow provided by (used in):Operating activities
    
    $
    60.8
    
    
    $
    9.3
    
    
    $
    3.1Investing activities
    
    
    (5.4
    )
    
    
    (8.1
    )
    
    
    18.9Financing activities
    
    
    10.0
    
    
    
    3.9
    
    
    
    5.4Net increase in cash and cash equivalents
    
    $
    65.4
    
    
    $
    5.1
    
    
    $
    27.4
 Operating Activities
   Investing Activities
  69




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##### Table of Contents



Financing Activities
  Liquidity
  Contractual Obligations
  Payments Due By PeriodLess than 1(In millions)
    
    Year
    
    
    1 - 3 Years
    
    
    3 - 5 Years
    
    
    Beyond
    
    
    TotalOperating Leases (1)
    
    $
    1.7
    
    
    $
    1.4
    
    
    $
    1.1
    
    
    $
    
    
    
    $
    4.2Building construction contract (2)
    
    
    18.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18.0Purchase obligations (3)
    
    
    17.5
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    17.8Total
    
    $
    37.2
    
    
    $
    1.7
    
    
    $
    1.1
    
    
    $
    
    
    
    $
    40.0
 
 (1)
    
    We lease office space and have entered into other lease commitments in North America as well
as various locations in Japan, China and Taiwan. Operating leases include future minimum
lease payments under all our noncancelable operating leases as of June 30, 2006.(2)
    
    We are currently constructing a new research and development building in Shanghai, China,
which we expect to be completed during the first quarter of fiscal 2008.(3)
    
    Purchase obligations primarily represent unconditional purchase order commitments with
contract manufacturers and suppliers for wafers and chipsets. Contingencies
 Shareholder Derivative Litigation
 In re
Trident Microsystems Inc. Derivative Litigation Limke v. Lin et al
 70




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##### Table of Contents



Intellectual Property Litigation
   Regulatory Actions
  Nasdaq Proceedings
  71




---



##### Table of Contents



Indemnification Obligations
    Off-Balance Sheet Arrangements
  72




---



##### Table of Contents



Recent Accounting Pronouncements
 Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements Materiality
 Fair Value Measurements
 Accounting for Uncertainty in Income Taxesan
interpretation of FASB Statement No. 109
 Accounting for Sabbatical Leave and Other Similar
Benefits Pursuant to FASB Statement No. 43, Accounting for compensated absences Accounting for Compensated Absences
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115
 73




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Foreign currency exchange rate risk
   Interest rate risk
  Investment risk
   74




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 TRIDENT MICROSYSTEMS, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Years Ended June 30, 2006
    
    2006
    
    
    2005
    
    
    2004(In thousands, except per share data)
    
    
    
    
    
    (As Restated)(1)
    
    
    (As Restated)(1)Revenues
    
    $
    171,442
    
    
    $
    69,011
    
    
    $
    52,551Cost of revenues (2)
    
    
    83,061
    
    
    
    32,562
    
    
    
    23,758Gross profit
    
    
    88,381
    
    
    
    36,449
    
    
    
    28,793Operating expenses:Research and development (2)
    
    
    33,809
    
    
    
    37,295
    
    
    
    19,617Selling, general and administrative (2)
    
    
    26,178
    
    
    
    23,870
    
    
    
    21,083In-process research and development
    
    
    
    
    
    
    5,171
    
    
    
    Total operating expenses
    
    
    59,987
    
    
    
    66,336
    
    
    
    40,700Income (loss) from operations
    
    
    28,394
    
    
    
    (29,887
    )
    
    
    (11,907
    )Interest income
    
    
    2,293
    
    
    
    546
    
    
    
    158Gain (loss) on investments, net
    
    
    (560
    )
    
    
    330
    
    
    
    10,584Other income (expense), net
    
    
    547
    
    
    
    95
    
    
    
    (262
    )Minority interests in subsidiaries
    
    
    
    
    
    
    158
    
    
    
    (674
    )Income (loss) before provision for income taxes and
cumulative effect of change in accounting principle
    
    
    30,674
    
    
    
    (28,758
    )
    
    
    (2,101
    )Provision for income taxes
    
    
    6,317
    
    
    
    1,426
    
    
    
    2,704Income (loss) before cumulative
effect of change in accounting principle
    
    
    24,357
    
    
    
    (30,184
    )
    
    
    (4,805
    )Cumulative effect of change in accounting principle, net of tax
    
    
    1,819
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    26,176
    
    
    $
    (30,184
    )
    
    $
    (4,805
    )Net income (loss) per share - basic:Income (loss) before change in accounting principle
    
    
    0.45
    
    
    
    (0.64
    )
    
    
    (0.11
    )Cumulative effect of change in accounting principle
    
    
    0.03
    
    
    
    
    
    
    
    Net income (loss) per share - basic
    
    
    0.48
    
    
    
    (0.64
    )
    
    
    (0.11
    )Net income (loss) per share - diluted:Income (loss) before change in accounting principle
    
    
    0.39
    
    
    
    (0.64
    )
    
    
    (0.11
    )Cumulative effect of change in accounting principle
    
    
    0.03
    
    
    
    
    
    
    
    Net income (loss) per share - diluted
    
    $
    0.42
    
    
    $
    (0.64
    )
    
    $
    (0.11
    )Shares used in computing basic per share amounts
    
    
    54,822
    
    
    
    47,418
    
    
    
    44,698Shares used in computing diluted per share amounts
    
    
    62,526
    
    
    
    47,418
    
    
    
    44,698
 
 (1)
    
    See Note 3, Restatement of Consolidated Financial
Statements and Special Committee and Company Findings.(2)
    
    Effective July 1, 2005, we adopted SFAS 123(R), Share-Based Paymentsand used the modified
prospective method to value our stock-based payments. Accordingly, for the fiscal year ended
June 30, 2006, stock-based compensation was accounted under SFAS 123(R), while for the years
ended June 30, 2005 and 2004, stock-based compensation was accounted under APB 25, Accounting
for Stock Issued to Employees. The accompanying notes are an integral part of these consolidated financial statements.
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TRIDENT MICROSYSTEMS, INC.
 
 CONSOLIDATED BALANCE SHEETS
 June 30, 2006 and 2005
    
    2006
    
    
    2005(In thousands, except par values)
    
    
    
    
    
    (As Restated)(1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    103,046
    
    
    $
    37,598Investments
    
    
    49,612
    
    
    
    54,555Accounts receivable, net of allowance for sales return
of $1,475 and $413 in 2006 and 2005, respectively
    
    
    4,278
    
    
    
    6,317Inventories
    
    
    14,641
    
    
    
    2,735Prepaid expenses and other current assets
    
    
    5,037
    
    
    
    2,307Deferred income tax assets
    
    
    622
    
    
    
    107Total current assets
    
    
    177,236
    
    
    
    103,619Property and equipment, net
    
    
    3,451
    
    
    
    2,154Intangible assets, net
    
    
    19,190
    
    
    
    24,621Other assets
    
    
    6,366
    
    
    
    4,597Deferred income tax assets
    
    
    947
    
    
    
    Total assets
    
    $
    207,190
    
    
    $
    134,991LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    19,472
    
    
    $
    6,678Accrued expenses
    
    
    21,332
    
    
    
    10,134Income taxes payable
    
    
    11,125
    
    
    
    5,181Total current liabilities
    
    
    51,929
    
    
    
    21,993Deferred income tax liabilities
    
    
    1,604
    
    
    
    3,668Minority interest in subsidiary
    
    
    
    
    
    
    10Total liabilities
    
    
    53,533
    
    
    
    25,671Commitments and contingencies (Notes 8)Stockholders equity:Preferred stock, $0.001 par value; 500 shares authorized; none issued and outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value; 95,000 and 60,000 shares authorized;
57,206 and 51,840 shares issued and outstanding at
June 30, 2006 and 2005, respectively
    
    
    57
    
    
    
    52Additional paid-in capital
    
    
    162,801
    
    
    
    164,610Deferred stock-based compensation
    
    
    
    
    
    
    (23,187
    )Accumulated deficit
    
    
    (11,320
    )
    
    
    (37,496
    )Accumulated other comprehensive income
    
    
    2,119
    
    
    
    5,341Total stockholders equity
    
    
    153,657
    
    
    
    109,320Total liabilities and stockholders equity
    
    $
    207,190
    
    
    $
    134,991
 
 (1)
    
    See Note 3, Restatement of Consolidated Financial
Statements and Special Committee and Company Findings. The accompanying notes are an integral part of these consolidated financial statements.
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TRIDENT MICROSYSTEMS, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Years Ended June 30, 2006
    
    2006
    
    
    2005
    
    
    2004(In thousands)
    
    
    
    
    
    (As Restated)(1)
    
    
    (As Restated)(1)Cash flows from operating activities:Net income (loss)
    
    $
    26,176
    
    
    $
    (30,184
    )
    
    $
    (4,805
    )Adjustments to reconcile net income (loss) to cash
provided by operating activities:Cumulative effect of change in accounting principle
    
    
    (1,819
    )
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    13,183
    
    
    
    30,500
    
    
    
    16,823Excess tax benefit from stock-based compensation
    
    
    (1,742
    )
    
    
    
    
    
    
    Depreciation and amortization
    
    
    1,230
    
    
    
    1,010
    
    
    
    1,073Loss on disposal of property and equipment
    
    
    106
    
    
    
    253
    
    
    
    460Provision for sales returns
    
    
    1,062
    
    
    
    113
    
    
    
    (309
    )(Gain) loss on investments, net
    
    
    560
    
    
    
    (331
    )
    
    
    (10,584
    )Amortization of intangible assets
    
    
    5,469
    
    
    
    1,155
    
    
    
    Minority interests in subsidiaries
    
    
    
    
    
    
    (158
    )
    
    
    1,065In-process research and development
    
    
    
    
    
    
    5,171
    
    
    
    Deferred income taxes, net
    
    
    (1,378
    )
    
    
    
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    976
    
    
    
    (3,994
    )
    
    
    2,211Inventories
    
    
    (11,906
    )
    
    
    368
    
    
    
    (419
    )Prepaid expenses and other current assets
    
    
    (2,728
    )
    
    
    (1,221
    )
    
    
    (353
    )Accounts payable
    
    
    12,795
    
    
    
    3,213
    
    
    
    (4,794
    )Accrued expenses
    
    
    11,553
    
    
    
    2,581
    
    
    
    79Income taxes payable
    
    
    7,259
    
    
    
    818
    
    
    
    2,680Net cash provided by operating activities
    
    
    60,796
    
    
    
    9,294
    
    
    
    3,127Cash flows from investing activities:Purchases of property and equipment
    
    
    (2,633
    )
    
    
    (1,045
    )
    
    
    (1,116
    )Purchases of investments
    
    
    (1,492
    )
    
    
    (1,012
    )
    
    
    (90
    )Proceeds from sale of investments, net
of transaction cost
    
    
    
    
    
    
    22
    
    
    
    9,195Purchase of minority interests in subsidiary
    
    
    (61
    )
    
    
    (6,145
    )
    
    
    Proceeds from sale of minority interests in subsidiaries
    
    
    
    
    
    
    877
    
    
    
    2,750Other assets
    
    
    (1,189
    )
    
    
    (824
    )
    
    
    (240
    )Proceeds from sale of graphics division, net of transaction cost
    
    
    
    
    
    
    
    
    
    
    8,427Net cash provided by (used in) investing activities
    
    
    (5,375
    )
    
    
    (8,127
    )
    
    
    18,926Cash flows from financing activities:Proceeds from issuance of common stock upon exercise of stock options
    
    
    8,285
    
    
    
    3,253
    
    
    
    5,350Excess tax benefit from stock-based compensation
    
    
    1,742
    
    
    
    
    
    
    
    Proceeds from exercise of TTI options
    
    
    
    
    
    
    690
    
    
    
    Net cash provided by financing activities
    
    
    10,027
    
    
    
    3,943
    
    
    
    5,350Net increase in cash and cash equivalents
    
    
    65,448
    
    
    
    5,110
    
    
    
    27,403Cash and cash equivalents at beginning of year
    
    
    37,598
    
    
    
    32,488
    
    
    
    5,085Cash and cash equivalents at end of year
    
    $
    103,046
    
    
    $
    37,598
    
    
    $
    32,488Supplemental disclosure of cash flow information:Trident Microsystems, Inc. common stock
issued in connection with the purchase of TTI minority interests
    
    $
    
    
    
    $
    31,146
    
    
    $
    Cash paid for income taxes
    
    $
    44
    
    
    $
    553
    
    
    $
    
 
 (1)
    
    See Note 3, Restatement of Consolidated Financial
Statements and Special Committee and Company Findings. The accompanying notes are an integral part of these consolidated financial statements.
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TRIDENT MICROSYSTEMS, INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 AND COMPREHENSIVE INCOME
 Retained (1)
    
    AccumulatedAdditional (1)
    
    Deferred (1)
    
    Earnings
    
    Other
    
    TotalCommon Stock
    
    
    
    
    
    Paid-in
    
    Stock-based
    
    (Accumulated
    
    Comprehensive
    
    Stockholders(In thousands)
    
    Shares
    
    Amount
    
    Capital
    
    Compensation
    
    Deficit)
    
    Income (Loss)
    
    EquityBalance at June 30, 2003 (as reported)
    
    
    41,982
    
    
    $
    42
    
    
    $
    39,758
    
    
    
    
    
    
    $
    14,581
    
    
    $
    (2,221
    )
    
    $
    52,160Adjustments to opening stockholders
equity
    
    
    
    
    
    
    
    
    
    
    26,626
    
    
    
    (9,548
    )
    
    
    (17,078
    )
    
    
    
    
    
    
    Balance at June 30, 2003 (as restated)
    
    
    41,982
    
    
    
    42
    
    
    
    66,384
    
    
    
    (9,548
    )
    
    
    (2,497
    )
    
    
    (2,221
    )
    
    
    52,160Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,805
    )
    
    
    
    
    
    
    (4,805
    )Unrealized gain on
investments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,108
    
    
    
    6,108Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,303Issuance of common stock, net
    
    
    3,780
    
    
    
    4
    
    
    
    5,356
    
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    5,350Deferred stock-based compensation
    
    
    
    
    
    
    
    
    
    
    30,128
    
    
    
    (30,128
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred
stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,823
    
    
    
    
    
    
    
    
    
    
    
    16,823Balance at June 30, 2004 (as restated)
    
    
    45,762
    
    
    
    46
    
    
    
    101,868
    
    
    
    (22,853
    )
    
    
    (7,312
    )
    
    
    3,887
    
    
    
    75,636Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,184
    )
    
    
    
    
    
    
    (30,184
    )Unrealized gain on
investments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,454
    
    
    
    1,454Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,730
    )Stock compensation expense related to
minority interest
    
    
    
    
    
    
    
    
    
    
    (2,485
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,485
    )Issuance of common stock
    
    
    6,078
    
    
    
    6
    
    
    
    34,393
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,399Deferred stock-based compensation
    
    
    
    
    
    
    
    
    
    
    30,834
    
    
    
    (30,834
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred
stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,500
    
    
    
    
    
    
    
    
    
    
    
    30,500Balance at June 30, 2005 (as restated)
    
    
    51,840
    
    
    
    52
    
    
    
    164,610
    
    
    
    (23,187
    )
    
    
    (37,496
    )
    
    
    5,341
    
    
    
    109,320Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,176
    
    
    
    
    
    
    
    26,176Elimination of deferred stock-based compensation
due to adoption of SFAS 123(R)
    
    
    
    
    
    
    
    
    
    
    (23,187
    )
    
    
    23,187
    
    
    
    
    
    
    
    
    
    
    
    Unrealized loss on
investments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,222
    )
    
    
    (3,222
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,954Issuance of common stock
    
    
    5,366
    
    
    
    5
    
    
    
    8,272
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,277Excess tax
benefit from stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    1,742
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,742Cumulative effect of change in
accounting principle, net of tax
    
    
    
    
    
    
    
    
    
    
    (1,819
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,819
    )Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    13,183
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,183Balance at June 30, 2006
    
    
    57,206
    
    
    $
    57
    
    
    $
    162,801
    
    
    
    
    
    
    $
    (11,320
    )
    
    $
    2,119
    
    
    $
    153,657
 
 (1)
    
    See Note 3, Restatement of Consolidated Financial Statements and Special Committee and Company Findings. The accompanying notes are an integral part of these consolidated financial statements.
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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. DESCRIPTION OF BUSINESS
   2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Principles of Consolidation
  Use of Estimates
  Fair Value of Financial Instruments
  Foreign Currency Transactions
  Cash and Cash Equivalents
 
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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 Investments
    Concentrations of Credit Risk and Other Risk
    Inventories
  Property and Equipment
  80




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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  Long-lived Assets
  Intangible Assets
 Goodwill and Other Intangible Assets
 Revenue Recognition
 Revenue Recognition
  Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendors Products)
  81




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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 Stock-based Compensation
 Share-Based Payment Accounting for Stock Issued to
Employees
 Accounting for Stock-Based Compensation
  Transition Election Related to Accounting for Tax Effects of Share-based Payment
Awards,
 Shipping and Handling Costs
  Research and Development
  82




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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 Software Development Costs
 Computer
Software to be Sold, Leased, or Otherwise Marketed.
 Income Taxes
 Accounting for Income Taxes
 Cumulative Effect of Change in Accounting Principle
  Net Income (Loss) per Share
  Accumulated Other Comprehensive Income (Loss)
  Reclassifications
  Critical Accounting Policies and Estimates Applied to the Restatement of Tridents Consolidated
Financial Statements
  83




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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  Recent Accounting Pronouncements
 Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements Materiality
 Fair Value Measurements
 Accounting for Uncertainty in Income Taxesan
interpretation of FASB Statement No. 109
 Accounting for Sabbatical Leave and Other Similar
Benefits Pursuant to FASB Statement No. 43, Accounting for compensated absences Accounting for Compensated Absences
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115
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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 3. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS AND SPECIAL COMMITTEE AND COMPANY    FINDINGS
 Special Committee Investigation of Historical Stock Option Grant Practices and Related Issues
   Findings
 Accounting for Certain Transactions
Involving Stock Compensation,
 Issues Related to the Accounting for Stock
Compensation under APB Opinion No. 25 and FASB Interpretation No. 44
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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  Details of Stock Option Investigation and Restatement
     
    
    New Hire Grants.During the Review Period, the Company
granted options to purchase a total of 14.2 million
shares to newly-hired employees or newly-retained consultants. During the Review Period, the
Companys prior internal practice for the grant of options to newly-hired employees was to
grant options with an exercise price set at the lower of the closing price of the Companys
common stock on the date of the letter extending the offer of employment, or the date the
person commenced employment. Even when consistently followed, this practice had accounting
consequences that were not correctly reflected in the Companys accounting records, as it
resulted in the grant of some stock options using a grant date that was prior to the date that
an employee started
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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 working for us. However, the Company did not consistently follow this
practice. The Company determined that, in numerous cases, offer letters were prepared and
dated with a date that did not correspond to the date on which an offer was initially made or
the date on which the letter was signed or sent to the prospective employee. Some offer
letters were dated with the benefit of hindsight, so that the dates of such letters
corresponded to dates on which the Companys stock closed at
favorable prices. The Company also
determined that certain offer letters were prepared with a date chosen to allow the grant of
options from our 1996 Stock Option Plan, which at the time of preparing the letters was
believed to have expired, although in fact the 1996 Stock Option Plan
had not expired. The 1996 Stock Option Plan was terminated on
June 19, 2007. As to options to newly-hired employees that required the approval of the
Compensation Committee, such grants were typically approved by unanimous written consents and
generally the Company could not locate documents that demonstrated contemporaneous approval by
the members of the Compensation Committee on the date used as the effective date for the
unanimous written consent approving such grant. The Company also identified instances in
which it provided new hires with grants that were recorded as of the date of a favorable price
in the Companys stock after their employment began rather than the date of their offer letter
or commencement of employment. The Company also concluded that it did not properly account for all grants to
consultants or for later modifications to grants made to certain newly-hired employees.Due to the errors described above, the Company modified measurement dates with respect to grants
of options to purchase approximately 9.7 million shares, or 68% of all new hire grants made during the Review
Period, which resulted in additional cumulative stock-based compensation expense of
approximately $4.6 million through June 30, 2006. Of this amount, approximately $1.3 million
related to grants made to 16 non-employee consultants, including grants of options to purchase
TTI stock, which were subsequently converted into options for Tridents common stock described
below, that also had not originally been accounted for as grants to consultants requiring the
fair values of grants to these consultants be remeasured at each reporting date until vested or
forfeited.
    
    Grants to Executive Officers Approved By the Compensation Committee or Board of Directors,
and to Directors Approved by the Board of Directors.Options to purchase a total of 10.5
million shares were granted to executive officers and directors during the Review Period.
During the Review Period, stock option grants to the Companys officers were approved by the
Compensation Committee or the Board of Directors, and stock option grants to the Companys
directors were approved by the Board of Directors. Prior to 2001, these grants were typically
approved by unanimous written consent of the members of the Compensation Committee or Board of
Directors rather than at a meeting in person or by telephone conference call. Some of these
written consents were deemed effective as of a date earlier than when the consents were sent
to or signed by the directors. Generally, with respect to most grants made by unanimous
written consent, documents were not located that demonstrated contemporaneous approval by the
directors on the date used as the effective date. The Company found evidence that the
unanimous written consents approving some grants were made effective as of dates prior to the
actual date that such consents were fully signed. In some cases the deemed effective dates
represented the date of a relatively low closing price of the Companys common stock, and
although the evidence did not show a consistent practice such as that described below
concerning its periodic grants to non-officer employees, the evidence suggests that the
effective date on some written consents was chosen in order to obtain a favorable exercise
price for the grants.Generally, after 2001, stock option grants to the Companys officers and directors were
typically approved at in-person or telephonic meetings of the Compensation Committee or the
Board of Directors. The Company did not modify the measurement date of most grants made at
meetings of the Compensation Committee or Board of Directors. In one instance, however, the
Company determined that it had used incorrect measurement dates in connection with stock option
grants to executive officers approved at an in person meeting and a subsequent telephonic
meeting of the Compensation Committee in 1997. The evidence relating to this grant suggests
that final approval of the grants was obtained at a date later than the date of the meeting at
which the grants were recorded as having been approved.We also found that approximately 1.8 million shares (of the
total 10.5 million shares) granted on repricings on July 14, 1993 and July 25, 1996 were
remeasured to a later date based upon approval by the Chief
Executive Officer or fax confirmation if approval by the Board of Directors.
This comprised $0.8 million of the expense in the Officers and Directors category.
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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 As a result of these findings relating to grants made to the Companys executive officers and
directors, the Company modified measurement dates of option grants to
executive officers to purchase approximately 7 million shares approved by the Compensation Committee or the Board of Directors,
representing approximately 67% of all grants to executive officers during the Review Period.
This modification to the measurement dates resulted in the recognition of additional stock-based
compensation expense of approximately $5.3 million through June 30, 2006.The Company determined that certain technical errors were made in the accounting for stock
option grants made to four directors in October 1998 as well as one grant to a newly appointed
director in January 1999, resulting in additional compensation
expense of approximately $81,000.
Other than these grants to these five directors, the Company did not modify the measurement
dates of any option grants to non-employee members of its Board of Directors.
    
    Periodic Grants to Non-Officer Employees.Options to
purchase a total of 16.4 million shares were granted to
non-officer employees during the Review Period, often in connection with an annual review
process. The Special Committee found evidence that the administration of stock option grants
to the Companys employees in the United States and in the Companys foreign subsidiaries was
conducted under the direction and supervision of
the Companys Chief Executive Officer. Periodic grants to non-officer employees were approved
by the Companys former Chief Executive Officer pursuant to his delegated authority to the
extent each individual grant did not exceed 90,000 shares. The contemporaneous evidence
available regarding when the grants were determined and when the allocations to specific
employees were finalized did not support the recorded measurement dates with respect to nearly
all of these grants made during the Review Period. The Special Committee also found evidence
that the Company had a pervasive practice of selecting grant dates and exercise prices with the
benefit of hindsight, using dates when the Companys closing stock price had been at or near an
absolute low for a quarter. Grants frequently occurred at favorable prices, particularly in the
period between 1996 and 2000 and in certain dates during 2003 and 2004. For example, during the
period between 1996 and 2000, the Company made grants to non-officer employees at one of the
lowest three prices for the Companys stock in 18 out of 20 quarters.As a result of the investigation, the Special Committee found evidence that in connection with
periodic or annual grants to existing non-officer employees, pools of shares had been set
aside and recorded as stock options granted to employees on a specific date. The administration
of these pools was conducted under the supervision of the
Companys former Chief Executive Officer.
Often, the number of shares comprising each individual option grant and the actual allocation of
each grant to specific individuals was not determined until months after the recorded grant date
and in some instances a couple of years after the recorded grant date. Shares from some pools
were allocated and granted to employees over extended periods, but reflected the original
recorded grant date, and in some cases the total number of shares comprising the pool was
later modified. In order to reflect these pools in the Companys records, grants were
initially recorded in the names of current employees who had not yet been granted options or in
amounts greater than the amounts eventually allocated to these employees. These initial entries
were modified or deleted when the options were later granted to other employees, with the later
grants made at the original grant date and exercise price. The Special Committee also found
evidence to indicate that grant documents were sometimes modified to remove indications that the
grant date, recipient, or the amount of shares had not been finalized as of the date that was
used for purposes of the Companys records. In the course of the investigation, the Special
Committee also found evidence to suggest that at times false or inaccurate information
concerning the Companys stock option grants was provided to its auditors.Separately, before April 30, 1996, the equity award program that the Company used did not have a
feature that allowed it to accurately track record added dates, and thus, entry dates were not
available for grants made before this date. To the extent that the Company used a date other
than the date on which information about a grant was initially entered into the database, a new
measurement date was determined by examining all of the facts and circumstances surrounding the
grant to identify or estimate the most likely date on which the requirements of APB 25 were met.
As a result, the Company has revised the measurement dates for
options to purchase approximately 1.5 million shares
that had been granted at low prices between December 1992 and April 1996. For these grants the
 88




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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 Company established a new measurement date by selecting the highest price between the original
grant date and the end of the quarter in which the original grant date occurred. This resulted
in $1.3 million of additional stock-based compensation expense being recorded. The Company also
adjusted the measurement date for options to purchase approximately
1.3 million shares from pre-April 1996 grants to
the signature date on the grant, which resulted in an additional $0.7 million expense being recorded.After reviewing information connected with the periodic grants described above, the Company
determined that the recorded grant date for nearly all grants in this category should be
modified, resulting in the adjustment of the measurement dates for
grants of options to purchase of approximately 16.4
million shares, representing approximately 99% of grants made to existing non-officer employees
during the Review Period. This resulted in additional stock-based compensation expense of $13.3
million.
    
    Grants by the Companys Taiwanese and Chinese Subsidiaries.In 1999, the Companys
Taiwanese subsidiary, Trident Technologies, Inc., or TTI set up a stock purchase plan,
structured in a fashion similar to a United States-styled stock option plan. In 2000, the
Companys Chinese subsidiary Trident Multimedia Technologies (Shanghai) Co., Ltd., or TMT, set
up a stock option plan. Because the TMT option agreements contained repurchase clauses,
variable accounting should have been applied. In addition, employees
with unvested TMT options were granted replacement options, to purchase Trident stock and TTI stock within 6
months of cancellation of their TMT options. Under FASB Interpretation No. 44,
Accounting for Certain
Transactions Involving Stock Compensation, or FIN 44, these options are deemed to have been
issued in exchange for cancellation of TMT option shares. In June 2003, TTI was recapitalized,
and stock purchase plan participants were given the opportunity to either fully purchase their
vested TTI shares or sell them back. Employees with an aggregate of 0.3 million unvested stock
purchase plan shares were granted warrants, referred to below as options, to purchase TTI stock
within six months of cancellation of their TTI stock purchase plan shares. These options are
deemed to have been issued in exchange for cancellation of the stock purchase plan shares. As a
result, under FIN 44 the Company was required to apply variable accounting in determining the
stock based compensation expense attributable to such shares through June 30, 2005.Between 2003 and 2005, TTI also granted options to purchase approximately 18.5 million shares of
its common stock to officers, employees and consultants in connection with the recapitalization
of TTI. Approximately 67% of these options were granted in August 2003. During the course of
its investigation, the Special Committee reviewed the manner in which these options were
granted. The Company reviewed the evidence presented by the Special Committee, and the
accounting that had been applied to such options. Options had been granted, contingent upon
repurchase clauses included therein, not only to TTI employees, but also to certain employees of
the Company and its other subsidiaries. All of the TTI options were
subject to variable accounting either because the option was
modified, the exercise price was denominated in a currency other than
that of the primary economic environment of TTI or the option
holders, the option agreements contained repurchase clauses, or the
options were deemed to have been issued in exchange for cancellation
of previously issued options or stock purchase plan shares. This
resulted in additional compensation expense totaling approximately
$23.7 million through June 30, 2006. This accounting error did not stem from inappropriate stock
administration practices, however, the Company identified approximately 17 instances of
modifications to TTI option grants that increased or decreased the number of shares, and these
modifications would have required the application of variable accounting for the underlying
options in any event.In March 2005, the Company acquired the minority interest in TTI, which resulted in its owning
approximately 99.9% of the outstanding equity interests in TTI. As part of this acquisition,
the Company converted all outstanding options to acquire TTI common stock into options to
acquire its common stock, which included options granted to its executive officers, employees,
prospective employees and consultants.The Special Committee also found evidence that, subsequent to the conversion of the TTI options
to Trident options in fiscal 2005, previously executed offer letters for a limited number of
recently-hired or prospective
 89




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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 personnel were altered by modifying references to the terms of TTI
option grants to be made to such personnel, including references to the number of option shares
granted. These letters were modified to conform to the terms reflected in the final list of TTI
options provided to the Compensation Committee in connection with the conversion. The modified
letters retained the dates set forth in the original offer letters that were provided to the
affected prospective employees.Based upon additional information obtained in the Special Committees investigation, the Company
determined that TTI set aside for two former members of its Board of Directors options to
acquire up to 80,000 and 60,000 shares of TTI common stock, which represent 32,000 and 24,000
shares of its common stock on an as-converted basis, respectively. Half of those options were
exercised prior to conversion for these two
directors; however, none of the underlying shares were ever sold, and the Company does not
believe that title to the underlying shares was conveyed to either director. These transactions
were not disclosed to the Companys Board of Directors. After reviewing information relating to
these grants, the Board of Directors concluded that a conflict of interest may have arisen
between Trident and each of such directors, individually, in their capacity as directors. While
the Board of Directors did not make any findings of wrongdoing, the independent members of the
Board of Directors and each of the two directors concluded that it would be in the best
interests of Trident and its stockholders for them to resign from their positions as members of
our Board of Directors. Both directors resigned on May 1, 2007.
    
    Option Repricings. The Board of Directors approved option
repricings on four dates between 1992 and 1998. No modifications
to measurement dates or related accounting were necessary for the
two repricings that were made in 1998. The Company determined
different measurement dates should be used for the two repricings
in 1993 and 1996 due to the Companys failure to obtain all of the
necessary paperwork implementing the repricing prior to the
originally recorded measurement dates. The cumulative effect of
the change in measurement dates related to the 1993 and 1996 repricings
through June 30, 2006 was $1.5 million.
    
    Modifications of Existing Options and Other Issues.The Special
Committee found evidence that the terms of certain outstanding
options had been modified at various times between 1993 and 2006
at the direction of the Companys former Chief Executive Officer.
At the time of the modifications, the Company did not make the
necessary adjustments in its financial statements to account for
these modifications. As a result, the Company is recording
additional stock-based compensation expense, before income taxes,
of approximately $12.2 million through June 30, 2006.
Approximately $7.4 million of this amount results from the
application of variable accounting due to the modification of
grants to purchase approximately 1 million shares that occurred after
December 31, 1998, as required by FIN 44. Approximately $2.4
million was primarily the result of extensions to the
exercisability period or accelerated vesting following termination
of employment, or the change of status from employee to
consultant. The remaining $2.4 million related to cancellation of
options granted by TTI and TMT and issuance of new options to
purchase Tridents common stock within six months of such cancellation,
resulting in the application of variable accounting.
    
    Option Exercises.The Special Committee examined whether cash
exercises by officers and employees were properly recorded. Since
many of the Companys option grants were non-qualified stock
options, exercise of the option triggers a tax liability on the
part of the individual optionee based upon the difference between
the exercise price and the fair market value of the Companys stock on the
date of exercise. Cash exercises prior to 1998 often occurred at
low prices. In a small number of cases, including one that
involved the Companys former Chief Executive Officer, the Special
Committee concluded that the actual exercise date was different
than the date recorded in the Companys equity award database, and
may have been chosen, or in certain cases changed, to take
advantage of a low market value of the Companys stock on the date of exercise to
decrease the amount of the tax liability. While the individual
option holders may have tax liabilities associated with these
events, the Company believes that any liability of the Company is
immaterial.
 90




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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 Tax Impact of Restatement Items
     Impact on SFAS 123 Disclosure
  91




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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  Restatements and Impact on the Consolidated Financial Statements
   Impact of the Additional Stock-Based Compensation Expense-Related Adjustments on the Consolidated
Financial Statements
 Total
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Pretax
    
    
    Minority
    
    
    Income Tax
    
    
    After TaxPeriodic
    
    
    Directors
    
    
    Option
    
    
    Option
    
    
    Compensation
    
    
    Interest
    
    
    Expense
    
    
    CompensationFiscal Years Ended June 30,
    
    New Hires
    
    
    Repricings
    
    
    Grants
    
    
    & Officers
    
    
    Modifications
    
    
    Accounting
    
    
    Expense
    
    
    (Benefit) (1)
    
    
    (Benefit)
    
    
    Expense1993
    
    $
    
    
    
    $
    
    
    
    $
    1
    
    
    $
    220
    
    
    $
    
    
    
    $
    
    
    
    $
    221
    
    
    $
    
    
    
    $
    (84
    )
    
    $
    1371994
    
    
    
    
    
    
    107
    
    
    
    50
    
    
    
    245
    
    
    
    
    
    
    
    
    
    
    
    402
    
    
    
    
    
    
    
    (133
    )
    
    
    2691995
    
    
    29
    
    
    
    81
    
    
    
    328
    
    
    
    74
    
    
    
    
    
    
    
    
    
    
    
    512
    
    
    
    
    
    
    
    (156
    )
    
    
    3561996
    
    
    126
    
    
    
    70
    
    
    
    581
    
    
    
    123
    
    
    
    
    
    
    
    
    
    
    
    900
    
    
    
    
    
    
    
    (221
    )
    
    
    6791997
    
    
    1,252
    
    
    
    561
    
    
    
    1,142
    
    
    
    798
    
    
    
    23
    
    
    
    
    
    
    
    3,776
    
    
    
    
    
    
    
    (1,205
    )
    
    
    2,5711998
    
    
    1,061
    
    
    
    352
    
    
    
    1,098
    
    
    
    854
    
    
    
    
    
    
    
    
    
    
    
    3,365
    
    
    
    
    
    
    
    1,133
    
    
    
    4,4981999
    
    
    809
    
    
    
    229
    
    
    
    1,035
    
    
    
    778
    
    
    
    
    
    
    
    
    
    
    
    2,851
    
    
    
    
    
    
    
    
    
    
    
    2,8512000
    
    
    618
    
    
    
    140
    
    
    
    1,197
    
    
    
    840
    
    
    
    3
    
    
    
    107
    
    
    
    2,905
    
    
    
    
    
    
    
    (1,083
    )
    
    
    1,8222001
    
    
    (53
    )
    
    
    (33
    )
    
    
    525
    
    
    
    800
    
    
    
    39
    
    
    
    616
    
    
    
    1,894
    
    
    
    
    
    
    
    (489
    )
    
    
    1,4052002
    
    
    262
    
    
    
    
    
    
    
    793
    
    
    
    410
    
    
    
    120
    
    
    
    107
    
    
    
    1,692
    
    
    
    
    
    
    
    (565
    )
    
    
    1,1272003
    
    
    176
    
    
    
    
    
    
    
    646
    
    
    
    127
    
    
    
    368
    
    
    
    21
    
    
    
    1,338
    
    
    
    
    
    
    
    25
    
    
    
    1,363Cumulative 1993-2003 impact
    
    
    4,280
    
    
    
    1,507
    
    
    
    7,396
    
    
    
    5,269
    
    
    
    553
    
    
    
    851
    
    
    
    19,856
    
    
    
    
    
    
    
    (2,778
    )
    
    
    17,0782004
    
    
    75
    
    
    
    
    
    
    
    1,910
    
    
    
    
    
    
    
    3,459
    
    
    
    10,773
    
    
    
    16,217
    
    
    
    (1,034
    )
    
    
    
    
    
    
    15,1832005
    
    
    44
    
    
    
    
    
    
    
    1,932
    
    
    
    
    
    
    
    7,314
    
    
    
    11,696
    
    
    
    20,986
    
    
    
    (1,337
    )
    
    
    
    
    
    
    19,6492006
    
    
    160
    
    
    
    
    
    
    
    2,102
    
    
    
    
    
    
    
    826
    
    
    
    809
    
    
    
    3,897
    
    
    
    
    
    
    
    
    
    
    
    3,897Total cumulative impact - 1993 - 2006
    
    $
    4,559
    
    
    $
    1,507
    
    
    $
    13,340
    
    
    $
    5,269
    
    
    $
    12,152
    
    
    $
    24,129
    
    
    $
    60,956
    
    
    $
    (2,371
    )
    
    $
    (2,778
    )
    
    $
    55,807
  92




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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  Stock-Based Compensation ExpenseAs Reported
    
    
    Adjustments
    
    
    As Restated(In thousands)Fiscal year ended June 30,1993
    
    
    606
    
    
    
    221
    
    
    
    8271994
    
    
    364
    
    
    
    402
    
    
    
    7661995
    
    
    268
    
    
    
    512
    
    
    
    7801996
    
    
    253
    
    
    
    900
    
    
    
    1,1531997
    
    
    
    
    
    
    3,776
    
    
    
    3,7761998
    
    
    
    
    
    
    3,365
    
    
    
    3,3651999
    
    
    
    
    
    
    2,851
    
    
    
    2,8512000
    
    
    
    
    
    
    2,905
    
    
    
    2,9052001
    
    
    
    
    
    
    1,894
    
    
    
    1,8942002
    
    
    
    
    
    
    1,692
    
    
    
    1,6922003
    
    
    105
    
    
    
    1,338
    
    
    
    1,4432004
    
    
    606
    
    
    
    16,217
    
    
    
    16,8232005
    
    
    9,514
    
    
    
    20,986
    
    
    
    30,5002006
    
    
    9,286
    
    
    
    3,897
    
    
    
    13,183Total cumulative impact
    
    $
    21,002
    
    
    $
    60,956
    
    
    $
    81,958
 93




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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  RECONCILIATION OF CONSOLIDATED STATEMENTS OF OPERATIONS FOR FISCAL 2005 AND 2004
 Year Ended June 30, 2005
    
    
    Year Ended June 30, 2004(In thousands, except per share data)
    
    As Reported
    
    
    Adjustments
    
    
    As Restated
    
    
    As Reported
    
    
    Adjustments
    
    
    As RestatedRevenues
    
    $
    69,011
    
    
    $
    
    
    
    $
    69,011
    
    
    $
    52,551
    
    
    $
    
    
    
    $
    52,551Cost of revenues
    
    
    32,150
    
    
    
    412
    
    
    
    32,562
    
    
    
    23,674
    
    
    
    84
    
    
    
    23,758Gross profit
    
    
    36,861
    
    
    
    (412
    )
    
    
    36,449
    
    
    
    28,877
    
    
    
    (84
    )
    
    
    28,793Operating expenses:Research and development
    
    
    26,088
    
    
    
    11,207
    
    
    
    37,295
    
    
    
    11,475
    
    
    
    8,142
    
    
    
    19,617Selling, general and administrative
    
    
    14,503
    
    
    
    9,367
    
    
    
    23,870
    
    
    
    12,968
    
    
    
    8,115
    
    
    
    21,083In-process research and development

    
    5,171
    
    
    
    
    
    
    
    5,171
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    45,762
    
    
    
    20,574
    
    
    
    66,336
    
    
    
    24,443
    
    
    
    16,257
    
    
    
    40,700Income (loss) from operations
    
    
    (8,901
    )
    
    
    (20,986
    )
    
    
    (29,887
    )
    
    
    4,434
    
    
    
    (16,341
    )
    
    
    (11,907
    )Interest income
    
    
    546
    
    
    
    
    
    
    
    546
    
    
    
    158
    
    
    
    
    
    
    
    158Gain on investments, net
    
    
    330
    
    
    
    
    
    
    
    330
    
    
    
    10,584
    
    
    
    
    
    
    
    10,584Other income (expense), net
    
    
    95
    
    
    
    
    
    
    
    95
    
    
    
    (262
    )
    
    
    
    
    
    
    (262
    )Minority interests in subsidiaries
    
    
    (1,179
    )
    
    
    1,337
    
    
    
    158
    
    
    
    (1,832
    )
    
    
    1,158
    
    
    
    (674
    )Income (loss) before income taxes
    
    
    (9,109
    )
    
    
    (19,649
    )
    
    
    (28,758
    )
    
    
    13,082
    
    
    
    (15,183
    )
    
    
    (2,101
    )Provision for income taxes
    
    
    1,426
    
    
    
    
    
    
    
    1,426
    
    
    
    2,704
    
    
    
    
    
    
    
    2,704Net income (loss)
    
    $
    (10,535
    )
    
    $
    (19,649
    )
    
    $
    (30,184
    )
    
    $
    10,378
    
    
    $
    (15,183
    )
    
    $
    (4,805
    )Basic net income (loss) per share
    
    $
    (0.22
    )
    
    $
    (0.42
    )
    
    $
    (0.64
    )
    
    $
    0.23
    
    
    $
    (0.34
    )
    
    $
    (0.11
    )Diluted net income (loss) per share
    
    $
    (0.22
    )
    
    $
    (0.42
    )
    
    $
    (0.64
    )
    
    $
    0.21
    
    
    $
    (0.32
    )
    
    $
    (0.11
    )Shares used in computing basic per share amounts
    
    
    47,418
    
    
    
    
    
    
    
    47,418
    
    
    
    44,698
    
    
    
    
    
    
    
    44,698Shares used in computing diluted per share amounts
    
    
    47,418
    
    
    
    
    
    
    
    47,418
    
    
    
    50,022
    
    
    
    (5,324
    )
    
    
    44,698The following table presents details of the total stock-based
compensation expense that is included in each functional line item in the
consolidated statements of operations above:Supplemental
dataCost of revenues
    
    
    
    
    
    
    412
    
    
    
    412
    
    
    
    
    
    
    
    84
    
    
    
    84Research and development
    
    
    5,482
    
    
    
    13,807
    
    
    
    19,289
    
    
    
    124
    
    
    
    8,471
    
    
    
    8,595Selling, general and administrative
    
    
    4,032
    
    
    
    6,767
    
    
    
    10,799
    
    
    
    482
    
    
    
    7,662
    
    
    
    8,144Total stock-based compensation expense

    $
    9,514
    
    
    $
    20,986
    
    
    $
    30,500
    
    
    $
    606
    
    
    $
    16,217
    
    
    $
    16,823
 94




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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  RECONCILIATION OF CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2005
 June 30, 2005(In thousands)
    
    As Reported
    
    
    Adjustments
    
    
    As RestatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    37,598
    
    
    $
    
    
    
    $
    37,598Investments
    
    
    54,555
    
    
    
    
    
    
    
    54,555Accounts receivable, net
    
    
    6,317
    
    
    
    
    
    
    
    6,317Inventories
    
    
    2,735
    
    
    
    
    
    
    
    2,735Deferred income tax assets
    
    
    
    
    
    
    107
    
    
    
    107Prepaid expenses and other current assets
    
    
    2,307
    
    
    
    
    
    
    
    2,307Total current assets
    
    
    103,512
    
    
    
    107
    
    
    
    103,619Property and equipment, net
    
    
    2,154
    
    
    
    
    
    
    
    2,154Intangible assets, net
    
    
    24,621
    
    
    
    
    
    
    
    24,621Other assets
    
    
    4,597
    
    
    
    
    
    
    
    4,597Total assets
    
    $
    134,884
    
    
    $
    107
    
    
    $
    134,991LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    
    6,678
    
    
    
    
    
    
    
    6,678Accrued expenses
    
    
    10,009
    
    
    
    125
    
    
    
    10,134Income taxes payable
    
    
    5,181
    
    
    
    
    
    
    
    5,181Deferred income tax liabilities
    
    
    3,561
    
    
    
    (3,561
    )
    
    
    Total current liabilities
    
    
    25,429
    
    
    
    (3,436
    )
    
    
    21,993Deferred income tax liabilities
    
    
    
    
    
    
    3,668
    
    
    
    3,668Minority interests in subsidiary
    
    
    20
    
    
    
    (10
    )
    
    
    10Total liabilities
    
    
    25,449
    
    
    
    222
    
    
    
    25,671Commitments and contingenciesStockholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    52
    
    
    
    
    
    
    
    52Additional paid-in capital
    
    
    125,907
    
    
    
    38,466
    
    
    
    164,610Deferred stock-based compensation
    
    
    (36,280
    )
    
    
    13,330
    
    
    
    (23,187
    )Retained earnings (accumulated deficit)
    
    
    14,415
    
    
    
    (51,911
    )
    
    
    (37,496
    )Accumulated other comprehensive income
    
    
    5,341
    
    
    
    
    
    
    
    5,341Total stockholders equity
    
    
    109,435
    
    
    
    (115
    )
    
    
    109,320Total liabilities and stockholders equity
    
    $
    134,884
    
    
    $
    107
    
    
    $
    134,991
 95




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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 4. INVESTMENTS AND RELATED PARTY TRANSACTIONS
 Accounting for Certain Investments in
Debt and Equity Securities
 Reporting Comprehensive
Income
     96




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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 5. BALANCE SHEET COMPONENTS
 June 30,(In thousands)
    
    2006
    
    
    2005Inventories:Work in process
    
    $
    9,566
    
    
    $
    1,569Finished goods
    
    
    5,075
    
    
    
    1,166Total inventories
    
    $
    14,641
    
    
    $
    2,735Property and equipment, net:Machinery, equipment and software
    
    $
    8,954
    
    
    $
    6,574Furniture and fixtures
    
    
    1,237
    
    
    
    1,723Leasehold improvements
    
    
    944
    
    
    
    1,05711,135
    
    
    
    9,354Accumulated depreciation and amortization
    
    
    (7,684
    )
    
    
    (7,200
    )Total property and equipment, net
    
    $
    3,451
    
    
    $
    2,154Accrued expenses :Accrued compensation and benefits
    
    $
    9,633
    
    
    $
    3,752Others
    
    
    11,699
    
    
    
    6,382Total accrued expenses
    
    $
    21,332
    
    
    $
    10,134
 6. INTANGIBLE ASSETS
  2006
    
    
    2005Accumulated
    
    
    
    
    
    
    
    
    
    
    Accumulated(In thousands)
    
    Gross
    
    
    Amortization
    
    
    Net
    
    
    Gross
    
    
    Amortization
    
    
    NetCore and developed technologies
    
    $
    23,694
    
    
    $
    (6,249
    )
    
    $
    17,445
    
    
    $
    23,658
    
    
    $
    (1,121
    )
    
    $
    22,537Customer relationships
    
    
    2,120
    
    
    
    (375
    )
    
    
    1,745
    
    
    
    2,118
    
    
    
    (34
    )
    
    
    2,084Total
    
    $
    25,814
    
    
    $
    (6,624
    )
    
    $
    19,190
    
    
    $
    25,776
    
    
    $
    (1,155
    )
    
    $
    24,621
  (In thousands)
    
    2006
    
    
    2005
    
    
    2004Reported as:Cost of revenues
    
    $
    5,128
    
    
    $
    1,121
    
    
    $
    Selling, general and administrative
    
    
    341
    
    
    
    34
    
    
    
    Total
    
    $
    5,469
    
    
    $
    1,155
    
    
    $
    
  97




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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 7. GUARANTEES
 Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others
 (In thousands)
    
    2006Accrued product warranty, beginning of fiscal year
    
    $
    Charged to cost of revenues
    
    
    1,190Actual product warranty expenditures
    
    
    (108
    )Accrued product warranty, end of fiscal year
    
    $
    1,082
 8. COMMITMENTS AND CONTINGENCIES
 Commitments
 Lease Commitments
  Purchase Commitments
  Contingencies
 Shareholder Derivative Litigation
 In re
Trident Microsystems Inc. Derivative Litigation Limke v. Lin et al
 98




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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  Intellectual Property Litigation
   Regulatory Actions
  Nasdaq Proceedings
  99




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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   Indemnification Obligations
   9. STOCKHOLDERS EQUITY
 Preferred Shares Rights
  Stock Split
  100




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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  Comprehensive Income (Loss)
  10. EMPLOYEE STOCK PLANS
 Equity Incentive Plans
     101




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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
    Equity Incentive Plans
    
    Employee Stock Purchase PlanYear Ended June 30,
    
    2006
    
    2005
    
    2004
    
    2006
    
    2005
    
    2004Expected terms (in years)
    
    5
    
    5
    
    5
    
    
    
    0.5
    
    0.5Volatility
    
    68.81%
    
    48.00%
    
    69.00%
    
    
    
    39% to 64%
    
    59% - 71%Risk-free interest rate
    
    4.14%
    
    3.25% - 4.33%
    
    2.46% - 4.10%
    
    
    
    1.17% to 3.19%
    
    1.57% to 9.83%Expected dividend rate
    
    
    
    
    
    
    
    
    
    
    
    Weighted average fair value
    
    $10.37
    
    $7.95
    
    $3.38
    
    
    
    $3.14
    
    $2.13
   102




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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   
 Year Ended(In thousands, except per share amounts)
    
    June 30, 2006Cost of revenues
    
    $
    113Research and development
    
    
    8,912Selling, general and administrative
    
    
    4,158Total share-based compensation expense
    
    
    13,183Income taxes
    
    
    Net decrease on net income
    
    $
    13,183Increase (decrease) on:Cash flows from operating activities
    
    $
    (1,742
    )Cash flows from financing activities
    
    $
    1,742Decrease on:Net income per share-Basic
    
    $
    0.24Net income per share-Diluted
    
    $
    0.21
  103




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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  Options OutstandingShares Available
    
    
    
    
    
    Weighted Average(In thousands, except per share amounts)
    
    for Grant
    
    Number of Shares
    
    Exercise PriceBalance at June 30, 2003
    
    
    3,216
    
    
    
    13,399
    
    
    $
    1.50Plan shares expired
    
    
    (252
    )
    
    
    
    
    
    
    Options granted
    
    
    (700
    )
    
    
    700
    
    
    
    5.93Options exercised
    
    
    
    
    
    
    (3,738
    )
    
    
    1.42Options canceled
    
    
    1,296
    
    
    
    (1,296
    )
    
    
    1.47Balance at June 30, 2004
    
    
    3,560
    
    
    
    9,065
    
    
    $
    1.89Additional shares reserved
    
    
    5,868
    
    
    
    
    
    
    
    Plan shares expired
    
    
    (36
    )
    
    
    
    
    
    
    Options granted
    
    
    (308
    )
    
    
    308
    
    
    
    7.86Options assumed through acquisition
    
    
    (5,868
    )
    
    
    5,868
    
    
    
    0.79Options exercised
    
    
    
    
    
    
    (2,351
    )
    
    
    1.35Options canceled
    
    
    120
    
    
    
    (120
    )
    
    
    1.27Balance at June 30, 2005
    
    
    3,336
    
    
    
    12,770
    
    
    $
    1.65Additional shares reserved
    
    
    4,350
    
    
    
    
    
    
    
    Plan shares expired
    
    
    (161
    )
    
    
    
    
    
    
    Options granted
    
    
    (2,423
    )
    
    
    2,423
    
    
    
    12.99Options exercised
    
    
    
    
    
    
    (5,366
    )
    
    
    1.54Options canceled
    
    
    233
    
    
    
    (233
    )
    
    
    3.43Balance at June 30, 2006
    
    
    5,335
    
    
    
    9,594
    
    
    $
    4.49Vested and
expected to vest at June 30, 2006
    
    
    
    
    
    
    9,385
    
    
    $
    4.44
   104




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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  Options Outstanding
    
    Options ExercisableWeightedAverageRemaining
    
    Weighted
    
    
    
    
    
    WeightedContractual
    
    Average
    
    
    
    
    
    AverageNumber
    
    Term (in
    
    Exercise
    
    Number of
    
    ExerciseRange of Exercise Prices
    
    of Shares
    
    Years)
    
    Price
    
    Shares
    
    Price$
    0.79
    
    
    -
    
    $
    0.79
    
    
    
    4,207
    
    
    
    7.6
    
    
    $
    0.79
    
    
    
    658
    
    
    $
    0.79$
    0.88
    
    
    -
    
    $
    5.22
    
    
    
    2,499
    
    
    
    6.0
    
    
    $
    2.07
    
    
    
    1,853
    
    
    $
    1.69$
    5.35
    
    
    -
    
    $
    13.99
    
    
    
    2,536
    
    
    
    8.9
    
    
    $
    11.08
    
    
    
    149
    
    
    $
    7.50$
    14.34
    
    
    -
    
    $
    29.65
    
    
    
    352
    
    
    
    9.5
    
    
    $
    18.54
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    
    
    9,594
    
    
    
    7.6
    
    
    $
    4.49
    
    
    
    2,660
    
    
    $
    1.79
  Employee Stock Purchase Plan
  11. GAIN (LOSS) ON INVESTMENTS, NET
 105




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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  Gain on sale of UMC common stock (Note 4)
    
    $
    2,652Gain on sale of graphics division and interests in XGI
    
    
    6,627Gain on sale of 7% interest in TTI
    
    
    1,817Write-off of investments in privately held companies
    
    
    (679
    )Gain on sale of investments in privately held companies
    
    
    257Venture capital funds write-down
    
    
    (90
    )Total
    
    $
    10,584
  12. INCOME TAXES
 Accounting for Income Taxes .
 106




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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  Year Ended June 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2004(As Restated)
    
    
    (As Restated)Loss subject to domestic income taxes only
    
    $
    (12,243
    )
    
    $
    (11,200
    )
    
    $
    (5,941
    )Income (loss) subject to foreign income taxes, and in
certain cases, domestic income taxes
    
    
    42,917
    
    
    
    (17,558
    )
    
    
    3,840$
    30,674
    
    
    $
    (28,758
    )
    
    $
    (2,101
    )
  Year Ended June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2004(As Restated)
    
    
    (As Restated)Current:Federal
    
    $
    (610
    )
    
    $
    66
    
    
    $
    State
    
    
    2
    
    
    
    2
    
    
    
    1Foreign
    
    
    8,303
    
    
    
    1,358
    
    
    
    2,703$
    7,695
    
    
    $
    1,426
    
    
    $
    2,704Deferred:Federal
    
    
    197
    
    
    
    (197
    )
    
    
    State
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    (1,575
    )
    
    
    197
    
    
    
    (1,378
    )
    
    
    
    
    
    
    $
    6,317
    
    
    $
    1,426
    
    
    $
    2,704
  June 30,(in thousands)
    
    2006
    
    
    2005(As Restated)Deferred tax assets:Reserves and accruals
    
    $
    2,184
    
    
    $
    856Research and development credits
    
    
    14,706
    
    
    
    12,889Net operating loss carryforwards
    
    
    6,893
    
    
    
    19,025Other
    
    
    7,718
    
    
    
    7,054Deferred tax assets
    
    
    31,501
    
    
    
    39,824Valuation allowance
    
    
    (24,151
    )
    
    
    (33,654
    )Deferred tax assets, net
    
    
    7,350
    
    
    
    6,170Total deferred tax liabilities:Capital gains not recognized for tax
    
    
    (1,413
    )
    
    
    (3,561
    )Unremitted earnings of foreign subsidiaries
    
    
    (5,972
    )
    
    
    (5,972
    )Other
    
    
    
    
    
    
    (198
    )Total deferred tax liabilities
    
    
    (7,385
    )
    
    
    (9,731
    )Net deferred
tax liabilities
    
    $
    (35
    )
    
    $
    (3,561
    )
   107




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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   Year Ended June 30,2006
    
    2005
    
    2004(As Restated)
    
    (As Restated)Federal statutory rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State taxes, net of federal tax benefit
    
    
    5.0
    
    
    
    5.0
    
    
    
    4.6Research and development credit
    
    
    (6.5
    )
    
    
    6.1
    
    
    
    95.6Foreign rate differential
    
    
    (27.0
    )
    
    
    (26.8
    )
    
    
    (64.7
    )Valuation allowance
    
    
    15.5
    
    
    
    (24.7
    )
    
    
    (199.2
    )Other
    
    
    (1.3
    )
    
    
    0.5
    
    
    
    0.0Effective income tax rate
    
    
    20.7
    %
    
    
    (4.9)
    %
    
    
    (128.7)
    %
  13. NET INCOME (LOSS) PER SHARE
  Year Ended June 30,(In thousands, except per share data)
    
    2006
    
    2005
    
    2004(As Restated)
    
    (As Restated)Income (loss) before change in accounting principle
    
    $
    24,357
    
    
    $
    (30,184
    )
    
    $
    (4,805
    )Cumulative effect of change in accounting principle
    
    
    1,819
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    26,176
    
    
    $
    (30,184
    )
    
    $
    (4,805
    )Shares used in computing basic per share amounts
    
    
    54,822
    
    
    
    47,418
    
    
    
    44,698Dilutive potential common shares
    
    
    7,704
    
    
    
    
    
    
    
    Shares used in computing diluted per share amounts
    
    
    62,526
    
    
    
    47,418
    
    
    
    44,698Income (loss) before change in accounting principle:Basic
    
    $
    0.45
    
    
    $
    (0.64
    )
    
    $
    (0.11
    )Diluted
    
    $
    0.39
    
    
    $
    (0.64
    )
    
    $
    (0.11
    )Net income (loss) per share:Basic
    
    $
    0.48
    
    
    $
    (0.64
    )
    
    $
    (0.11
    )Diluted
    
    $
    0.42
    
    
    $
    (0.64
    )
    
    $
    (0.11
    )
  108




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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  14. BUSINESS COMBINATION
  Business Combinations
 Fair value of TMI common stock
    
    $
    31,146Cash
    
    
    6,206Transaction costs
    
    
    501Total purchase price
    
    $
    37,853Purchase price allocation:Net tangible assets acquired
    
    $
    6,176In-process research and development
    
    
    5,171Inventory write-up
    
    
    366Customer relationships
    
    
    2,147Core and developed technologies
    
    
    23,993Total purchase price
    
    $
    37,853
  109




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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
     For the Years Ended(In thousands except per share amounts, unaudited)
    
    June 30, 2005
    
    June 30, 2004(As restated)
    
    (As restated)Revenue
    
    $
    69,011
    
    
    $
    52,551Pro forma net loss
    
    $
    (31,311
    )
    
    $
    (25,329
    )Pro forma net loss per share -
basic and fully diluted
    
    $
    (0.64
    )
    
    $
    (0.54
    )Shares used in calculating
basic and fully diluted amounts
    
    
    49,274
    
    
    
    46,554
 15. SEGMENT INFORMATION AND MAJOR CUSTOMERS
 Segment Information
  110




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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  Year Ended June 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2004Revenues:Japan
    
    $
    66,705
    
    
    $
    21,190
    
    
    $
    3,567South Korea
    
    
    55,742
    
    
    
    10,461
    
    
    
    10,012China
    
    
    27,573
    
    
    
    30,176
    
    
    
    30,465Taiwan
    
    
    12,494
    
    
    
    5,318
    
    
    
    7,492United States
    
    
    388
    
    
    
    204
    
    
    
    213Others
    
    
    8,540
    
    
    
    1,662
    
    
    
    802Total
    
    $
    171,442
    
    
    $
    69,011
    
    
    $
    52,551
  June 30,(In thousands)
    
    2006
    
    
    2005Long-lived assets:China
    
    $
    1,884
    
    
    $
    1,608United States
    
    
    1,134
    
    
    
    312Taiwan
    
    
    385
    
    
    
    234Japan
    
    
    48
    
    
    
    Total
    
    $
    3,451
    
    
    $
    2,154
  Major Customers
  Years Ended June 30,Revenue:
    
    2006
    
    2005
    
    2004Customer A
    
    
    
    
    
    
    14
    %
    
    
    23
    %Customer B
    
    
    
    
    
    
    
    
    
    
    16
    %Customer C
    
    
    31
    %
    
    
    10
    %
    
    
    15
    %Customer D
    
    
    30
    %
    
    
    22
    %
    
    
    
  16. SUBSEQUENT EVENTS
  111




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##### Table of Contents



TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
      112




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
   Consolidated financial statements and financial statement schedule
    Internal control over financial reporting
 Internal ControlIntegrated
Framework
   113




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##### Table of Contents



(1) Failure to Maintain Effective Control Environment
 (2) Insufficient controls relating to the Companys stock-based compensation expense
 
    
    Effective controls, including monitoring, were not maintained to ensure the proper
exercise of authority to grant and administer stock options as well as the existence,
completeness, valuation and presentation of its stock-based compensation transactions.
    
    There was insufficient segregation of duties with respect to stock option administration
between those who had authority to grant options and those who maintained the Companys
stock administration records.
   114




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Internal ControlIntegrated Framework Internal ControlIntegrated Framework
  
 115




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##### Table of Contents



SUPPLEMENTARY FINANCIAL DATA
  RECONCILIATION OF CONSOLIDATED STATEMENTS OF CASH FLOWS FOR FISCAL 2005 AND 2004
 Year Ended June 30, 2005
    
    
    Year Ended June 30, 2004(In thousands, except per share data)
    
    As Reported
    
    
    Adjustments
    
    
    As Restated
    
    
    As Reported
    
    
    Adjustments
    
    
    As RestatedCash flows from operating activities:Net income (loss)
    
    $
    (10,535
    )
    
    $
    (19,649
    )
    
    $
    (30,184
    )
    
    $
    10,378
    
    
    $
    (15,183
    )
    
    $
    (4,805
    )Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:Stock-based compensation expense
    
    
    9,514
    
    
    
    20,986
    
    
    
    30,500
    
    
    
    606
    
    
    
    16,217
    
    
    
    16,823Depreciation and amortization
    
    
    1,010
    
    
    
    
    
    
    
    1,010
    
    
    
    1,073
    
    
    
    
    
    
    
    1,073Loss on disposal of property and equipment
    
    
    253
    
    
    
    
    
    
    
    253
    
    
    
    460
    
    
    
    
    
    
    
    460Provision for doubtful accounts and sales returns
    
    
    113
    
    
    
    
    
    
    
    113
    
    
    
    (309
    )
    
    
    
    
    
    
    (309
    )(Gain)loss on investments, net
    
    
    (331
    )
    
    
    
    
    
    
    (331
    )
    
    
    (10,584
    )
    
    
    
    
    
    
    (10,584
    )Amortization of intangible assets
    
    
    1,155
    
    
    
    
    
    
    
    1,155
    
    
    
    
    
    
    
    
    
    
    
    Minority interests in subsidiaries
    
    
    1,179
    
    
    
    (1,337
    )
    
    
    (158
    )
    
    
    2,223
    
    
    
    (1,158
    )
    
    
    1,065In-process research and development
    
    
    5,171
    
    
    
    
    
    
    
    5,171
    
    
    
    
    
    
    
    
    
    
    
    Changes in assets and liabilities, net of effects of business combination:Accounts receivable
    
    
    (3,994
    )
    
    
    
    
    
    
    (3,994
    )
    
    
    2,211
    
    
    
    
    
    
    
    2,211Inventories
    
    
    368
    
    
    
    
    
    
    
    368
    
    
    
    (419
    )
    
    
    
    
    
    
    (419
    )Prepaid expenses and other current assets
    
    
    (1,221
    )
    
    
    
    
    
    
    (1,221
    )
    
    
    (353
    )
    
    
    
    
    
    
    (353
    )Accounts payable
    
    
    3,213
    
    
    
    
    
    
    
    3,213
    
    
    
    (4,794
    )
    
    
    
    
    
    
    (4,794
    )Accrued expenses
    
    
    2,581
    
    
    
    
    
    
    
    2,581
    
    
    
    (45
    )
    
    
    124
    
    
    
    79Income taxes payable
    
    
    818
    
    
    
    
    
    
    
    818
    
    
    
    2,680
    
    
    
    
    
    
    
    2,680Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net cash provided by operating activities
    
    
    9,294
    
    
    
    
    
    
    
    9,294
    
    
    
    3,127
    
    
    
    
    
    
    
    3,127Cash flows from investing activities:Proceeds from sale of graphics division, net of transaction cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,427
    
    
    
    
    
    
    
    8,427Proceeds from sale of minority intersts in subsidiaries
    
    
    877
    
    
    
    
    
    
    
    877
    
    
    
    2,750
    
    
    
    
    
    
    
    2,750Proceeds from sale of other long-term investments
    
    
    22
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from sale of short-term investments, net
of transaction cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,195
    
    
    
    
    
    
    
    9,195Other assets
    
    
    (824
    )
    
    
    
    
    
    
    (824
    )
    
    
    (240
    )
    
    
    
    
    
    
    (240
    )Purchases of property and equipment
    
    
    (1,045
    )
    
    
    
    
    
    
    (1,045
    )
    
    
    (1,116
    )
    
    
    
    
    
    
    (1,116
    )Purchases of investments
    
    
    (1,012
    )
    
    
    
    
    
    
    (1,012
    )
    
    
    (90
    )
    
    
    
    
    
    
    (90
    )Purchase of minority interests in subsidiary
    
    
    (6,145
    )
    
    
    
    
    
    
    (6,145
    )
    
    
    
    
    
    
    
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (8,127
    )
    
    
    
    
    
    
    (8,127
    )
    
    
    18,926
    
    
    
    
    
    
    
    18,926Cash flows from financing activities:Proceeds from exercise of TTI options
    
    
    690
    
    
    
    
    
    
    
    690
    
    
    
    
    
    
    
    
    
    
    
    Proceeds form issuance of common stock upon exercise of stock options
    
    
    3,253
    
    
    
    
    
    
    
    3,253
    
    
    
    5,350
    
    
    
    
    
    
    
    5,350Net cash provided by financing activities
    
    
    3,943
    
    
    
    
    
    
    
    3,943
    
    
    
    5,350
    
    
    
    
    
    
    
    5,350Net increase in cash and cash equivalents
    
    
    5,110
    
    
    
    
    
    
    
    5,110
    
    
    
    27,403
    
    
    
    
    
    
    
    27,403Cash and cash equivalents at beginning of year
    
    
    32,488
    
    
    
    
    
    
    
    32,488
    
    
    
    5,085
    
    
    
    
    
    
    
    5,085Cash and cash equivalents at end of year
    
    $
    37,598
    
    
    $
    
    
    
    $
    37,598
    
    
    $
    32,488
    
    
    $
    
    
    
    $
    32,488Supplemental disclosure of cash flow information:Trident Microsystems, Inc. common stock
issued in connection with the purchase of TTI minority interests
    
    $
    31,146
    
    
    
    
    
    
    $
    31,146
    
    
    $
    
    
    
    
    
    
    
    $
    Cash paid for income taxes
    
    $
    553
    
    
    
    
    
    
    $
    553
    
    
    $
    
    
    
    
    
    
    
    $
    
 116




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##### Table of Contents



Stock-Based Compensation Expense Computed in Accordance with SFAS 123
  RECONCILIATION OF FAS 123 STOCK-BASED COMPENSATION EXPENSE FOR FISCAL 2005 AND 2004
 Year Ended June 30, 2005
    
    
    Year Ended June 30, 2004(In thousands except per share data)
    
    As Reported
    
    
    Adjustments
    
    
    As Restated
    
    
    As Reported
    
    
    Adjustments
    
    
    As RestatedNet income (loss)  as reported
    
    $
    (10,535
    )
    
    $
    (19,649
    )
    
    $
    (30,184
    )
    
    $
    10,378
    
    
    $
    (15,183
    )
    
    $
    (4,805
    )Add: stock-based employee compensation
included in reported net income (loss), net
of related tax benefit
    
    
    9,514
    
    
    
    20,986
    
    
    
    30,500
    
    
    
    606
    
    
    
    16,217
    
    
    
    16,823Less: stock-based employee compensation
determined under the fair value based method
for all awards, net of related tax benefit
    
    
    (4,089
    )
    
    
    (3,672
    )
    
    
    (7,761
    )
    
    
    (2,472
    )
    
    
    (3,110
    )
    
    
    (5,582
    )Pro forma net income (loss)
    
    $
    (5,110
    )
    
    $
    (2,335
    )
    
    $
    (7,445
    )
    
    $
    8,512
    
    
    $
    (2,076
    )
    
    $
    6,436Basic net income (loss) per share:As reported
    
    ($
    0.22
    )
    
    ($
    0.42
    )
    
    ($
    0.64
    )
    
    $
    0.23
    
    
    ($
    0.34
    )
    
    ($
    0.11
    )Pro forma
    
    ($
    0.11
    )
    
    ($
    0.05
    )
    
    ($
    0.16
    )
    
    $
    0.19
    
    
    ($
    0.05
    )
    
    $
    0.14Diluted net income (loss) per share:As reported
    
    ($
    0.22
    )
    
    ($
    0.42
    )
    
    ($
    0.64
    )
    
    $
    0.21
    
    
    ($
    0.32
    )
    
    ($
    0.11
    )Pro forma
    
    ($
    0.11
    )
    
    ($
    0.05
    )
    
    ($
    0.16
    )
    
    $
    0.17
    
    
    ($
    0.04
    )
    
    $
    0.13Basic shares
    
    
    47,418
    
    
    
    
    
    
    
    47,418
    
    
    
    44,698
    
    
    
    
    
    
    
    44,698Diluted shares
    
    
    47,418
    
    
    
    
    
    
    
    47,418
    
    
    
    50,022
    
    
    
    (747
    )
    
    
    49,275
 RECONCILIATION OF FAS 123 STOCK-BASED COMPENSATION EXPENSE FOR INTERIM PERIODS OF FISCAL 2005
 September 30, 2004
    
    
    December 31, 2004
    
    
    March 31, 2005
    
    
    June 30, 2005(in thousands except per share data)
    
    As Reported
    
    
    Adjustments
    
    
    As Restated
    
    
    As Reported
    
    
    Adjustments
    
    
    As Restated
    
    
    As Reported
    
    
    Adjustments
    
    
    As Restated
    
    
    As Reported
    
    
    Adjustments
    
    
    As RestatedNet income (loss)  as reported
    
    $
    1,381
    
    
    $
    (5,454
    )
    
    $
    (4,073
    )
    
    $
    (546
    )
    
    $
    (6,974
    )
    
    $
    (7,520
    )
    
    $
    (4,515
    )
    
    $
    (7,969
    )
    
    $
    (12,484
    )
    
    $
    (6,855
    )
    
    $
    748
    
    
    $
    (6,107
    )Add: stock-based employee compensation
included in reported net income (loss), net
of related tax benefit
    
    
    216
    
    
    
    6,142
    
    
    
    6,358
    
    
    
    721
    
    
    
    7,362
    
    
    
    8,083
    
    
    
    820
    
    
    
    8,237
    
    
    
    9,057
    
    
    
    7,757
    
    
    
    (755
    )
    
    
    7,002Less: stock-based employee compensation
determined under the fair value based method
for all awards, net of related tax benefit
    
    
    (728
    )
    
    
    (1,227
    )
    
    
    (1,955
    )
    
    
    (895
    )
    
    
    (739
    )
    
    
    (1,634
    )
    
    
    (1,247
    )
    
    
    (789
    )
    
    
    (2,036
    )
    
    
    (1,219
    )
    
    
    (917
    )
    
    
    (2,136
    )Pro forma net income (loss)
    
    $
    869
    
    
    $
    (539
    )
    
    $
    330
    
    
    $
    (720
    )
    
    $
    (351
    )
    
    $
    (1,071
    )
    
    $
    (4,942
    )
    
    $
    (521
    )
    
    $
    (5,463
    )
    
    $
    (317
    )
    
    $
    (924
    )
    
    $
    (1,241
    )Basic net income (loss) per share:As reported
    
    $
    0.03
    
    
    ($
    0.12
    )
    
    ($
    0.09
    )
    
    ($
    0.01
    )
    
    ($
    0.15
    )
    
    ($
    0.16
    )
    
    ($
    0.10
    )
    
    ($
    0.18
    )
    
    ($
    0.28
    )
    
    ($
    0.13
    )
    
    $
    0.01
    
    
    ($
    0.12
    )Pro forma
    
    $
    0.02
    
    
    ($
    0.01
    )
    
    $
    0.01
    
    
    ($
    0.02
    )
    
    $
    
    
    
    ($
    0.02
    )
    
    ($
    0.11
    )
    
    ($
    0.01
    )
    
    ($
    0.12
    )
    
    ($
    0.01
    )
    
    ($
    0.01
    )
    
    ($
    0.02
    )Diluted net income (loss) per share:As reported
    
    $
    0.03
    
    
    ($
    0.12
    )
    
    ($
    0.09
    )
    
    ($
    0.01
    )
    
    ($
    0.15
    )
    
    ($
    0.16
    )
    
    ($
    0.10
    )
    
    ($
    0.18
    )
    
    ($
    0.28
    )
    
    ($
    0.13
    )
    
    $
    0.01
    
    
    ($
    0.12
    )Pro forma
    
    $
    0.02
    
    
    ($
    0.01
    )
    
    $
    0.01
    
    
    ($
    0.02
    )
    
    $
    
    
    
    ($
    0.02
    )
    
    ($
    0.11
    )
    
    ($
    0.01
    )
    
    ($
    0.12
    )
    
    ($
    0.01
    )
    
    ($
    0.01
    )
    
    ($
    0.02
    )Basic shares
    
    
    45,828
    
    
    
    
    
    
    
    45,828
    
    
    
    45,572
    
    
    
    
    
    
    
    45,572
    
    
    
    46,680
    
    
    
    
    
    
    
    46,680
    
    
    
    51,100
    
    
    
    
    
    
    
    51,100Diluted shares
    
    
    50,834
    
    
    
    34
    
    
    
    50,868
    
    
    
    45,572
    
    
    
    
    
    
    
    45,572
    
    
    
    46,680
    
    
    
    
    
    
    
    46,680
    
    
    
    51,100
    
    
    
    
    
    
    
    51,100
 117




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##### Table of Contents



Financial Data for Interim Periods of Fiscal Years 2006 and 2005 (Unaudited)
    CONSOLIDATED STATEMENTS OF OPERATIONS FOR INTERIM PERIODS OF FISCAL 2006 AND 2005
 Three Months Ended
    
    
    Three Months Ended(In thousands, except per share data)
    
    September 30,
    
    
    December 31,
    
    
    March 31,
    
    
    June 30
    
    
    September 30,
    
    
    December 31,
    
    
    March 31,
    
    
    June 302005
    
    
    2005
    
    
    2006
    
    
    2006
    
    
    2004
    
    
    2004
    
    
    2005
    
    
    2005(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    
    
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Revenues
    
    $
    33,203
    
    
    $
    40,614
    
    
    $
    44,743
    
    
    $
    52,882
    
    
    $
    16,602
    
    
    $
    15,387
    
    
    $
    16,136
    
    
    $
    20,886Cost of revenues
    
    
    15,652
    
    
    
    19,731
    
    
    
    21,953
    
    
    
    25,725
    
    
    
    7,505
    
    
    
    7,058
    
    
    
    7,215
    
    
    
    10,784Gross profit
    
    
    17,551
    
    
    
    20,883
    
    
    
    22,790
    
    
    
    27,157
    
    
    
    9,097
    
    
    
    8,329
    
    
    
    8,921
    
    
    
    10,102Operating expenses:Research and development
    
    
    7,326
    
    
    
    8,359
    
    
    
    8,627
    
    
    
    9,497
    
    
    
    7,324
    
    
    
    9,350
    
    
    
    10,288
    
    
    
    10,333Selling, general and administrative
    
    
    5,794
    
    
    
    6,177
    
    
    
    7,072
    
    
    
    7,135
    
    
    
    5,827
    
    
    
    6,134
    
    
    
    6,325
    
    
    
    5,584In-process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    585
    
    
    
    4,586
    
    
    
    Total operating expenses
    
    
    13,120
    
    
    
    14,536
    
    
    
    15,699
    
    
    
    16,632
    
    
    
    13,151
    
    
    
    16,069
    
    
    
    21,199
    
    
    
    15,917Income (loss) from operations
    
    
    4,431
    
    
    
    6,347
    
    
    
    7,091
    
    
    
    10,525
    
    
    
    (4,054
    )
    
    
    (7,740
    )
    
    
    (12,278
    )
    
    
    (5,815
    )Interest income
    
    
    254
    
    
    
    483
    
    
    
    604
    
    
    
    952
    
    
    
    91
    
    
    
    126
    
    
    
    144
    
    
    
    185Gain (loss) on investments, net
    
    
    (100
    )
    
    
    (167
    )
    
    
    (242
    )
    
    
    (51
    )
    
    
    400
    
    
    
    (70
    )
    
    
    
    
    
    
    Other income (expense), net
    
    
    258
    
    
    
    159
    
    
    
    (34
    )
    
    
    164
    
    
    
    8
    
    
    
    1
    
    
    
    65
    
    
    
    21Minority interests in subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99
    
    
    
    61
    
    
    
    5
    
    
    
    (7
    )Income (loss) before income taxes
    
    
    4,843
    
    
    
    6,822
    
    
    
    7,419
    
    
    
    11,590
    
    
    
    (3,456
    )
    
    
    (7,622
    )
    
    
    (12,064
    )
    
    
    (5,616
    )Provision for income taxes
    
    
    1,020
    
    
    
    (371
    )
    
    
    1,831
    
    
    
    3,837
    
    
    
    617
    
    
    
    (102
    )
    
    
    420
    
    
    
    491Income (loss) before cumulative effect of
change in accounting principle
    
    
    3,823
    
    
    
    7,193
    
    
    
    5,588
    
    
    
    7,753
    
    
    
    (4,073
    )
    
    
    (7,520
    )
    
    
    (12,484
    )
    
    
    (6,107
    )Cumulative effect of change in accounting principle
    
    
    1,819
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    5,642
    
    
    $
    7,193
    
    
    $
    5,588
    
    
    $
    7,753
    
    
    $
    (4,073
    )
    
    $
    (7,520
    )
    
    $
    (12,484
    )
    
    $
    (6,107
    )Net income (loss) per share  basic:Income (loss) before change in accounting principle
    
    
    0.08
    
    
    
    0.13
    
    
    
    0.10
    
    
    
    0.14
    
    
    
    (0.09
    )
    
    
    (0.17
    )
    
    
    (0.27
    )
    
    
    (0.12
    )Cumulative effect of change in accounting principle
    
    
    0.03
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) per share  basic
    
    $
    0.11
    
    
    $
    0.13
    
    
    $
    0.10
    
    
    $
    0.14
    
    
    $
    (0.09
    )
    
    $
    (0.17
    )
    
    $
    (0.27
    )
    
    $
    (0.12
    )Net income (loss) per share  diluted:Income (loss) before change in accounting principle
    
    
    0.06
    
    
    
    0.12
    
    
    
    0.09
    
    
    
    0.12
    
    
    
    (0.09
    )
    
    
    (0.17
    )
    
    
    (0.27
    )
    
    
    (0.12
    )Cumulative effect of change in accounting principle
    
    
    0.03
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) per share  diluted
    
    $
    0.09
    
    
    $
    0.12
    
    
    $
    0.09
    
    
    $
    0.12
    
    
    $
    (0.09
    )
    
    $
    (0.17
    )
    
    $
    (0.27
    )
    
    $
    (0.12
    )Shares used in computing basic per share amounts
    
    
    52,560
    
    
    
    53,591
    
    
    
    56,025
    
    
    
    57,160
    
    
    
    45,828
    
    
    
    45,572
    
    
    
    46,680
    
    
    
    51,100Shares used in computing diluted per share amounts
    
    
    62,049
    
    
    
    62,418
    
    
    
    63,716
    
    
    
    63,738
    
    
    
    45,828
    
    
    
    45,572
    
    
    
    46,680
    
    
    
    51,100
  Supplemental data
 Cost of revenues
    
    
    6
    
    
    
    34
    
    
    
    39
    
    
    
    34
    
    
    
    87
    
    
    
    170
    
    
    
    45
    
    
    
    110Research and development
    
    
    1,650
    
    
    
    2,354
    
    
    
    2,595
    
    
    
    2,312
    
    
    
    3,214
    
    
    
    5,043
    
    
    
    5,935
    
    
    
    5,099Selling, general and administrative
    
    
    864
    
    
    
    1,127
    
    
    
    1,157
    
    
    
    1,010
    
    
    
    3,057
    
    
    
    2,870
    
    
    
    3,077
    
    
    
    1,794Total stock-based compensation expense
    
    
    2,520
    
    
    
    3,515
    
    
    
    3,791
    
    
    
    3,356
    
    
    
    6,358
    
    
    
    8,083
    
    
    
    9,057
    
    
    
    7,003
 118




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##### Table of Contents



CONSOLIDATED BALANCE SHEETS FOR INTERIM PERIODS OF FISCAL 2006 AND 2005
 September 30,
    
    
    December 31,
    
    
    March 31,
    
    
    June 30
    
    
    September 30,
    
    
    December 31,
    
    
    March 31,
    
    
    June 302005
    
    
    2005
    
    
    2006
    
    
    2006
    
    
    2004
    
    
    2004
    
    
    2005
    
    
    2005(In thousands)
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    
    
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    52,871
    
    
    $
    68,665
    
    
    $
    83,388
    
    
    $
    103,046
    
    
    $
    35,405
    
    
    $
    34,561
    
    
    $
    32,971
    
    
    $
    37,598Investments
    
    
    53,143
    
    
    
    46,916
    
    
    
    52,295
    
    
    
    49,612
    
    
    
    45,331
    
    
    
    48,487
    
    
    
    45,454
    
    
    
    54,555Accounts receivable, net
    
    
    6,092
    
    
    
    4,430
    
    
    
    7,325
    
    
    
    4,278
    
    
    
    2,508
    
    
    
    2,007
    
    
    
    3,959
    
    
    
    6,317Inventories
    
    
    5,006
    
    
    
    4,369
    
    
    
    6,635
    
    
    
    14,641
    
    
    
    2,317
    
    
    
    2,508
    
    
    
    2,838
    
    
    
    2,735Prepaid expenses and other current assets
    
    
    2,439
    
    
    
    2,892
    
    
    
    3,550
    
    
    
    5,037
    
    
    
    1,945
    
    
    
    2,201
    
    
    
    2,400
    
    
    
    2,307Deferred income tax assets
    
    
    107
    
    
    
    1,618
    
    
    
    1,618
    
    
    
    622
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    107Total current assets
    
    
    119,658
    
    
    
    128,890
    
    
    
    154,811
    
    
    
    177,236
    
    
    
    87,506
    
    
    
    89,764
    
    
    
    87,622
    
    
    
    103,619Deferred income tax assets
    
    
    
    
    
    
    632
    
    
    
    632
    
    
    
    947
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Property and equipment, net
    
    
    2,675
    
    
    
    2,831
    
    
    
    2,943
    
    
    
    3,451
    
    
    
    2,349
    
    
    
    2,096
    
    
    
    1,990
    
    
    
    2,154Intangible assets, net
    
    
    23,429
    
    
    
    22,231
    
    
    
    20,714
    
    
    
    19,190
    
    
    
    
    
    
    
    3,735
    
    
    
    26,029
    
    
    
    24,621Other assets
    
    
    4,517
    
    
    
    5,944
    
    
    
    5,720
    
    
    
    6,366
    
    
    
    3,960
    
    
    
    5,054
    
    
    
    4,762
    
    
    
    4,597Total assets
    
    $
    150,279
    
    
    $
    160,528
    
    
    $
    184,820
    
    
    $
    207,190
    
    
    $
    93,815
    
    
    $
    100,649
    
    
    $
    120,403
    
    
    $
    134,991LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    12,645
    
    
    $
    11,493
    
    
    $
    13,252
    
    
    $
    19,472
    
    
    $
    4,045
    
    
    $
    6,461
    
    
    $
    5,583
    
    
    
    6,678Accrued expenses
    
    
    11,097
    
    
    
    14,455
    
    
    
    16,892
    
    
    
    21,332
    
    
    
    7,601
    
    
    
    8,663
    
    
    
    9,074
    
    
    
    10,134Income taxes payable
    
    
    6,586
    
    
    
    8,363
    
    
    
    9,766
    
    
    
    11,125
    
    
    
    4,868
    
    
    
    4,759
    
    
    
    5,187
    
    
    
    5,181Deferred income tax liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total current liabilities
    
    
    30,328
    
    
    
    34,311
    
    
    
    39,910
    
    
    
    51,929
    
    
    
    16,514
    
    
    
    19,883
    
    
    
    19,844
    
    
    
    21,993Deferred income tax liabilities
    
    
    2,932
    
    
    
    441
    
    
    
    2,592
    
    
    
    1,604
    
    
    
    89
    
    
    
    1,352
    
    
    
    
    
    
    
    3,668Minority interests in subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,957
    
    
    
    2,998
    
    
    
    11
    
    
    
    10Total liabilities
    
    
    33,260
    
    
    
    34,752
    
    
    
    42,502
    
    
    
    53,533
    
    
    
    20,560
    
    
    
    24,233
    
    
    
    19,855
    
    
    
    25,671Commitments and contingenciesStockholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    54
    
    
    
    54
    
    
    
    57
    
    
    
    57
    
    
    
    46
    
    
    
    46
    
    
    
    50
    
    
    
    52Additional paid-in capital
    
    
    144,582
    
    
    
    149,881
    
    
    
    157,606
    
    
    
    162,801
    
    
    
    108,094
    
    
    
    115,547
    
    
    
    157,911
    
    
    
    164,610Deferred stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,690
    )
    
    
    (21,354
    )
    
    
    (25,033
    )
    
    
    (23,187
    )Accumulated deficits
    
    
    (31,854
    )
    
    
    (24,660
    )
    
    
    (19,073
    )
    
    
    (11,320
    )
    
    
    (12,175
    )
    
    
    (19,696
    )
    
    
    (32,181
    )
    
    
    (37,496
    )Accumulated other comprehensive income
    
    
    4,237
    
    
    
    501
    
    
    
    3,728
    
    
    
    2,119
    
    
    
    (20
    )
    
    
    1,873
    
    
    
    (199
    )
    
    
    5,341Total stockholders equity
    
    
    117,019
    
    
    
    125,776
    
    
    
    142,318
    
    
    
    153,657
    
    
    
    73,255
    
    
    
    76,416
    
    
    
    100,548
    
    
    
    109,320Total liabilities and stockholders equity
    
    $
    150,279
    
    
    $
    160,528
    
    
    $
    184,820
    
    
    $
    207,190
    
    
    $
    93,815
    
    
    $
    100,649
    
    
    $
    120,403
    
    
    $
    134,991
 119




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##### Table of Contents



RECONCILIATION OF CONSOLIDATED STATEMENTS OF OPERATIONS FOR INTERIM PERIODS OF FISCAL 2006
 September 30, 2005
    
    
    December 31, 2005
    
    
    March 31, 2006
    
    
    June 30, 2006(In thousands, except per share data)
    
    As Reported
    
    
    Adjustments
    
    
    As Restated
    
    
    As Reported
    
    
    Adjustments
    
    
    As Restated
    
    
    As Reported
    
    
    Adjustments
    
    
    As RestatedRevenues
    
    $
    33,203
    
    
    $
    
    
    
    $
    33,203
    
    
    $
    40,614
    
    
    $
    
    
    
    $
    40,614
    
    
    $
    44,743
    
    
    $
    
    
    
    $
    44,743
    
    
    $
    52,882Cost of revenues
    
    
    15,646
    
    
    
    6
    
    
    
    15,652
    
    
    
    19,697
    
    
    
    34
    
    
    
    19,731
    
    
    
    21,914
    
    
    
    39
    
    
    
    21,953
    
    
    
    25,725Gross profit
    
    
    17,557
    
    
    
    (6
    )
    
    
    17,551
    
    
    
    20,917
    
    
    
    (34
    )
    
    
    20,883
    
    
    
    22,829
    
    
    
    (39
    )
    
    
    22,790
    
    
    
    27,157Operating expenses:Research and development
    
    
    7,357
    
    
    
    (31
    )
    
    
    7,326
    
    
    
    8,166
    
    
    
    193
    
    
    
    8,359
    
    
    
    8,644
    
    
    
    (17
    )
    
    
    8,627
    
    
    
    9,497Selling, general and administrative
    
    
    4,817
    
    
    
    977
    
    
    
    5,794
    
    
    
    5,098
    
    
    
    1,079
    
    
    
    6,177
    
    
    
    5,612
    
    
    
    1,460
    
    
    
    7,072
    
    
    
    7,135Total operating expenses
    
    
    12,174
    
    
    
    946
    
    
    
    13,120
    
    
    
    13,264
    
    
    
    1,272
    
    
    
    14,536
    
    
    
    14,256
    
    
    
    1,443
    
    
    
    15,699
    
    
    
    16,632Income (loss) from operations
    
    
    5,383
    
    
    
    (952
    )
    
    
    4,431
    
    
    
    7,653
    
    
    
    (1,306
    )
    
    
    6,347
    
    
    
    8,573
    
    
    
    (1,482
    )
    
    
    7,091
    
    
    
    10,525Interest income
    
    
    254
    
    
    
    
    
    
    
    254
    
    
    
    483
    
    
    
    
    
    
    
    483
    
    
    
    604
    
    
    
    
    
    
    
    604
    
    
    
    952Gain (loss) on investments, net
    
    
    (101
    )
    
    
    1
    
    
    
    (100
    )
    
    
    (167
    )
    
    
    
    
    
    
    (167
    )
    
    
    (242
    )
    
    
    
    
    
    
    (242
    )
    
    
    (51
    )Other income (expense), net
    
    
    258
    
    
    
    
    
    
    
    258
    
    
    
    159
    
    
    
    
    
    
    
    159
    
    
    
    (34
    )
    
    
    
    
    
    
    (34
    )
    
    
    164Income (loss) before income taxes
    
    
    5,794
    
    
    
    (951
    )
    
    
    4,843
    
    
    
    8,128
    
    
    
    (1,306
    )
    
    
    6,822
    
    
    
    8,901
    
    
    
    (1,482
    )
    
    
    7,419
    
    
    
    11,590Provision for income taxes
    
    
    1,201
    
    
    
    (181
    )
    
    
    1,020
    
    
    
    (414
    )
    
    
    43
    
    
    
    (371
    )
    
    
    1,919
    
    
    
    (88
    )
    
    
    1,831
    
    
    
    3,837Income (loss) before cumulative effect of
change in accounting principle
    
    
    4,593
    
    
    
    (770
    )
    
    
    3,823
    
    
    
    8,542
    
    
    
    (1,349
    )
    
    
    7,193
    
    
    
    6,982
    
    
    
    (1,394
    )
    
    
    5,588
    
    
    
    7,753Cumulative effect of change in accounting principle
    
    
    171
    
    
    
    1,648
    
    
    
    1,819
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    4,764
    
    
    $
    878
    
    
    $
    5,642
    
    
    $
    8,542
    
    
    $
    (1,349
    )
    
    $
    7,193
    
    
    $
    6,982
    
    
    $
    (1,394
    )
    
    $
    5,588
    
    
    $
    7,753Net income (loss) per share  basic:Income (loss) before change in accounting principle
    
    
    0.09
    
    
    
    (0.01
    )
    
    
    0.08
    
    
    
    0.16
    
    
    
    (0.03
    )
    
    
    0.13
    
    
    
    0.12
    
    
    
    (0.02
    )
    
    
    0.10
    
    
    
    0.14Cumulative effect of change in accounting principle
    
    
    
    
    
    
    0.03
    
    
    
    0.03
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) per share  basic
    
    $
    0.09
    
    
    $
    0.02
    
    
    $
    0.11
    
    
    $
    0.16
    
    
    $
    (0.03
    )
    
    $
    0.13
    
    
    $
    0.12
    
    
    $
    (0.02
    )
    
    $
    0.10
    
    
    $
    0.14Net income (loss) per share  diluted:Income (loss) before change in accounting principle
    
    
    0.08
    
    
    
    (0.02
    )
    
    
    0.06
    
    
    
    0.14
    
    
    
    (0.02
    )
    
    
    0.12
    
    
    
    0.11
    
    
    
    (0.02
    )
    
    
    0.09
    
    
    
    0.12Cumulative effect of change in accounting principle
    
    
    
    
    
    
    0.03
    
    
    
    0.03
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) per share  diluted
    
    $
    0.08
    
    
    $
    0.01
    
    
    $
    0.09
    
    
    $
    0.14
    
    
    $
    (0.02
    )
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    (0.02
    )
    
    $
    0.09
    
    
    $
    0.12Shares used in computing basic per share amounts
    
    
    52,560
    
    
    
    
    
    
    
    52,560
    
    
    
    53,591
    
    
    
    
    
    
    
    53,591
    
    
    
    56,025
    
    
    
    
    
    
    
    56,025
    
    
    
    57,160Shares used in computing diluted per share amounts
    
    
    60,440
    
    
    
    1,609
    
    
    
    62,049
    
    
    
    60,842
    
    
    
    1,576
    
    
    
    62,418
    
    
    
    62,729
    
    
    
    987
    
    
    
    63,716
    
    
    
    63,738
  Supplemental data
 Cost of revenues
    
    
    
    
    
    
    6
    
    
    
    6
    
    
    
    
    
    
    
    34
    
    
    
    34
    
    
    
    
    
    
    
    39
    
    
    
    39
    
    
    
    34Research and development
    
    
    1,001
    
    
    
    649
    
    
    
    1,650
    
    
    
    1,495
    
    
    
    859
    
    
    
    2,354
    
    
    
    1,621
    
    
    
    974
    
    
    
    2,595
    
    
    
    2,312Selling, general and administrative
    
    
    567
    
    
    
    297
    
    
    
    864
    
    
    
    714
    
    
    
    413
    
    
    
    1,127
    
    
    
    688
    
    
    
    469
    
    
    
    1,157
    
    
    
    1,010Total stock-based compensation expense
    
    
    1,568
    
    
    
    952
    
    
    
    2,520
    
    
    
    2,209
    
    
    
    1,306
    
    
    
    3,515
    
    
    
    2,309
    
    
    
    1,482
    
    
    
    3,791
    
    
    
    3,356
 120




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##### Table of Contents



RECONCILIATION OF CONSOLIDATED STATEMENTS OF OPERATIONS FOR INTERIM PERIODS OF FISCAL 2005
 September 30, 2004
    
    
    December 31, 2004
    
    
    March 31, 2005
    
    
    June 30, 2005(In thousands, except per share data)
    
    As Reported
    
    
    Adjustments
    
    
    As Restated
    
    
    As Reported
    
    
    Adjustments
    
    
    As Restated
    
    
    As Reported
    
    
    Adjustments
    
    
    As Restated
    
    
    As Reported
    
    
    Adjustments
    
    
    As RestatedRevenues
    
    $
    16,602
    
    
    $
    
    
    
    $
    16,602
    
    
    $
    15,387
    
    
    $
    
    
    
    $
    15,387
    
    
    $
    16,136
    
    
    $
    
    
    
    $
    16,136
    
    
    $
    20,886
    
    
    $
    
    
    
    $
    20,886Cost of revenues
    
    
    7,418
    
    
    
    87
    
    
    
    7,505
    
    
    
    6,888
    
    
    
    170
    
    
    
    7,058
    
    
    
    7,170
    
    
    
    45
    
    
    
    7,215
    
    
    
    10,674
    
    
    
    110
    
    
    
    10,784Gross profit
    
    
    9,184
    
    
    
    (87
    )
    
    
    9,097
    
    
    
    8,499
    
    
    
    (170
    )
    
    
    8,329
    
    
    
    8,966
    
    
    
    (45
    )
    
    
    8,921
    
    
    
    10,212
    
    
    
    (110
    )
    
    
    10,102Operating expenses:Research and development
    
    
    4,738
    
    
    
    2,586
    
    
    
    7,324
    
    
    
    5,559
    
    
    
    3,791
    
    
    
    9,350
    
    
    
    5,481
    
    
    
    4,807
    
    
    
    10,288
    
    
    
    10,310
    
    
    
    23
    
    
    
    10,333Selling, general and administrative
    
    
    2,358
    
    
    
    3,469
    
    
    
    5,827
    
    
    
    2,733
    
    
    
    3,401
    
    
    
    6,134
    
    
    
    2,940
    
    
    
    3,385
    
    
    
    6,325
    
    
    
    6,472
    
    
    
    (888
    )
    
    
    5,584In-process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    585
    
    
    
    
    
    
    
    585
    
    
    
    4,586
    
    
    
    
    
    
    
    4,586
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    7,096
    
    
    
    6,055
    
    
    
    13,151
    
    
    
    8,877
    
    
    
    7,192
    
    
    
    16,069
    
    
    
    13,007
    
    
    
    8,192
    
    
    
    21,199
    
    
    
    16,782
    
    
    
    (865
    )
    
    
    15,917Income (loss) from operations
    
    
    2,088
    
    
    
    (6,142
    )
    
    
    (4,054
    )
    
    
    (378
    )
    
    
    (7,362
    )
    
    
    (7,740
    )
    
    
    (4,041
    )
    
    
    (8,237
    )
    
    
    (12,278
    )
    
    
    (6,570
    )
    
    
    755
    
    
    
    (5,815
    )Interest income
    
    
    91
    
    
    
    
    
    
    
    91
    
    
    
    126
    
    
    
    
    
    
    
    126
    
    
    
    144
    
    
    
    
    
    
    
    144
    
    
    
    185
    
    
    
    
    
    
    
    185Gain (loss) on investments, net
    
    
    400
    
    
    
    
    
    
    
    400
    
    
    
    (70
    )
    
    
    
    
    
    
    (70
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income (expense), net
    
    
    8
    
    
    
    
    
    
    
    8
    
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    65
    
    
    
    
    
    
    
    65
    
    
    
    21
    
    
    
    
    
    
    
    21Minority interests in subsidiaries
    
    
    (589
    )
    
    
    688
    
    
    
    99
    
    
    
    (327
    )
    
    
    388
    
    
    
    61
    
    
    
    (263
    )
    
    
    268
    
    
    
    5
    
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )Income (loss) before income taxes
    
    
    1,998
    
    
    
    (5,454
    )
    
    
    (3,456
    )
    
    
    (648
    )
    
    
    (6,974
    )
    
    
    (7,622
    )
    
    
    (4,095
    )
    
    
    (7,969
    )
    
    
    (12,064
    )
    
    
    (6,364
    )
    
    
    748
    
    
    
    (5,616
    )Provision for income taxes
    
    
    617
    
    
    
    
    
    
    
    617
    
    
    
    (102
    )
    
    
    
    
    
    
    (102
    )
    
    
    420
    
    
    
    
    
    
    
    420
    
    
    
    491
    
    
    
    
    
    
    
    491Net income (loss)
    
    $
    1,381
    
    
    $
    (5,454
    )
    
    $
    (4,073
    )
    
    $
    (546
    )
    
    $
    (6,974
    )
    
    $
    (7,520
    )
    
    $
    (4,515
    )
    
    $
    (7,969
    )
    
    $
    (12,484
    )
    
    $
    (6,855
    )
    
    $
    748
    
    
    $
    (6,107
    )Basic net income (loss) per share
    
    $
    0.03
    
    
    $
    (0.12
    )
    
    $
    (0.09
    )
    
    $
    (0.01
    )
    
    $
    (0.16
    )
    
    $
    (0.17
    )
    
    $
    (0.10
    )
    
    $
    (0.17
    )
    
    $
    (0.27
    )
    
    $
    (0.13
    )
    
    $
    0.01
    
    
    $
    (0.12
    )Diluted net income (loss) per share
    
    $
    0.03
    
    
    $
    (0.12
    )
    
    $
    (0.09
    )
    
    $
    (0.01
    )
    
    $
    (0.16
    )
    
    $
    (0.17
    )
    
    $
    (0.10
    )
    
    $
    (0.17
    )
    
    $
    (0.27
    )
    
    $
    (0.13
    )
    
    $
    0.01
    
    
    $
    (0.12
    )Shares used in computing basic per share amounts
    
    
    45,828
    
    
    
    
    
    
    
    45,828
    
    
    
    45,572
    
    
    
    
    
    
    
    45,572
    
    
    
    46,680
    
    
    
    
    
    
    
    46,680
    
    
    
    51,100
    
    
    
    
    
    
    
    51,100Shares used in computing diluted per share amounts
    
    
    50,384
    
    
    
    (4,556
    )
    
    
    45,828
    
    
    
    45,572
    
    
    
    
    
    
    
    45,572
    
    
    
    46,680
    
    
    
    
    
    
    
    46,680
    
    
    
    51,100
    
    
    
    
    
    
    
    51,100
  Supplemental data
 Cost of revenues
    
    
    
    
    
    
    87
    
    
    
    87
    
    
    
    
    
    
    
    170
    
    
    
    170
    
    
    
    
    
    
    
    45
    
    
    
    45
    
    
    
    
    
    
    
    110
    
    
    
    110Research and development
    
    
    84
    
    
    
    3,130
    
    
    
    3,214
    
    
    
    486
    
    
    
    4,557
    
    
    
    5,043
    
    
    
    543
    
    
    
    5,392
    
    
    
    5,935
    
    
    
    4,369
    
    
    
    728
    
    
    
    5,097Selling, general and administrative
    
    
    132
    
    
    
    2,925
    
    
    
    3,057
    
    
    
    235
    
    
    
    2,635
    
    
    
    2,870
    
    
    
    277
    
    
    
    2,800
    
    
    
    3,077
    
    
    
    3,388
    
    
    
    (1,593
    )
    
    
    1,795Total stock-based compensation
    
    
    216
    
    
    
    6,142
    
    
    
    6,358
    
    
    
    721
    
    
    
    7,362
    
    
    
    8,083
    
    
    
    820
    
    
    
    8,237
    
    
    
    9,057
    
    
    
    7,757
    
    
    
    (755
    )
    
    
    7,002
 121




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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Stock Option Investigation
  Evaluation of Disclosure Controls and Procedures
    Managements Report on Internal Control over Financial Reporting
  
    
    pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and
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
    
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the companys assets that could have a material effect
on the financial statements.
  Internal ControlIntegrated Framework
  (1) Failure to Maintain Effective Control Environment
 (2) Insufficient controls relating to our stock-based compensation expense
 
    
    Effective controls, including monitoring, were not maintained to ensure the proper
exercise of authority to grant and administer stock options as well as the existence,
completeness, valuation and presentation of our stock-based compensation transactions.
    
    There was insufficient segregation of duties with respect to stock option administration
between those who had authority to grant options and those who maintained our stock
administration records.
   123




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Remediation of Material Weaknesses in Internal Control over Financial Reporting
  
    
    The Board of Directors sought and obtained the resignations of our former Chief Executive Officer, as well as another
non-executive employee in November 2006. We also terminated our employment relationship with our former Chief
Accounting Officer in April 2007. Additionally, we terminated our employment relationship with one other finance
employee. One of our other executives resigned in May 2007, at our request, although he continues to provide
consulting service to us.
 
    
    Two members of the Board of Directors resigned from the Board of Directors effective May 1, 2007.
 
    
    In February 2007, we appointed a new Chief Accounting Officer and in April 2007 we appointed a General Counsel, Vice
President of Human Resources & Corporate Secretary. Our recently appointed General Counsel was named as our new compliance officer. The
Board of Directors is searching for a new Chief Executive Officer, and in May 2007 appointed two new, independent
directors.
 
    
    We will provide additional training to managers and director-level employees with functions that require the
preparation, execution or dating of documents with respect to the processes governing proper dating of documents. We
will also provide ethics training to our employees, including additional education concerning our code of conduct and
other policies.
 
    
    The Nominating and Corporate Governance Committee of the Board of Directors is reviewing our corporate governance
practices and will make recommendations for improvements, if any, that might enhance the ability of the Board of
Directors to carry out its responsibilities. The Nominating and Corporate Governance Committee has made
recommendations for certain improvements in processes relating to Board of Directors and committee procedures that have
been adopted by the Board of Directors, and expects to continue to review policies and procedures that might be
implemented by the Board of Directors to enhance corporate governance, including review of corporate governance
guidelines and policies.
  
    
    Adoption of Policies Regarding the Grant and Administration of Stock-based Compensation.
The Board of Directors revised our processes for administering stock options and other
stock-based compensation, placing administration of such functions with the finance
department. This effectively creates separation of duties and enables greater oversight of
stock administration by the finance department. The Board of Directors has also adopted new
policies governing the grant of stock options and other equity awards, providing that,
except in unusual circumstances, all such grants shall be made by the Compensation
Committee or the Board of Directors, at duly held meetings.
 
    
    Expanded Role of Finance Function.The Board of Directors expanded the role of the
finance function and our Chief Financial Officer to provide responsibility for global
finance and accounting functions within the Company and its subsidiaries. Our stock
administration function has been moved to the supervision of the finance department, and in
July 2007 we hired a senior stock option administrator with public company experience to
administer our equity programs.
 
    
    Review of Internal Controls and Adopt Best Practices.We have reviewed and had an
independent third party review our existing internal controls and we have evaluated further
improvements that might be made to our internal controls in connection with our ongoing
effort to improve our control processes and corporate governance. These improvements
include those discussed above relating to our policies regarding the grant and
administration of our stock option programs and related internal controls, the
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adoption of formalized policies relating to our stock option grants, and the expanded role
of our finance department. In addition, we have reviewed the documentation of our
significant accounting policies, and we are improving the documentation of the actions of
the Compensation Committee, as well as strengthening our disclosure controls and procedures.
 
    
    Internal Audit Function.The Audit Committee of the Board of Directors has determined
to establish an internal audit function that will report to the Audit Committee.
 Limitations on the Effectiveness of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  
 ITEM 9B. OTHER INFORMATION
  125




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PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 Information about the Members of the Board of Directors
   DirectorName
    
    Age
    
    Position
    
    SinceGlen M. Antle
    
    
    68
    
    
    Acting Chief Executive Officer
and Chairman of the Board of
Directors
    
    
    1992Brian R. Bachman
    
    
    62
    
    
    Director
    
    
    2007Hans Geyer
    
    
    56
    
    
    Director
    
    
    2007Raymond K. Ostby
    
    
    59
    
    
    Director
    
    
    2006Millard Phelps
    
    
    79
    
    
    Director
    
    
    1995
 Glen M. Antle
 Brian R. Bachman
 Hans Geyer
 126




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Raymond K. Ostby
 Millard Phelps
 Information about the Executive Officers
  Name
    
    Age
    
    PositionGlen M. Antle
    
    
    68
    
    
    Acting Chief Executive Officer and Chairman of the Board of
DirectorsDr. Jung-Herng Chang
    
    
    51
    
    
    PresidentJohn S. Edmunds
    
    
    50
    
    
    Chief Financial OfficerDavid L. Teichmann (1)
    
    
    51
    
    
    General Counsel, Vice President of Human Resources & Corporate
SecretaryChris P. Siu (2)
    
    
    36
    
    
    Chief Accounting Officer and Director of FinanceFormer OfficersFrank C. Lin (3)
    
    
    62
    
    
    Former President, Chief Executive Officer and Chairman of the BoardPeter Jen(4)
    
    
    61
    
    
    Former Senior Vice President, Asia Operations and Chief
Administrative Officer
 
 (1)
    
    Mr. Teichmann joined effective April 2, 2007(2)
    
    Mr. Siu joined effective February 5, 2007(3)
    
    Mr. Lin resigned effective November 15, 2006.(4)
    
    Mr. Jen ceased acting as Chief Accounting Officer on December 3, 2006, and was terminated on
April 30, 2007. Dr. Jung-Herng Chang
 127




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John S. Edmunds
 David L. Teichmann
 Chris P. Siu
 Former Officers
 Frank C. Lin
 Peter Jen
 Independence of the Board of Directors
  128




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Information regarding the Committees of the Board of Directors
   Nominating andCorporateName
    
    Audit
    
    Compensation
    
    GovernanceGlen M. Antle
    
    
    X*
    (1)
    
    
    X
    (2)
    
    
    X
    (3)Yasushi Chikagami(4)
    
    
    
    
    
    
    X
    
    
    
    XJohn Luke(4)
    
    
    X
    
    
    
    X
    *
    
    
    (3
    )Millard Phelps
    
    
    X
    
    
    
    
    
    
    
    X
    *Raymond K. Ostby
    
    
    (1
    )Total meetings in Fiscal 2006
    
    
    7
    
    
    
    1
    
    
    
    5
 
 *
    
    Committee Chairperson(1)
    
    Mr. Ostby replaced Mr. Antle and became the Chairperson of the Audit Committee effective
December 20, 2006.(2)
    
    Mr. Antle ceased to be a member of the Compensation committee effective December 20, 2006.(3)
    
    Mr. Luke replaced Mr. Antle and became a member of the Nominating and Corporate Governance
Committee effective December 20, 2006.(4)
    
    Mr. Chikagami and Mr. Luke each resigned from the Board of Directors effective May 1, 2007.
On such date, Mr. Phelps and Mr. Ostby were appointed to the Compensation Committee. On May
16, 2007, the Board of Directors elected Brian R. Bachman and Hans Geyer as members of the
Board of Directors. Mr. Geyer was also appointed a member of the Audit Committee, and Mr.
Bachman was appointed a member of the Compensation Committee and the Nominating and Corporate
Governance Committee. Effective May 23, 2007, Mr. Bachman was elected Chairperson of the
Compensation Committee. The Audit Committee
  
    
    is responsible for the appointment, compensation, retention and oversight of our
independent registered public accounting firm;
    
    approves in advance the engagement of the independent registered public accounting firm
for all audit and non-audit services, and approves the fees and other terms of the
engagement;
    
    reviews, with our independent registered public accounting firm, any significant
difficulties, disagreements, or restrictions encountered during the course of the audit,
and reviews any management letters issued by the independent registered public accounting
firm;
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
    
    reviews the critical accounting policies and all alternative treatments of financial
information discussed by the independent registered public accounting firm with management,
and reviews with management significant judgments made in the preparation of financial
statements;
    
    reviews, with our independent registered public accounting firm, management and the
Board of Directors, our financial reporting processes and internal financial controls;
    
    reviews the annual audited financial statements and recommends to the Board of Directors
their inclusion in our annual report;
    
    reviews the quarterly financial statements and earnings press releases;
    
    reviews with management its assessment of the effectiveness and adequacy of our internal
controls and procedures for financial reporting, and any significant deficiencies in the
design or operation of our internal controls, and reviews with the independent registered
public accounting firm their attestation to and report on our internal controls;
    
    reviews and approves any related party transactions;
    
    establishes and oversees procedures for the receipt, retention and treatment of
complaints received regarding accounting, internal controls or auditing matters; reviews
changes in, or waivers of, our Code of Conduct, and as requested by the Board, reviews and
investigates any conduct alleged to be in violation of the Code of Conduct; and
    
    periodically reviews and discusses with the independent registered public accounting
firm the matters required to be discussed by Statement on Accounting Standards 61
(Codification of Statements on Auditory Standards No. 380) and any formal written
statements received from the registered independent.
   The Compensation Committee
  
    
    determines all compensation for the Chief Executive Officer and other executive
officers, including incentive-based and equity-based compensation ;
    
    reviews and approves corporate performance goals and objectives relevant to the
compensation of our executive officers, including annual performance objectives and goals.
In doing so, considers company performance and relative stockholder return, the value of
similar incentive awards to officers at similar companies, and the awards given in past
years, and periodically reviews regional and industry-wide compensation practices and
trends;
    
    approves and administers incentive-based or equity-based compensation plans in which our
executive officers participate;
    
    evaluates and recommends to the Board of Directors for determination all employment,
severance, or change-in-control agreements applicable to executive officers; and
    
    reviews and proposes to the Board of Directors from time to time changes in director
compensation.
 130




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The Nominating and Corporate Governance Committee
  
    
    evaluates and recommends to the Board of Directors director nominees for each election of directors;
    
    determines criteria for selecting new directors and reviews and makes recommendations to
the Board of Directors concerning qualifications, appointment and removal of committee
members;
    
    considers any nominations of director candidates validly made by stockholders;
    
    reviews and makes recommendations to the Board of Directors concerning Board of Director
and committee compensation;
    
    develops, recommends for Board of Director approval and reviews corporate governance
principles applicable to us;
    
    together with the Audit Committee, reviews changes in, or waivers of, the Code of
Conduct; and
    
    assists the Board of Directors in developing criteria for evaluation of Board of
Director and committee performance and evaluates the Nominating and Corporate Governance
Committees performance on an annual basis.
  Director Nominations
  
    
    the appropriate size of our Board of Directors and its Committees;
    
    the perceived needs of the Board of Directors for particular skills, background and
business experience;
    
    the skills, background, reputation, and business experience of nominees compared to
the skills, background, reputation, and business experience already possessed by other
members of the Board of Directors;
    
    nominees independence from management;
    
    applicable regulatory and listing requirements, including independence requirements
and legal considerations, such as antitrust compliance;
    
    the benefits of a constructive working relationship among directors; and
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
    
    the desire to balance the considerable benefit of continuity with the periodic
injection of the fresh perspective provided by new members.
  .
   132




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Stockholder Proposals
  Meetings of the Board of Directors and Committees
  Communications by Stockholders with Directors
   Section 16(a) Beneficial Ownership Reporting Compliance
   Code of Conduct and Committee Charters
  133




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http://www.tridentmicro.com.
 
 ITEM 11. EXECUTIVE COMPENSATION
 Executive Compensation and Other Matters
  Annual Compensation
    
    Long-Term CompensationSecuritiesUnderlyingOther Annual
    
    Options/SARs
    
    Other AnnualName and Principal Position
    
    Year
    
    Salary
    
    Bonus (1)
    
    Compenation (2)
    
    (3)
    
    Compenation (4)Jung-Herng Chang
    
    
    2006
    
    
    $
    330,000
    
    
    $
    369,049
    
    
    $
    38,832
    
    
    
    80,000
    
    
    $
    2,625President
    
    
    2005
    
    
    $
    300,000
    
    
    $
    226,930
    
    
    $
    11,700
    
    
    
    494,000
    (5)
    
    $
    2,5632004
    
    
    $
    263,200
    
    
    $
    58,789
    
    
    $
    64,675
    
    
    
    1,900,000
    (6)
    
    $
    2,500John S. Edmunds
    
    
    2006
    
    
    $
    250,000
    
    
    $
    211,301
    
    
    $
    5,000
    
    
    
    50,000
    
    
    $
    2,625Chief Financial Officer
    
    
    2005
    
    
    $
    230,000
    
    
    $
    138,000
    
    
    $
    
    
    
    
    80,000
    (5)
    
    $
    2,5632004
    
    
    $
    11,326
    
    
    $
    50,000
    
    
    $
    
    
    
    
    430,000
    (7)
    
    $
    135Frank C. Lin (8)
    
    
    2006
    
    
    $
    575,000
    
    
    $
    607,491
    
    
    $
    596,812
    
    
    
    100,000
    
    
    $
    2,625Former Chief Executive Officer
    
    
    2005
    
    
    $
    575,000
    
    
    $
    432,250
    
    
    $
    323,646
    
    
    
    707,200
    (5)
    
    $
    2,5632004
    
    
    $
    505,523
    
    
    $
    186,821
    
    
    $
    319,425
    
    
    
    2,720,000
    (6)
    
    $
    2,500Peter Jen (9)
    
    
    2006
    
    
    $
    268,000
    
    
    $
    151,044
    
    
    $
    50,229
    
    
    
    40,000
    
    
    $
    2,625Former Senior VP, Asia Operations
    
    
    2005
    
    
    $
    259,840
    
    
    $
    70,000
    
    
    $
    9,000
    
    
    
    33,800
    (5)
    
    $
    2,563and Chief Administrative Officer
    
    
    2004
    
    
    $
    259,840
    
    
    $
    48,224
    
    
    $
    77,705
    
    
    
    130,000
    (6)
    
    $
    2,500
 
 (1)
    
    Consists of bonus awarded under the Executive Bonus Plan.(2)
    
    Amounts reflected consist of aggregate incremental costs for perquisites and personal
benefits. The fiscal 2006 amounts include the following: Mr. Chang, $24,432 for accrued
vacation pay-out and $14,400 for car allowance; Mr. Edmunds, $5,000 for car allowance; Mr.
Lin, $500,061 overseas housing (rental fee) and hardship allowance and $96,751 for accrued
vacation pay-out; and Mr. Jen, $41,229 for accrued vacation pay-out and $9,000 for car
allowance. The fiscal 2005 amounts include the following: Mr. Chang, $11,700 for car
allowances; Mr. Lin, $323,646 overseas housing (rental fee) and hardship allowance; and Mr.
Jen, $9,000 for car allowance. The fiscal 2004 amounts include the following: Mr. Chang,
$55,675 for accrued vacation pay-out and $9,000 for car allowance; Mr. Lin, $191,105 overseas
housing (rental fee) and hardship allowance and $128,320 for accrued vacation pay-out; Mr.
Jen, $68,705 for accrued vacation pay-out and $9,000 for car allowance.(3)
    
    No SARs were granted in these fiscal years.(4)
    
    These are the amounts contributed by us as a matching contribution to the 401(k) plan.(5)
    
    Represents the number of shares subject to options to purchase our common stock into which
options to acquire shares of the common stock of Trident Technologies Inc., our Taiwanese
subsidiary (TTI), were converted upon our acquisition on March 31, 2005 of substantially all
of the outstanding minority interests in TTI (the TTI Acquisition).(6)
    
    Represents the number of shares of TTI common stock subject to options granted by TTI during
fiscal 2004. In connection with the TTI Acquisition, outstanding TTI options were assumed by
us and converted into our options at an exchange ratio of
two shares of our common stock for each five shares of TTI common stock, which are listed as
grants in 2005. The options granted in 2004 are no longer outstanding. 134




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(7)
    
    Represents an option to purchase 300,000 shares of our common stock and an option to purchase
130,000 shares of the common stock of TTI granted in fiscal 2004. In connection with the TTI
Acquisition, outstanding TTI options were assumed by us and converted into options to purchase
our common stock at an exchange ratio of two shares of our common stock for each five shares
of TTI common stock.(8)
    
    Mr. Lin resigned his employment effective November 15, 2006.(9)
    
    Mr. Jen ceased acting as Chief Accounting Officer on December 3, 2006, and was terminated
on April 30, 2007. Option/SAR Grants in Last Fiscal Year
  Individual Grants (1)Number of
    
    Percent of Total
    
    
    
    
    
    
    
    
    
    Potential Realizable Value atSecurities
    
    Options/SARs
    
    
    
    
    
    
    
    
    
    Assumed Annual Rates of Stockunderlying
    
    Granted to
    
    Exercise Price
    
    
    
    
    
    Price Appreciation For Option TermOptions/ SARs
    
    Employees in
    
    Per Share
    
    Expiration
    
    (2)Name
    
    Granted(#)
    
    Fiscal Year
    
    ($/Share)
    
    Date
    
    5%
    
    10%Jung-Herng Chang
    
    
    160,000
    
    
    
    6.60
    %
    
    $
    13.99
    
    
    
    7/26/2015
    
    
    $
    1,407,718
    
    
    $
    3,567,433John S. Edmunds
    
    
    100,000
    
    
    
    4.13
    %
    
    $
    13.99
    
    
    
    7/26/2015
    
    
    $
    879,824
    
    
    $
    2,229,646Former OfficersFrank C. Lin (3)
    
    
    200,000
    
    
    
    8.26
    %
    
    $
    13.99
    
    
    
    7/26/2015
    
    
    $
    1,759,647
    
    
    $
    4,459,291Peter Jen (4)
    
    
    80,000
    
    
    
    3.30
    %
    
    $
    13.99
    
    
    
    7/26/2015
    
    
    $
    703,859
    
    
    $
    1,783,717
 
 (1)
    
    Consists of a single stock option grant at an exercise price of 100% of the fair market
value of the underlying shares on the grant date and expiring 10 years from the grant date.
One-third of the options granted vest 12 months from the date of grant each year. The option
holder may pay the exercise price in cash or by delivery of already-owned shares. No SARs
were granted in fiscal 2006.(2)
    
    These assumed rates are not intended to represent a forecast of possible future appreciation
of our common stock or total stockholder return.(3)
    
    Mr. Lin resigned his employment effective November 15, 2006. Any unvested stock options were
forfeited after his resignation.(4)
    
    Mr. Jen ceased acting as Chief Accounting Officer on December 3, 2006, and was terminated
on April 30, 2007. Aggregated Options/SAR Exercises in Last Fiscal Year and Fiscal Year-End Options/SAR Values
  Number of Securities UnderlyingShares
    
    
    
    
    
    Unexercised Options/SARs at
    
    Value of Unexercised In-the-MoneyAcquired on
    
    Value
    
    Fiscal Year-End
    
    Options/SARs at Fiscal Year-EndName
    
    Exercise(#)
    
    Realized($)
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableJung-Herng Chang
    
    
    519,000
    
    
    $
    9,372,762
    
    
    
    165,000
    
    
    
    540,000
    
    
    $
    2,916,950
    
    
    $
    7,712,500John S. Edmunds
    
    
    93,200
    
    
    $
    1,099,872
    
    
    
    89,800
    
    
    
    297,000
    
    
    $
    1,176,411
    
    
    $
    3,168,415Former OfficersFrank C. Lin
    
    
    1,951,388
    
    
    $
    44,299,241
    
    
    
    190,400
    
    
    
    553,600
    
    
    $
    3,464,328
    
    
    $
    7,431,752Peter Jen
    
    
    255,000
    
    
    $
    4,620,249
    
    
    
    472,800
    
    
    
    106,000
    
    
    $
    8,246,344
    
    
    $
    872,270
 135




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Employment Contracts, Termination of Employment and Change-In-Control Arrangements
     136




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##### Table of Contents



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 Equity Compensation Plan Information
  A
    
    B
    
    CNumber of securitiesremaining available forNumber of securities to be
    
    Weighted average
    
    future issuance under equityissued upon exercise
    
    exercise price of
    
    compensation plansof outstanding options,
    
    outstanding options,
    
    (excluding securitiesPlan Category
    
    warrants and rights
    
    warrants and rights
    
    reflected in column A)Equity
compensation plans
approved by
security holders
    
    
    6,090,383
    (1)
    
    $
    2.81
    
    
    
    6,169,128
    (2)Equity compensation
plans not approved
by security holders
(3)
    
    
    3,503,948
    (3)
    
    $
    7.42
    
    
    
    66,948Total
    
    
    9,594,331
    
    
    $
    4.49
    
    
    
    6,236,076
 
 (1)
    
    Includes 639,000 shares that are reserved and issuable upon exercise of options
outstanding under the 1992 Plan, which plan expired on October 16, 2002, 230,000 shares that
are reserved and issuable upon exercise of options outstanding under the 1994 Plan, which
expired on January 13, 2004, 1,015,333 shares that are reserved and issuable upon exercise of
options outstanding under the 2002 Plan and 4,206,050 shares that are reserved and issuable
upon exercise of options outstanding under the 2005 Stock Option Plan.(2)
    
    Includes 901,128 shares reserved for future issuance under the Purchase Plan, 918,000 shares
reserved for future issuance under the 2002 Plan and 4,350,000 shares reserved for issuance
under the 2006 Plan.(3)
    
    Consists of shares subject to options that are outstanding pursuant to the 1996 Plan, which
plan was terminated on June 19, 2007. Material Features of the 1996 Nonstatutory Stock Option Plan
  137




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Compensation Committee Interlocks and Insider Participation in Compensation Decisions
  138




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Stock Ownership of Certain Beneficial Owners and Management
  Shares Owned(1)(2)Name and Address of
    
    Number
    
    PercentageBeneficial Owners
    
    of Shares
    
    of ClassBeneficial Owners of in Excess of
5% (other than directors and named executive officers)Wellington Management Company, LLP(3)
75 State Street
Boston, MA 02109
    
    
    6,050,226
    
    
    
    10.47
    %Galleon Management, LP(4)
590 Madison Avenue, 34th Floor
New York, NY 10022
    
    
    3,234,362
    
    
    
    5.60
        %Adage Capital Partners, L.P.(5)
200 Clarendon Street, 52nd Floor
Boston, MA 02116
    
    
    2,902,000
    
    
    
    5.03
    %Named Executive Officers and directors(6)Glen M. Antle(7)
    
    
    73,334
    
    
    
    *Jung-Herng Chang(8)
    
    
    777,887
    
    
    
    *John S. Edmunds(9)
    
    
    251,467
    
    
    
    *Millard Phelps(10)
    
    
    33,364
    
    
    
    *Former Officers and DirectorsYasushi Chikagami(11)
    
    
    151,334
    
    
    
    *Peter Jen(12)
    
    
    645,877
    
    
    
    *Frank C. Lin(13)
    
    
    643,889
    
    
    
    *John Luke(14)
    
    
    76,667
    
    
    
    *Executive officers and directors
as a group (8 persons)(15)
    
    
    2,653,819
    
    
    
    4.60
    %
 
 *
    
    Less than 1%(1)
    
    Except as otherwise noted, the persons named in the table have the sole voting and
investment power with respect to all shares shown as beneficially owned by them, subject to
the information contained in the footnotes to this table. The number of shares indicated
includes in each case the number of shares of Common Stock issuable upon exercise of stock
options to the extent such options are currently exercisable for purposes of this table.
Options and warrants are deemed to be currently exercisable if they may be exercised within
60 days of June 30, 2007.(2)
    
    Calculated on the basis of 57,747,786 shares of Common Stock outstanding as of June
30, 2007 provided that any additional shares of Common Stock that a stockholder has the right
to acquire within 60 days after June 30, 139




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2007 are deemed to be outstanding for the purpose of calculating that stockholders percentage
beneficial ownership.(3)
    
    Based on a Schedule 13F filed on May 15, 2007 by Wellington Management Company LLP.
Included in these shares are 2,388,500 shares over which Wellington Management has sole voting
authority and 2,723,126 shares over which it has no voting authority. Also included in these
shares are 895,400 shares over which Wellington Management Company shares investment discretion and voting authority with Welling Trust Company NA, and 43,200 shares over which it
shares investment discretion but has no voting authority with Wellington Management
International Ltd.(4)
    
    Based on a Schedule 13G/A filed on May 25, 2007 by Galleon Management L.P. The shares
of Common Stock being reported as beneficially owned by Galleon Management are held through
various affiliated entities.(5)
    
    Based on a Schedule 13G filed on June 13, 2007 by Adage Capital Partners, L.P., a
Delaware limited partnership. Each of Adage Capital Partners, L.P. (ACP), Adage Capital
Partners GP, L.P. (ACPGP), Adage Capital Advisors, L.L.C. (ACA)Robert Atchinson and
Phillip Gross may be deemed to own and share voting and dispositive power with respect to such
2,902,000 shares. ACPGP, the general partner of ACP, has the power to direct the affairs of
ACP, including decisions respecting the disposition of the shares of our common stock.
Messrs. Atchinson and Gross are the Managing Members of ACA, the managing member of ACPGP, and
in that capacity direct ACPGPs operations.(6)
    
    The address of the executive officers and directors is c/o Trident Microsystems, Inc.,
3408 Garrett Drive, Santa Clara, California 95054.(7)
    
    Includes 73,334 shares subject to options exercisable by Mr. Antle within sixty days
of June 30, 2007.(8)
    
    Includes 651,667 shares subject to options exercisable by Mr. Chang within sixty days
of June 30, 2007.(9)
    
    Includes 251,467 shares subject to options exercisable by Mr. Edmunds within sixty
days of June 30, 2007.(10)
    
    Includes 33,334 shares subject to options exercisable by Mr. Phelps within sixty days
of June 30, 2007.(11)
    
    Includes 3,000 shares held by a joint tenant account for Mr. Chikagamis wife, son
and daughter. Also includes 148,334 shares subject to options exercisable by Mr. Chikagami
within sixty days of June 30, 2007.(12)
    
    Includes 512,467 shares subject to options exercisable by Mr. Jen within sixty days
of June 30, 2007.(13)
    
    Includes 21,500 shares held by Mr. Lins wife, 25,000 shares held by Mr. Lins second
son and 30,000 shares held by Mr. Lins youngest son. Also includes 433,867 shares subject to
options exercisable by Mr. Lin within sixty days of June 30, 2007.(14)
    
    Includes 76,667 shares subject to options exercisable by Mr. Luke within sixty days
of June 30, 2007. 140




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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
     
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Sevices Rendered/Fees
    
    2006
    
    
    2005Audit Fees
    
    $
    745,000
    
    
    $
    754,000Audit-Related Fees
    
    
    50,000
    
    
    
    61,000Tax Fees
    
    
    168,000
    
    
    
    157,000All Other Fees
    
    
    2,000
    
    
    
    2,000Total
    
    $
    965,000
    
    
    $
    974,000
 Audit Fees
 Audit-Related Fees
 Tax Fees
 All Other fees
 141




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Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Registered Public Accounting Firm.
  142




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PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
  Page Number1. Financial Statements:Report of Independent Registered Public Accounting Firm
    
    
    113Consolidated Balance Sheets  As of June 30, 2006 and 2005
    
    
    76Consolidated Statements of Operations  For the Years Ended June 30, 2006, 2005 and 2004
    
    
    75Consolidated Statements of Changes in Stockholders Equity For the Years Ended June 30, 2006, 2005 and 2004
    
    
    78Consolidated Statements of Cash Flows For the Years Ended June 30, 2006, 2005 and 2004
    
    
    77Notes to Consolidated Financial Statements
    
    
    792. Financial Statement Schedules:II  Valuation and Qualifying Accounts for each of the Years Ended June 30, 2006, 2005 and 2004
    
    
    147
 143




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##### Table of Contents



3. Exhibits:
 Exhibit
    
    
    Description3.1
    
    
    Restated Certificate of Incorporation.(1)3.2
    
    

Certificate of Amendment of Restated Certificate of Incorporation.(12)3.3
    
    

Amended and Restated Bylaws.(11)3.4
    
    

Amendment to Article VIII of the Bylaws.(16)4.1
    
    

Reference
is made to Exhibits 3.1, 3.2, 3.3 and 3.4.4.2
    
    
    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.(10)10.19
    (+)
    

Form of 1996 Nonstatutory Stock Option Plan.(10)10.20
    
    
    Lease agreement dated April 11, 2006 between the Company and Cooperage Rose Properties for the
Companys principal offices located at 3408-3410 Garrett Drive., Santa Clara, CA
(13)10.21
    
    

2006 Executive Bonus Plan (14)10.22
    
    

2006 Equity Incentive Plan.(15)21.1
    
    
    List of Subsidiaries.(7)24.1
    
    

Power
of Attorney (included on signature page).(7)31.1
    
    
    Rule 13a-14(a) Certification of Chief Executive Officer(7)31.2
    
    
    Rule 13a-14(a) Certification of Chief Financial Officer(7)32.1
    
    
    Section 1350 Certification of Chief Executive Officer(7)32.2
    
    
    Section 1350 Certification of Chief Financial Officer(7)
 144




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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).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, 1996.5.
    
    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 exhibit of the same number to the Companys Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002.11.
    
    Incorporated by reference from exhibit of the same number to the Companys Form 10-Q
dated December 31, 2003.12.
    
    Incorporated by reference from exhibit of the same number to the Companys Form 10-Q
dated March 31, 2004.13.
    
    Incorporated by reference from exhibit of the same number to the Companys Form 10-Q
dated March 31, 2006.14.
    
    Incorporated by reference from exhibit 99.1 to the Companys Current Report on Form 8-K
dated July 26, 2005 and filed with the Securities and Exchange Commission on August 1,
2005.15.
    
    Incorporated by reference to the Companys Proxy Statement filed with the Securities
and Exchange Commission on April 26, 2006.16.
    
    Incorporated by reference from exhibit 99.1 to the Companys Current Report on Form 8-K
dated July 24, 2007 and filed with the Securities and Exchange Commission on July 30, 2007.(*)
    
    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. 145




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SIGNATURES
   TRIDENT MICROSYSTEMS, INC.By:
    
    /s/ Glen M. AntleGlen M. AntleActing Chief Executive Officer
 
 POWER OF ATTORNEY
   Signature
    
    Capacity
    
    Date/s/ Glen M. Antle

Glen M. Antle
    
    Acting Chief Executive
Officer and Chairman of the
Board and Director(Principal
Executive Officer)
    
    August 6, 2007/s/ John S. Edmunds

John S. Edmunds
    
    Chief Financial Officer
(Principal Financial Officer)
    
    August 6, 2007/s/ Chris P. Siu

Chris P. Siu
    
    Chief Accounting Officer and
Director of Finance(Principal Accounting Officer)
    
    August 6, 2007/s/ Brian R. Bachman

Brian R. Bachman
    
    Director
    
    August 6, 2007/s/ Hans Geyer

Hans Geyer
    
    Director
    
    August 6, 2007/s/ Raymond K. Ostby

Raymond K. Ostby
    
    Director
    
    August 6, 2007/s/ Millard Phelps

Millard Phelps
    
    Director
    
    August 6, 2007
 146




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Schedule II
 TRIDENT MICROSYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
 Write-offs orBalance at
    
    Charged as a
    
    AdjustmentsFiscal
    
    
    
    Beginning of
    
    Reduction to
    
    Charged to
    
    Balance atYear
    
    Description
    
    Period
    
    Revenue
    
    Allowance
    
    End of Period(In thousands)2006
    
    
    Allowance for sales returns
    
    $
    413
    
    
    $
    1,062
    
    
    $
    
    
    
    $
    1,4752005
    
    
    Allowance for sales returns
    
    $
    300
    
    
    $
    113
    
    
    $
    
    
    
    $
    4132004
    
    
    Allowance for sales returns
    
    $
    609
    
    
    $
    
    
    
    $
    309
    
    
    $
    300
 Balance atFiscal
    
    
    
    Beginning of
    
    Increase
    
    Balance at EndYear
    
    Description
    
    Period
    
    (decrease)
    
    of Period(In thousands)2006
    
    
    Valuation allowance for deferred tax assets
    
    $
    33,654
    
    
    $
    (9,503
    )
    
    $
    24,1512005
    
    
    Valuation allowance for deferred tax assets
    
    $
    15,415
    
    
    $
    18,239
    
    
    $
    33,6542004
    
    
    Valuation allowance for deferred tax assets
    
    $
    12,353
    
    
    $
    3,062
    
    
    $
    15,415
 147




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INDEX TO EXHIBITS FILED TOGETHER WITH THIS ANNUAL REPORT
 Exhibit
        
    Description3.1
    
    
    Restated Certificate of Incorporation.(1)3.2
    
    

Certificate of Amendment of Restated Certificate of Incorporation.(12)3.3
    
    

Amended and Restated Bylaws.(11)3.4
    
    

Amendment to Article VIII of the Bylaws.(16)4.1
    
    

Reference
is made to Exhibits 3.1, 3.2, 3.3 and 3.4.4.2
    
    
    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.(10)10.19
    (+)
    

Form of 1996 Nonstatutory Stock Option Plan.(10)10.20
    
    
    Lease agreement dated April 11, 2006 between the Company and Cooperage Rose Properties for the
Companys principal offices located at 3408-3410 Garrett Drive., Santa Clara, CA
(13)10.21
    
    

2006 Executive Bonus Plan.(14)10.22
    
    

2006 Equity Incentive Plan.(15)21.1
    
    
    List of Subsidiaries.(7)24.1
    
    

Power
of Attorney (included on signature page).(7)31.1
    
    
    Rule 13a-14(a) Certification of Chief Executive Officer(7)31.2
    
    
    Rule 13a-14(a) Certification of Chief Financial Officer(7)32.1
    
    
    Section 1350 Certification of Chief Executive Officer(7)32.2
    
    
    Section 1350 Certification of Chief Financial Officer(7)




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##### Table of Contents



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).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, 1996.5.
    
    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 exhibit of the same number to the Companys Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002.11.
    
    Incorporated by reference from exhibit of the same number to the Companys Form 10-Q
dated December 31, 2003.12.
    
    Incorporated by reference from exhibit of the same number to the Companys Form 10-Q
dated March 31, 2004.13.
    
    Incorporated by reference from exhibit of the same number to the Companys Form 10-Q
dated March 31, 2006.14.
    
    Incorporated by reference from exhibit 99.1 to the Companys Current Report on Form 8-K
dated July 26, 2005 and filed with the Securities and Exchange Commission on August 1,
2005.15.
    
    Incorporated by reference to the Companys Proxy Statement filed with the Securities
and Exchange Commission on April 26, 2006.16.
    
    Incorporated by reference from exhibit 99.1 to the Companys Current Report on Form 8-K
dated July 24, 2007 and filed with the Securities and Exchange Commission on July 30, 2007.(*)
    
    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.