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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, 2007


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.

(Exact Name of Registrant as Specified in Its Charter)


Delaware (State or other jurisdiction of Incorporation or Organization)		77-0156584 (I.R.S. Employer Identification Number)

3408 Garrett Drive, Santa Clara, California (Address of principal executive offices)		95054-2803 (Zip Code)

(408) 764-8808
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
Common Stock, $0.001 par value		NASDAQ Global Market

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of December 29, 2006, the last business day of registrant’s second fiscal quarter for fiscal 2007, the aggregate market value of shares of registrant’s Common Stock held by non-affiliates of registrant was approximately $808,971,000 (based on the closing sale price of the registrant’s common stock on that date). Shares of registrant’s common stock held by the registrant’s executive officers and directors and by each entity that owns 5% or more of registrant’s outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

At August 31, 2007, the number of shares of the Registrant’s common stock outstanding was 58,016,618.

DOCUMENTS INCORPORATED BY REFERENCE

Definitive Proxy Statement for the Company’s 2007 Annual Meeting of Stockholders – Part III of this Form 10-K.

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.

PART I

ITEM 1. BUSINESS

Overview

We design, develop and market integrated circuits, or ICs, and associated software for digital media applications, such as digital television, or digital TV, liquid crystal display television, or LCD TV, and digital set-top boxes, or STB. Since 1987 we have designed, developed and marketed very large-scale ICs for graphics applications, historically for the personal computer, or PC, market, and since 1999 for digitally processed televisions, or DPTV^TM, for the consumer television market. In June 2003 we announced a restructuring of our business to divest our legacy graphics business and in a separate transaction merged our digital media segment with Trident Technologies, Inc., or TTI, – a Taiwanese company that was 99.9% owned by Trident at June 30, 2007, 2006 and 2005, in order to strengthen and extend our digital TV business. TTI had previously been operating primarily as a Taiwan-based semiconductor design house which had developed various video processing technologies useful for digital media applications. As a result, since June 2003, we have focused our business primarily in the rapidly growing DPTV market and related areas.

We reorganized again in 2006, and since September 1, 2006, we have conducted this business primarily through our subsidiary, Trident Microsystems (Far East) Ltd., or TMFE, located in the Cayman Islands, with research and development services relating to existing projects and certain new projects, conducted by both Trident Microsystems, Inc. and its subsidiary, Trident Multimedia Technologies (Shanghai) Co. Ltd., or TMT, located in Shanghai, China. Operations and field application engineering support and certain sales activities are conducted through our subsidiary, Trident Microelectronics Co. Ltd., or TML, located in Taiwan and other affiliates. TTI is in the process of being dissolved.

We operate in one reportable segment: digital media. During the fiscal years ended June 30, 2007, 2006 and 2005, the digital media segment accounted for nearly all of our revenues. For the fiscal years ended June 30, 2007, 2006 and 2005, the digital media segment accounted for $270.8 million, $171.3 million, and $68.5 million in revenues, respectively. As a percentage of total revenues for the fiscal years ended June 30, 2007, 2006 and 2005, the digital media segment accounted for 100%, 99%, and 99% of our revenues for those years, respectively. We also sell a product that focuses on digital television in the PC market and revenues generated from this product are included in the digital media segment. We have done some engineering consulting, which has historically been accounted for separately from our digital media revenue stream and is included in other revenue.

We have been investing in and experiencing success in the digital media market for several years. During that time, the digital television industry has grown rapidly and we believe that this industry is entering into a further growth phase. To date, we have invested in developing strong relationships with large original equipment manufacturers, or OEMs, in the consumer electronics area, such as Sony, Samsung, Sharp, Philips and others. We are also focused on developing strong relationships with fast growing Chinese manufacturers such as Skyworth, TCL, Konka, Changhong, Xoceco and Hisense, and leading European manufacturers such as Vestel, although a majority of the market today is held by large OEMs. We believe that over time more of the high volume digital media business will migrate to the Taiwanese and Chinese original-design manufacturers, or ODMs; accordingly, we believe that it is important to have strong relationships among customers operating at both ends of the market. We have also invested in integrating key technologies and providing integrated system-on-chip, or SOC, advantages to our customers, including innovation in video quality.

We believe that this combination of our early entrance and success in this area of the market, our many years of experience in enhancing digital image quality, and our growing reputation and success with top tier world class TV manufacturers will provide a strategic advantage for us in this emerging SOC market.

Trident’s market strategy relies on leveraging television display controller design wins to further supply digital decoding and other value-added portions of television systems to leading consumer electronics OEMs. Trident’s goal is to create an integrated video decoder and processor that achieves superior image quality attractive to the world’s leading television OEMs. Achievement of this goal will require both mixed signal semiconductor and television system knowledge as well as the ability to work with customers who are experts in these areas in a heuristic learning process that involves multiple design cycles.

Successful execution of this strategy will require us to be an early mover with new technology and to achieve outstanding execution of complex system-on-chip designs. We have established our position as an early mover through the industry’s first integration of multi-standard video decoding and comb filtering with advanced video processing with the introduction of the DPTV-DX chip in 2001. We again demonstrated our ability to lead with new technology by introducing the industry’s first integrated 10-bit ADC in the DPTV 3D Pro in 2002. In 2005 we introduced advanced video processing integrated with ATSC/DVB decoding and HDMI integrated with 10-bit 3D multi-standard video decoding. DVB, short for Digital Video Broadcasting, is a suite of internationally accepted open standards for digital television. Advanced Television Systems Committee, or ATSC, is defined as digital television standards. HDMI, or high-definition multimedia interface, is an all-digital audio/video interface capable of transmitting uncompressed streams. Achieving such industry firsts demonstrates our ability to timely execute highly complex chip designs which add significant additional features and performance. In 2007 we have continued to evolve our technology by developing products that include motion estimation and motion compensation technology that helps to eliminate motion judder, which is most notable when a camera pans across a wide area. In addition, we have continued to focus on enhancing our highly integrated solution that adds MPEG decoding to image processing in the form of our high definition digital television, or HiDTV^{^®}, product lines. MPEG stands for Moving Picture Experts Group, the family of standards used for coding audio-visual information (e.g., movies, video and music) in a digital compressed format.

Our business is subject to various risks and uncertainties. You should carefully consider the factors described in Item 1A “Risk Factors” in conjunction with the description of our business set forth below and the other information included in this Annual Report on Form 10-K.

Markets and Applications

In fiscal 2007, we focused our principal design, development and marketing efforts on our digital media products. Our digital media products accounted for 99% or more of total revenues for each of our fiscal years ended June 30, 2007, 2006 and 2005. We plan to continue developing our next generation DPTV product, as well as other advanced products for digital TV and digital set top boxes, or STB, for the worldwide digital television market. The DPTV family’s high levels of functional integration and video quality enable our customers to have flexibility and cost advantages in their advanced TV designs. The DPTV video processor converts both standard and high-definition analog TV signals into a high-quality progressive-scan video signal suitable for today’s advanced digital televisions. The HiDTV family applies the same concept of functional integration and video quality excellence to standard and high-definition digital broadcast signals. We expect that the worldwide television market will eventually be dominated by digitally broadcast content; therefore, we believe that our future success depends on our ability to integrate additional technologies and have our products support that market volume opportunity on an ongoing basis. However, we anticipate that the digital television market will generate substantially all of our revenues in the near term.

The following table describes our product families and markets:


Product Family	Description	Markets
DPTV	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.

HiDTV	Integrated ATSC/DVB (MPEG2) decoding, format conversion, and image enhancement processors	Digital TV including CRT, plasma, LCD, rear-projection and front-projection display types.

TDM	Demodulation for ATSC, DVB-C, DTMB IF signals	Digital TV including CRT, plasma, LCD, rear-projection and front-projection display types.

Current Digital Media Products:

We have been developing products for other digital media applications, such as set top boxes and progressive television sets, since 1999. The DPTV market in particular has begun to emerge as a high volume market for these products. Our DPTV products are designed to optimize and enhance video quality for various display devices, such as cathode ray television (“CRT TV”), liquid crystal display television , plasma display panel (“PDP”), projection television, liquid crystal display projection TV and AV notebooks.

DCRe^{^®}. DCRe, Digital Cinema Reality Engine, is Trident’s proprietary technology to address the need for today’s high-end multimedia digital television application requirement. It embodies Trident’s DPTV design by offering a highly integrated and common-chassis multimedia digital television design platform that is both a high quality television set as well as a multimedia display terminal for PC graphics. This design platform is able to receive and decode the conventional NTSC, PAL and SECAM broadcasting signals, the three main video broadcast standards, to display PC VGA inputs and to receive high definition component inputs from the digital set-top box.

SVP-UX/WX^TM. SVP UX/WX is Trident’s seventh-generation all-in-one video processor product family. The video processors are highly integrated system-on-a-chip devices for providing the highest performance, targeting the fast growing HDTV and PC-ready LCD TV, PDP TV, and DLP TV applications where high precision processing of video and data are the requirements. SVP UX/WX contains dual purposed triple 10-bit high-precision and high speed video ADCs for both PC and video inputs, the high speed HDMI could support all HDMI inputs up to 162 MHz with HDCP format, the high performance multi-format 3D digital comb video decoder that supports NTSC, PAL, and SECAM, a HDTV sync separator, and motion adaptive de-interlacing engine. SVP UX/WX is Trident’s 7th generation DCRe super video processor which integrates a high performance MEMC (motion estimation motion compensation) engine. The MEMC technology analyzes the movements between successive fields through the method of motion estimation engine and then inserts motion compensated frames to remove motion judders for video sources from movie films. The DCRe technology integrates advanced 3D-comb video decoding, motion adaptive deinterlacing, object-based digital noise reduction, advanced seventh generation scaling engine, film mode support, average picture level (APL), edge smoothing and dynamic sharpness enhancement.

SVP-AX^TM. The SVP-AX is Trident’s seventh-generation all-in-one video processor for entry-level advanced digital TVs. Optimizing DCRe technology to meet the needs of cost-effective systems, the SVP-AX targets mid to large-size displays up to “1080p” (1920x1080p) resolution. The SVP AX includes many of the improvements in video decoding, video processing, and display interface, as found in the SVP-WX. In addition, the SVP AX features an embedded multi-standard audio decoder and processor. The SVP-AX targets the entry-level market for LCD, PDP, and DLP TVs for the leading branded TV OEMs.

SVP-PX^TM. The SVP PX video processor is a highly integrated system-on-chip device, targeting the converging HDTV-ready and PC-ready LCD TV, PDP TV, and DLP TV applications where high-precision processing of video and data are required. SVP-PX contains our sixth generation dual-purpose triple 10-bit high-precision and high-speed video analog to digital converters, or ADCs, for both PC and video inputs, the high-performance multi-format 3D digital “comb filter” or television video decoder that supports NTSC, PAL and SECAM broadcasting signals, a HDTV sync separator, motion adaptive de-interlacing engine, and the video format conversion engine, supporting multi-window display in many different output modes. Trident’s DCRe engine—digital cinema reality engine, is integrated inside the SVP PX to provide the most natural cinema-realistic images. The DCRe technology integrates advanced 3D-comb video decoding, advanced motion adaptive de-interlacing, object-based digital noise reduction, our advanced sixth generation scaler, film mode support, average picture level, or APL, edge smoothing and dynamic sharpness enhancement. Trident’s patented Unified Memory Architecture, or UMA, allows frame rate conversion, 3D comb video decoding, and video enhancement processing to share the same frame buffer memory that is made up of high-speed and cost-effective PC graphic memory. All of these advanced digital processing techniques are combined with a true 10-bit video data processing for the most optimal video fidelity in order to provide the most natural and cinema-quality video images. Designed for maximum system design flexibility, SVP-PX integrates all video interfaces to support converging digital video, analog video and PC data applications. The users of Trident’s single chip SVP PX video processor(s) will benefit from many features while maintaining a price competitive advantage over existing solution(s).

SVP-LX^TM. The SVP-LX is Trident’s sixth-generation all-in-one video processor for high-end advanced digital TVs. The SVP-LX targets large-size high-definition (1920x1080p resolution) displays. The SVP-LX includes improvements in video decoding, video processing, display interface, and specific European-market functionality such as SCART, a French-originated standard and associated 21-pin connector for connecting audio-visual equipment. The SVP-LX targets the high-end market for LCD, PDP, and DLP TVs.

SVP-CX^TM. The SVP-CX is Trident’s sixth-generation all-in-one video processor for entry-level advanced digital TVs. Optimizing DCRe technology to meet the needs of cost-effective systems, the SVP-CX targets small and mid-size displays up to “WXGA” (1366x768p resolution) resolution. The SVP-CX includes many of the improvements in video decoding, video processing, display

interface, and specific European-market functionality as the SVP PX. The SVP-CX targets the entry-level market for LCD, PDP, and DLP TVs for the leading branded TV OEMs.

SVP-EX^TM. The SVP-EX is Trident’s fifth-generation all-in-one video processor product family. It features the industry’s first Truevideo^TM 10-bit video processing technology that is optimized for 1080i HDTV component input. Embedded with a DCRe engine, the SVP-EX video processor delivers the highest quality digital video images. The DCRe technology integrates an advanced 3D-comb video decoder, advance motion adaptive de-interlacing engine for up to 1080i input, object-based digital noise reduction, cubic-4 image scaling, film mode support, APL feedback to increase the TV set dynamic range, edge smoothing, and dynamic sharpness enhancement. The SVP-EX video processor is equipped with numerous outputs, including a 24-bit transistor-transistor logic, or TTL, digital to analog converter, or DAC, and low voltage differential signaling, or LVDs interface, providing versatility with Trident proprietary DCRe technology. It delivers vivid cinema-realistic motion and still images. The SVP-EX processor targets the high-performance flat-panel LCD, rear-projection, flat CRT and plasma display TV markets.

HiDTV^{^®}. HiDTV is the first generation, system-on-a-chip digital TV engine for the design of high definition digital TV, or HiDTV, systems. It integrates a 32-bit embedded CPU microprocessor, a MPEG2 MP@HL decoder, a programmable MPEG audio decoder supporting AC3, AAC and MP3, a transport stream demultiplexer that supports ATSC and DVB standards, TDES and DVB common descrambler, a high performance graphics engine, and key video enhancement processing technologies for the DPTV products to enhance the analog TV signals. A unified external DDR DRAM is used for both system buffers and application programming. HiDTV integrates all key functions needed to support both digital and analog TV broadcasting with minimum external components.

Components such as video decoders and demodulators can interface with HiDTV without external glue logic. HiDTV integrates standard I/O interfaces such as UART, IR, and smart card interface.

HiDTV^{^®}PRO. HiDTV PRO is Trident’s second generation, system-on-chip digital TV engine for the design of HiDTV systems. It integrates dual 32-bit embedded CPU, dual MPEG2 MP@HL decoders, a programmable MPEG audio decoder supporting AC3, AAC and MP3, a transport stream demultiplexer that supports ATSC, DVB and ARIB standards, TDES, Multi2 and DVB common descrambler, a high-performance 2D graphics engine, and Trident’s SVPTMLX with DCRe video processing to enhance all essential video signals. A unified external DDR2 DRAM is used for both system buffers and application programming. HiDTV PRO integrates all key functions needed to support both digital and analog TV broadcasting with minimum external components. Components such as video decoders and demodulators can interface with HiDTV PRO without external glue logic. HiDTV PRO integrates standard I/O interfaces such as UART, IR, and smart card interface. It also integrates a POD controller that supports US digital cable-ready applications.

HiDTV^{^®} LX. HiDTV LX integrates Trident’s dual-channel fourth-generation video processor core with a 180MHz 32-bit embedded CPU, a single-stream high-definition MPEG2 decoder, and peripheral interface functions such as PCI. The HiDTV LX enables TV system OEMs to create high-quality digital television systems capable of decoding ATSC, DVB, and ARIB transport streams with no sacrifice in picture quality.

HiDTV^{^®} Pro PX/LX. HiDTV Pro PX/LX integrates Trident’s sixth-generation dual-channel video processor core with a 250MHz 32-bit embedded CPU, a dual-stream high-definition MPEG2 decoder, and additional peripheral interface functions such as USB 2.0 and logic supporting digital-cable-ready, or DCR, and common-interface, or CI, protocols. HiDTV Pro PX supports 1366x768-resolution displays while HiDTV Pro LX supports 1920x768 HD displays. In conjunction with the Trident Analog Front End, or TAFE, chip the HiDTV Pro family enables leading digital TV OEMs to create cost-effective no-compromise solutions for the rapidly-growing integrated digital decoding segment of the world-wide DTV market.

TAFE^TM. Our TAFE product is the result of our collaboration with a third party in integrating HDMI with advanced digital TV functions. TAFE integrates dual HDMI receivers with Trident’s sixth-generation 3D video decoder. A 30-bit interface to Trident’s HiDTV Pro family of integrated digital video processors ensures that video quality is not compromised. TAFE and HiDTV Pro PX/LX represent Trident’s market strategy to meet the needs of top-tier digital TV OEMs.

Current PCTV Application Products:

TV Master^TM TM6000. The TV Master TM6000 is a highly integrated system-on chip device, designed to transform ordinary notebooks and desktop PCs into high quality PC/TVs and media center PCs. The TV Master TM6000 integrates dual 10-bit high-quality video ADCs with a 2D digital comb filter, multi-standard color decoder, dual 16-bit audio ADCs, USB2.0 controller and PHY, the electronic IC or functional block of a circuit that takes care of encoding and decoding between a pure digital domain, and a modulation in the analog domain, and an embedded MPU. Our TV Master TM6000 has achieved a high level of integration for the USB2.0 TV tuner box and TV add-in card application. TV Master TM6000 also supports digital AV streams in transport-stream, or

TS, format and is one of the first USB 2.0 TV capture device to support both analog and digital TVs (DVB-T/S/C/H, ATSC, DMB, and etc) with minimum external components.

TV Master^TM TM5600. The TV Master TM5600 is a pin-to-pin compatible IC with TM6000; containing the same application functions as TM6000, but without the support on digital TV TS input.

Sales, Marketing and Distribution

We sell our products through direct sales efforts, distributors and independent sales representatives. Our digitally processed television products are marketed primarily from our offices in Taipei, Taiwan; Shanghai, China; and Santa Clara, California. Our offices are staffed with sales, applications engineering, technical support, customer service and administrative personnel to support our direct customers.

Our future success depends in large part on the success of our sales to leading digital television manufacturers. Accordingly, the focus of our sales and marketing efforts is to increase sales to the leading digital television manufacturers and OEM channels. Competitive factors of particular importance to success in such markets include TV platform support, product performance and the integration of functions on a single integrated circuit chip.

Our digitally processed television customers include leading manufacturers of TVs in Japan, South Korea, China, Taiwan, Europe and Turkey. We service these customers primarily through our offices in the United States, Taiwan and China. As digital media is rapidly developing in the United States, Europe, Japan, South Korea, China, and elsewhere, we expect that leadership in the digital media industry will also rapidly change. Our goal is to become a leading supplier to a broad range of manufacturers in this marketplace, and to manufacturers for other markets as DPTV sales increase in those markets.

During fiscal 2007, we generated nearly all of our revenues from customers located in Asia. A small number of customers often account for a majority of our revenues in any quarter. Our top five customers accounted for 82% of our total revenues for the fiscal year ended June 30, 2007. However, sales to any particular customer may fluctuate significantly from quarter to quarter. During the fiscal years ended June 30, 2007 and 2006, sales to two customers, Samsung and Midoriya (a distributor for Sony), each accounted for more than 10% of total revenues. During the fiscal year ended June 30, 2005, sales to three customers, Midoriya, Skyworth and Samsung, each accounted for more than 10% of total revenues. Fluctuations in sales to any of these key customers may adversely affect our operating results in the future. For additional information on foreign and domestic operations, see Note 13, “Segment and Geographic Information and Major Customers,” to the Consolidated Financial Statements.

During fiscal years 2007, 2006 and 2005, a majority of our digital media product revenues was generated through sales to customers located in Asia. We anticipate that sales to customers in Asia will continue to account for a substantial percentage of our revenues. In addition, the foundries that manufacture our products are located in Asia. Due to this concentration of international sales and manufacturing capacity in Asia, we are subject to the risks of conducting business internationally, including unexpected changes in regulatory requirements, fluctuations in the U.S. dollar which could increase our products’ sales price in local currencies in foreign markets, tariffs and other barriers and restrictions, and the burdens of complying with a wide variety of foreign laws. In addition, we are subject to general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships, in connection with our sales, support and third-party fabrication efforts in Hong Kong, Taiwan and elsewhere. Also, political instability or significant changes in economic policy could disrupt our operations in foreign countries or result in the curtailment or termination of such operations.

Competition

The global digital media market and related industries are highly competitive and characterized by rapid technological change. Our ability to compete depends primarily on our ability to commercialize our technology, continually improve our products and develop new products that meet constantly evolving customer requirements. We expect competition to continue to increase. The principal factors upon which competitors compete in our markets include, but are not limited to, price, performance, the timing of new product introductions by us and our competitors, product features, level of integration of various functions, quality and customer support. Substantial competition exists in all areas of our business. In the digital media market our principal competitors are Broadcom Corporation, Micronas AG, Media Tek Ltd., Toshiba, NXP Semiconductors (formerly Philips Semiconductor), Pixelworks, Inc., Genesis Microchip, Inc., Advanced Micro Devices, Inc., Zoran Corporation, ST Microelectronics, Morning Star, and Huaya. Other smaller competitors supplying LCDTV chip sets may arise in the future. Certain of our current competitors and many potential competitors have significantly greater technical, manufacturing, financial and marketing resources than we have.

We plan to continue developing the next generation DPTV and HiDTV products as well as other advanced products for digitally processed television and digital set top boxes for worldwide markets. We believe the market for digital media will continue to be competitive and will require substantial research and development, sales, and marketing efforts to remain competitive. We expect to devote significant resources to compete in this market.

Research and Development

Developing products based on advanced technological concepts is essential to our ability to compete effectively in the digital media marketplace. We maintain a product research and development and engineering staff responsible for product design and engineering. We have conducted substantially all of our product development in-house and, as of June 30, 2007, 2006 and 2005, our staff of research and development personnel comprised 310 people, 224 people and 189 people, respectively. Research and development expenditures totaled approximately $45 million, $34 million and $37 million in fiscal years 2007, 2006 and 2005, respectively.

Our significant investment in research and development has generally enabled us to provide highly integrated video processor solutions to the market. We were one of the first companies to integrate a high precision ADC, advanced 3D comb filter, video decoder, HDMI receiver, de-interlacer, and scaler into a single chip. We continue to plan introductions of next-generation DPTV and HiDTV chips. New technology development includes motion-compensated deinterlacing, multi-format video decoder, and intermediate frequency (IF) demodulation. We are currently working on system-on-chip digital TV SOC chip solutions for HiDTV systems that will integrate some of these technologies to support both digital and analog TV broadcasting with an optimized blend of cost and performance for the major segments of the advanced digital media market. We continue to work on improvements of our system-on-chip IC’s for PCTV applications through USB and PCI Express interfaces.

Manufacturing

We have adopted a “fabless” manufacturing strategy whereby we contract-out our wafer fabricating needs to qualified contractors that we believe provide cost, technology or capacity advantages for specific products. As a result, we have generally been able to avoid the significant capital investment required for wafer fabrication facilities and to focus our resources on product design, quality assurance, marketing and customer support. From our August 2003 restructuring through September 2006, TTI provided manufacturing operations for our digital media business segment; these operations are now conducted through our subsidiary Trident Microelectronics Co. Ltd., or TML, located in Taiwan and other affiliates. In fiscal 2007, United Microelectronic Corporation, or UMC, in which we held an investment in common stock valued at $50.7 million as of June 30, 2007, provided substantially all of our foundry requirements, and we expect that UMC will provide substantially all of our foundry requirements for fiscal 2008. We expect to sell our investment in UMC over time and expect to have fully sold our investment in UMC by December 31, 2010.

We purchase product in wafer form from foundries and contract with third parties to provide chip packaging and testing. In order to manage the production and back-end operations, we have increased personnel and added equipment to our manufacturing and test development operations. Our goal is to increase the quality assurance of the products while reducing manufacturing cost. To ensure the integrity of the suppliers’ quality assurance procedures, we have developed and maintained test tools, detailed test procedures and test specifications for each product produced on our behalf, and we require the foundry and third party contractors to follow those procedures and meet the specifications before shipping finished products. In general, we have experienced a relatively low amount of product returns from our customers. However, our future return experience may vary because our more advanced, more complex products are more difficult to manufacture and test. In addition, some of our customers may subject our more advanced products to more rigid testing standards than have been applied to our prior products.

Our reliance on third party foundries, UMC in particular, and assembly and testing houses, creates several risks for us, including the risk that we may in the future be unable to obtain adequate capacity, and may face interruptions in access to or unavailability of certain process technologies, and reduced control over delivery schedules, manufacturing yields, quality assurance and costs. We often conduct business with foundries, including UMC, by delivering written purchase orders specifying the particular product ordered, quantity, price, delivery date and shipping terms, rather than pursuant to established long-term supply contracts. As a result, such foundries are not obligated to supply products to us for any specific period, in any specific quantity or at any specified price, except as may be provided in a particular purchase order.

Constraints or delays in the supply of our products, whether because of capacity constraints, unexpected disruptions at the foundries or assembly or testing houses, delays in additional production at existing foundries or in obtaining additional production from existing or new foundries, shortages of raw materials, or other reasons, could result in the loss of customers and other material adverse effects on our operating results, including effects that may result should we be forced to purchase products from higher cost foundries or pay expediting charges to obtain additional supply. In addition, to the extent we elect to use multiple sources for certain products, customers may be required to qualify multiple sources, which could adversely affect the customers’ desire to design-in our products.

Backlog

Our sales are primarily made pursuant to standard purchase orders and not pursuant to long term agreements specifying future quantities or delivery dates. The quantity of products purchased by our customers as well as shipment schedules are subject to revisions that reflect changes in both the customers’ requirements and in manufacturing availability. Further, a substantial number of our customers are required to post a letter of credit or pay for products in advance of shipment, so that if the customer does not provide this type of security on a timely basis, the backlog may be rescheduled or simply never materialize. The semiconductor industry is characterized by short lead time orders and quick delivery schedules. In light of industry practice and experience, we believe that only a small portion of our backlog is non-cancelable and that the dollar amount associated with the non-cancelable portion is not significant. Consequently, we do not believe that a backlog as of any particular date is indicative of future results.

Seasonality

Our industry is largely focused on the consumer products market. Typically we experience seasonally slower sales in our third and fourth fiscal quarters ending March 31 and June 30 of each year.

Patent and Proprietary Rights

We attempt to protect our trade secrets and other proprietary information primarily through agreements with customers and suppliers, proprietary information agreements with employees and consultants and other security measures. Although we intend to protect our rights vigorously, there can be no assurance that these measures will be successful. We have obtained 16 digital video processing technology patents from July 2002 to July 2007, including 5 U.S. patents and 11 patents in foreign jurisdictions, and we have various other patent applications pending. However, there can be no assurance that others will not independently develop similar or competing technology or design around any patents that may be issued to us. While we maintain certain rights and obligations with respect to our graphics technology, substantially all such rights for the PC graphics field were transferred as part of a transaction with XGI Technology, Inc., or XGI, in July 2003 in which we transferred our graphics assets in exchange for an equity interest in XGI.

The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. From time to time, we have received notices claiming that we have infringed third-party patents or other intellectual property rights. To date, licenses generally have been available to us where third-party technology was necessary or useful for the development or production of our products. There can be no assurance that third parties will not assert additional claims against us with respect to existing or future products or that licenses will be available on reasonable terms, or at all, with respect to any third-party technology. Any litigation to determine the validity of any third-party claims could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not such litigation is determined in our favor. In the event of an adverse result in any such litigation, we could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology that is the subject of the litigation. There can be no assurance that we will be successful in such development or that any such licenses would be available. Patent disputes in the semiconductor industry have often been settled through cross licensing arrangements. Because we currently do not have a large portfolio of patents, we may not be able to settle any alleged patent infringement claim through a cross-licensing arrangement. In the event any third party made a valid claim against us, or our customers, and a license was not made available to us on commercially reasonable terms, we would be adversely affected. In addition, the laws of certain countries in which our products have been or may be developed, manufactured or sold, including China, Taiwan and South Korea, may not protect our products and intellectual property rights to the same extent as the laws of the United States of America.

We may in the future initiate claims or proceedings against third parties for infringement of our proprietary rights to determine the scope and validity of our proprietary rights. Any such claims could be time-consuming, result in costly litigation and diversion of technical and management personnel or require us to develop non-infringing technology or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on acceptable terms, if at all. In the event of a successful claim of infringement and our failure or inability to develop non-infringing technology or license the proprietary rights on a timely basis, our business, operating results and financial condition could be materially adversely affected.

Trademarks

DCRe, DPTV, HiDTV, PanelPro, PanelTV and PanelVision are our registered trademarks. HiDTV LX, HiDTV PRO, HiDTV Pro PX/LX, SVP-AX, SVP-CX, SVP-EX, SVP-LX, SVP-PX, SVP-UX/WX, TAFE, Trident, Trident Microsystems, Inc. and TV Master are our trademarks. Other trademarks used in this Annual Report on Form 10-K are the property of their respective owners.

Employees

As of June 30, 2007, we had approximately 520 full-time employees, 70 in the United States and 450 in Asia. Our future success will depend in great part on our ability to continue to attract, retain and motivate highly qualified technical, marketing, engineering and

management personnel. Our employees are not represented by any collective bargaining agreements, and we have never experienced a work stoppage. We believe that our employee relations are good.

Available Information

We file electronically with the Securities and Exchange Commission, or SEC, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The public may read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

You may obtain a free copy of our most recent annual report on Form 10-K and any amendments to the report on the day of filing with the SEC or on our website on the World Wide Web at http://www.tridentmicro.com. We do not make available on our website quarterly reports on Form 10-Q or current reports on Form 8-K because we state on our website the location where such filings can be found on the SEC website and on http://www.FreeEdgar.com. You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports by contacting the Investor Relations Department at our corporate offices by calling 408-764-8808 or by sending an email message to investor@tridentmicro.com.

ITEM 1A. RISK FACTORS

The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. If any of the following risks actually occur, our business, operating results, and financial condition could be materially adversely affected.

As a result of our investigation into our historical stock option granting practices and the restatement of our previously-filed financial statements, we are subject to civil litigation claims and regulatory investigations that could have a material adverse effect on our business, customer relationships, results of operations and financial condition.

As previously described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 3 of Notes to Consolidated Financial Statements, included in Part II, Item 8 of the Annual Report on Form 10-K for the fiscal year ended June 30, 2006 filed on August 7, 2007, we conducted an investigation into our historical stock option practices and related accounting. Based upon the findings of the investigation, we restated our financial statements for each of the years ended June 30, 1993 through June 30, 2005, and have restated our financial statements for the interim first three quarters of fiscal 2006 as well.

Our past stock option granting practices and the restatement of our prior financial statements have exposed and may continue to expose us to greater risks associated with litigation, regulatory proceedings and government inquiries and enforcement actions, as described in Part I, Item 3, “Legal Proceedings.” Any of these actions could result in civil and/or criminal actions seeking, among other things, injunctions against us and the payment of significant fines and penalties by us. In addition, the restatements of our previous financial results and the ongoing regulatory proceedings and government inquiries could impact our relationships with customers and our ability to generate revenues.

We face risks related to Securities and Exchange Commission, or SEC, Department of Justice, or DOJ, and other investigations into our historical stock option grant practices and related accounting, which could require significant management time and attention, and could require us to pay fines or other penalties.

The Department of Justice is currently conducting an investigation of us in connection with our investigation into our stock option grant practices and related issues, and we are subject to a subpoena from the DOJ. We are also subject to a formal investigation from the SEC on the same issue. We have been cooperating with, and continue to cooperate with, inquiries from the SEC and DOJ. In addition, our 401(k) plan and its administration are being audited by the Department of Labor as a result of actions taken in response to the findings from our investigation. The Department of Labor has recently advised us that because of the appointment of an independent fiduciary for the 401(k) plan, and assuming the Company will provide the Department of Labor with relevant information concerning any claims that may be brought, the Department of Labor will take no future action with respect to the 401(k) plan’s potential claims arising from its investment in Company stock. We are unable to predict what consequences, if any, that any investigation by any regulatory agency may have on us. Any regulatory investigation could result in substantial legal and accounting expenses, divert management’s attention from other business concerns and harm our business. Any civil or criminal action commenced against us by a regulatory agency could result in administrative orders against us, the imposition of significant penalties and/or fines against us, and/or the imposition of civil or criminal sanctions against certain of our former officers, directors and/or employees. Any regulatory action could result in the filing of additional restatements of our prior financial statements or require that we take other actions. If we are subject to an adverse finding resulting from the SEC and DOJ investigations, we could be required to pay damages or penalties or

have other remedies imposed upon us. The period of time necessary to resolve the investigations by the DOJ and the SEC is uncertain, and these matters could require significant management and financial resources which could otherwise be devoted to the operation of our business.

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.

Trident has been named as a nominal defendant in several purported shareholder derivative lawsuits concerning the granting of stock options. The federal court cases have been consolidated as In re Trident Microsystems Inc. Derivative Litigation, Master File No. C-06-3440-JF. A case also has been filed in State court, Limke v. Lin et al., No. 1:07-CV-080390. Plaintiffs in all cases allege that certain of our current or former officers and directors caused us to grant options at less than fair market value, contrary to our public statements (including our financial statements); and that this represented a breach of their fiduciary duties to us, and as a result those officers and directors are liable to us. No particular amount of damages has been alleged, and by the nature of the lawsuit no damages will be alleged against us. Our Board of Directors has appointed a Special Litigation Committee (“SLC”) composed solely of independent directors to review and manage any claims that we may have relating to the stock option grant practices and related issues investigated by the Special Committee. The scope of the SLC’s authority includes the claims asserted in the derivative actions. In federal court, Trident has moved to stay the case pending the assessment by the SLC that was formed to consider nominal plaintiffs’ claims. In State court, Trident moved to stay the case in deference to the federal lawsuit, and the parties have agreed, with the Court’s approval, to take that motion off the Court’s calendar to await the assessment of the SLC. We cannot predict whether these actions are likely to result in any material recovery by, or expense to, Trident. We expect to continue to incur legal fees in responding to these lawsuits, including expenses for the reimbursement of legal fees of present and former officers and directors under indemnification obligations. The expense of defending such litigation may be significant. The amount of time to resolve this and any additional lawsuits is unpredictable and these actions may divert management’s attention from the day-to-day operations of our business, which could adversely affect our business, results of operations and cash flows.

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.

In addition to the possibilities that there may be additional governmental actions and shareholder lawsuits against us, we may be sued or taken to arbitration by former officers and employees in connection with their stock options, employment terminations and other matters. These lawsuits may be time consuming and expensive, and cause further distraction from the operation of our business. The adverse resolution of any specific lawsuit could have a material adverse effect on our business, financial condition and results of operations.

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 have experienced certain departures of key personnel, including our former Chief Executive Officer, in connection with the investigation into our historical stock option grant practices and related issues. Two of our directors also resigned as a result of potential conflicts of interest identified during the stock option investigation. While we have appointed one of our directors, Glen Antle, as Chairman of the Board of Directors and Acting Chief Executive Officer, we have not retained a permanent Chief Executive Officer. Mr. Antle is available to assist us on a part time basis only. We are also searching for additional personnel to add to our management team and to our Board of Directors, and have recently retained two individuals as a General Counsel and a Chief Accounting Officer and two additional independent directors have been elected to our Board of Directors. While we do not believe that our business has been adversely affected by these changes to date, it is important to our success that we identify a permanent Chief Executive Officer. Our failure to manage these transitions, or to find and retain experienced management personnel, could adversely affect our ability to compete effectively and could adversely affect our operating results.

The process of restating our financial statements, making the associated disclosures, and complying with SEC requirements are subject to uncertainty and evolving requirements.

The issues surrounding our historical stock option grant practices are complex. We did not pre-clear our filings with the SEC, and if the SEC determined to review our filings, there can be no assurance that we will not be required to amend our Annual Report on Form 10-K for the fiscal year ended June 30, 2006 and the restatements included therein. In addition to the cost and time to amend financial reports, such amendments may have a material adverse affect on investors and common stock price.

We are exposed to increased costs and risks associated with complying with increasing and new regulation of corporate governance and disclosure standards.

We continue to spend an increasing amount of management time and external resources to comply with changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ Stock Market rules. In particular, Section 404 of the Sarbanes-Oxley Act of 2002 requires management’s annual review and evaluation of our internal control over financial reporting, and attestations of the effectiveness of our internal control over financial reporting by our independent registered public accounting firm. We have incurred additional costs, and expect such costs to continue in part in the future, in connection with the documentation, review, evaluation and attestation of our internal control systems and procedures and considering improvements that may be necessary in order for us to comply with the requirements of Section 404.

We continue to 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.

As a result of the Special Committee’s investigation, and as part of our evaluation of the effectiveness of our internal control over financial reporting and of our disclosure controls and procedures as of June 30, 2007, we concluded that there existed material weaknesses in a number of areas in our system of internal controls and procedures as of the fiscal year ended June 30, 2007, as described below under Item 9A, “Controls and Procedures.” These material weaknesses were first identified as a result of our evaluation of our internal control over financial report as of June 30, 2006, and have not yet been fully remediated. The Board of Directors previously directed management to implement, and management is continuing to implement, measures designed to ensure that information required to be disclosed in our periodic reports is complete, and is recorded, processed, and summarized accurately and reported timely, and that information is accumulated and communicated to our management, including our Acting Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure.

Our management, including our Acting Chief Executive Officer and our Chief Financial Officer, do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within a company are detected. The inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in reporting or controls can occur because of simple error or mistakes, and errors discovered by personnel within control systems may not be properly disclosed and addressed. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

As a result, although we expect to fully remediate the material weaknesses identified in Item 9A, “Controls and Procedures” below, during the second quarter of fiscal 2008, we cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

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.

with respect to our failure to timely file our Quarterly Reports on Form 10-Q for the first, second and third quarters of fiscal 2007. We requested and subsequently attended a hearing before the Nasdaq Listing Qualifications Panel (Listing Panel), which was held on November 16, 2006, to appeal the staff determination and presented a plan to cure the three filing deficiencies and regain compliance. On January 16, 2007, Nasdaq notified us that the exception had been granted, and that it would continue to list our shares on the Nasdaq Global Market, provided that we file our Form 10-K for fiscal 2006, our Form 10-Q for the first quarter of fiscal 2007, and all required restatements on or before April 2, 2007. Although we were unable to meet the requirement to file all required restatements by April 2, 2007, we appealed this decision to the Nasdaq Listing and Hearing Review Council (“Listing Council”), which decided to review the decision of the Listing Panel, and stayed the decision to suspend our securities from trading, pending further action by the Listing Council.

On July 6, 2007, we received the decision of the Listing Council concerning our appeal of the Listing Panel’s decision described above. In its decision, the Listing Council exercised its maximum discretionary authority and according to the limits of its authority, under Marketplace Rule 4802(b), granted us an extension to demonstrate compliance with all of the Nasdaq continued listing requirements until July 16, 2007. We have submitted a request to the Nasdaq Board of Directors for a further extension of time, beyond July 16, 2007, by which we must come into compliance with all of the listing requirements, and requested a continued stay of the decision to delist our common stock. On August 17, 2007, the Nasdaq Board of Directors informed us of its decision to provide us until September 13, 2007 to file all delinquent periodic reports necessary to regain compliance with the listing requirements. As a result of filing, on August 21, 2007, our Quarterly Reports on Form 10-Q for the periods ended September 30, 2006, December 31, 2006 and March 31, 2007, we believe that we have now filed all of our delinquent reports.

We have also requested an extension of time from the Listing Panel within which to comply with the requirement to hold an annual meeting of shareholders, to solicit proxies and to provide proxy statements to Nasdaq. The Nasdaq Board of Directors has determined that if we regain compliance with our filing requirements, it will remand the matter back to the Listing Panel for further consideration of the extension of time within which to hold an annual meeting of shareholders.

Our success depends upon the digital media market and we must continue to develop new products and to enhance our existing products.

The digital media industry is characterized by rapidly changing technology, frequent new product introductions, and changes in customer requirements. Our future success depends on our ability to anticipate market needs and develop products that address those needs. As a result, our products could quickly become obsolete if we fail to predict market needs accurately or develop new products or product enhancements in a timely manner. The long-term success in the digital media business will depend on the introduction of successive generations of products in time to meet the design cycles as well as the specifications of television original equipment manufacturers. Our failure to predict market needs accurately or to develop new products or product enhancements in a timely manner will harm market acceptance and sales of our products. If the development or enhancement of these products or any other future products takes longer than we anticipate, or if we are unable to introduce these products to market, our sales will not increase. Even if we are able to develop and commercially introduce these new products, the new products may not achieve widespread market acceptance necessary to provide an adequate return on our investment.

We 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.

We are and will continue to be dependent on a limited number of distributors and customers for a substantial amount of our revenue. Sales to Asian customers, primarily in Japan, South Korea, China and Taiwan, accounted for 93% of our revenues in fiscal 2007. Sales to Asian customers, primarily in Japan, South Korea, China and Taiwan, accounted for 95% of our revenues in fiscal 2006. Sales to Asian customers, primarily in China, Japan, South Korea and Taiwan accounted for 97% of our revenues in fiscal 2005.

In fiscal 2007, approximately 66% of our revenues were derived from sales to two customers, Samsung and Midoriya (a distributor for Sony), and each individually accounted for more than 10% of total revenues during this period. Of these customers, Samsung accounted for approximately 41% and Midoriya accounted for approximately 25%. Sales to our largest customers have fluctuated significantly from period to period primarily due to the timing and number of design wins with each customer and will likely continue to fluctuate dramatically in the future.

Accordingly, the loss of or reductions in purchases of our products by any of these customers could cause our revenues to decline during the period and have a material adverse impact on our financial results. We may be unable to replace any such lost revenues by sales to any new customers or increased sales to existing customers. Our operating results in the foreseeable future will continue to depend on sales to a relatively small number of customers, as well as the ability of these customers to sell products that incorporate

our products. In the future, these customers may decide not to purchase our products at all, purchase fewer products than they did in the past, or alter their purchasing patterns in some other way, particularly because:

	•		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.

As a result of our focus on digital media products, we expect to be primarily dependent on international sales and operations, particularly in Taiwan, Japan, South Korea and China, which are expected to continue to constitute a significant portion of our sales in the future. There are a number of risks arising from our international business, which could adversely affect future results, including:

	•		exchange rate variations, 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

	•		unexpected changes in regulatory requirements.

Our international sales currently are U.S. dollar-denominated. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets.

Our dependence on sales to distributors increases the risks of managing our supply chain and may result in excess inventory or inventory shortages.

Currently, the majority of our sales through distributors are made through distributors in Japan who function as purchasing conduits for each of two large Japanese OEM customers. In these two cases, we also have a direct relationship with the respective OEM customer, but generally the distributors also take certain inventory positions and resell to their OEM customers. On the other hand, in a smaller proportion of our distributor sales, we do have a more traditional distributor relationship that involves the distributor taking inventory positions and reselling to multiple customers. With all distributor relationships, we do not recognize revenue until the distributors sell the product through to their end user customers. The more traditional distributor relationships do reduce our ability to forecast sales and increases risks to our business. Since our distributors act as intermediaries between us and the end user customers, we must rely on our distributors to accurately report inventory levels and production forecasts. This requires us to manage a more complex supply chain and monitor the financial condition and credit worthiness of our distributors and the end user customers. Our failure to manage one or more of these risks could result in excess inventory or shortages that could adversely impact our operating results and financial condition.

The cyclical nature of the semiconductor industry may lead to significant variances in the demand for our products.

In the past, the semiconductor industry has experienced significant downturns and wide fluctuations in supply and demand. The semiconductor industry has also experienced fluctuations in anticipation of changes in general economic conditions, including economic conditions in Asia. These cycles have resulted in significant variations and fluctuations in product demand and production capacity, and may have added to the decline in average selling prices per unit. We may experience periodic fluctuations in our future financial results due to similar changes and fluctuations in industry-wide conditions and the semiconductor industry in general.

Intense competition exists in the market for digital media products.

We plan to continue developing the next generation of DPTV and HiDTV, as well as other advanced products for digital TV and digital STB for the digital media market in the United States, China, Japan, South Korea, Taiwan and Europe. We believe the digital media market will remain competitive, and will require us to incur substantial research and development, technical support, sales and other expenditures to stay competitive in this market. In the digital media market, our principal competitors are captive solutions from large TV OEMs as well as merchant solutions from Toshiba, NXP Semiconductors, Micronas AG, Pixelworks, Inc., Genesis Microchip, Inc., Advanced Micro Devices, Inc. (formerly ATI Technologies Inc.), Zoran Corporation, ST Microelectronics, Morningstar, and Media Tek, Ltd. Certain of our current competitors and many potential competitors have significantly greater technical, manufacturing, financial and marketing resources than we have. Therefore, we expect to devote significant resources to the DPTV and HiDTV market even though competitors are substantially more experienced than we are in this market.

The level and intensity of competition has increased over the past year and we expect competition to continue to increase in the future. Competitive pressures caused by the current economic conditions have resulted in reductions in average selling prices of our products, and continued or increased competition could reduce our market share, require us to further reduce the prices of our products, affect our ability to recover costs or result in reduced gross margins.

The average selling prices of our products may decline over relatively short periods.

Average selling prices for our products may decline over relatively short time periods, while many of our costs are fixed. On average, we have experienced average selling price declines over the course of 12 months of anywhere from approximately 10-20% per year in reductions part for part to average selling price of a given product. This annual pace of price decline for products or technology is generally expected in the consumer electronics industry. It is also possible for the pace of average selling price declines to accelerate beyond these levels for certain products in a commoditizing market. When our average selling prices decline, our gross profits decline unless we are able to sell more products or reduce the cost to manufacture our products. We generally attempt to combat average selling price declines by designing new products for reduced costs, innovating to integrate additional functions or features and working with our manufacturing partners to reduce the costs of manufacturing existing products. We have in the past and may in the future experience declining sales prices, which could negatively impact our revenues, gross profits and financial results. We therefore need to sell our current products in increasing volumes to offset any decline in their average selling prices, and introduce new products with improved gross margins, which we may be unable to do, or do on a timely basis.

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.

Our sales are made on the basis of purchase orders rather than long-term purchase commitments. Our customers may cancel or defer purchases at any time. This requires us to forecast demand based upon assumptions that may not be correct. If our customers or we overestimate demand, we may create inventory that we may not be able to sell or use, resulting in excess inventory, which could become obsolete or negatively affect our operating results. Conversely, if our customers or we underestimate demand, or if sufficient manufacturing capacity is not available, we may lose revenue opportunities, damage customer relationships and we may not achieve expected revenue.

If we do not achieve additional design wins in the future, our ability to sell additional products could be adversely affected.

Our future success depends on manufacturers of desktop and notebook PCs, consumer televisions and other digital media products designing our products into their products. To achieve design wins, we must define and deliver cost-effective, innovative and high performance integrated circuits. Once a supplier’s products have been designed into a system, the manufacturer may be reluctant to change components due to costs associated with qualifying a new supplier and determining performance capabilities of the component. Customers can choose at any time to discontinue using our products in their designs or product development efforts. Once a particular supplier’s product is selected, the manufacturer generally relies for a significant period of time upon this component. Accordingly, we may face narrow windows of opportunity to be selected as the supplier of component parts by significant new customers. It may be difficult for us to sell to a particular customer for a significant period of time once that customer selects a competitor’s product, and we may not be successful in obtaining broader acceptance of our products. If we are unable to achieve broader market acceptance of our products, we may be unable to maintain and grow our business and our operating results and financial condition will be adversely affected.

We have had fluctuations in quarterly results in the past and may continue to experience such fluctuations in the future.

Our quarterly revenue and operating results have varied in the past and may fluctuate in the future due to a number of factors including:

	•		uncertain demand in 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;

	•		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.

These factors are often difficult or impossible to forecast or predict, and these or other factors could cause our revenue and expenses to fluctuate over interim periods, increase our operating expenses, or adversely affect our results of operations or business condition.

We are vulnerable to undetected product problems.

Although we establish and implement test specifications, impose quality standards upon our suppliers and perform separate application-based compatibility and system testing, our products may contain undetected defects, which may or may not be material, and which may or may not have a feasible solution. Although we have experienced such errors in the past, significant errors have generally been detected relatively early in a product’s life cycle and therefore the costs associated with such errors have been immaterial. We cannot ensure that such errors will not be found from time to time in new or enhanced products after commencement of commercial shipments. These problems may materially adversely affect our business by causing us to incur significant warranty and repair costs, diverting the attention of our engineering personnel from our product development efforts and causing significant customer relations problems. Defects or other performance problems in our products could result in financial or other damages to our customers or could damage market acceptance of our products. Our customers could seek damages from us for their losses as a result of problems with our products.

Our reliance upon independent foundries could make it difficult to maintain product flow and affect our sales.

If the demand for our products grows, we will need to increase our material purchases, contract manufacturing capacity and internal test and quality functions. Any disruptions in product flow could limit our ability to meet orders, impact our revenue and our ability to increase sales, adversely affect our competitive position and reputation and result in additional costs or cancellation of orders.

We do not own or operate fabrication facilities and do not manufacture our products internally. We currently rely principally upon one third-party foundry to manufacture our products in wafer form and other contract manufacturers for assembly and testing of our products. Generally, we place orders by purchase order, and foundries are not obligated to manufacture our products on a long-term fixed-price basis, so they are not obligated to supply us with products for any specific period of time, in any specific quantity or at any specific price, except as may be provided in a particular purchase order. Our requirements typically represent only a small portion of the total production capacity of our contract manufacturers. Our contract manufacturers could re-allocate capacity to other customers, even during periods of high demand for our products. We have limited control over delivery schedules, quality assurance, manufacturing yields, potential errors in manufacturing and production costs. If we encounter shortages and delays in obtaining components, our ability to meet customer orders would be materially adversely affected. In addition, during periods of increased demand, putting pressure on the foundries to meet orders, we may have reduced control over pricing and timely delivery of

components, and if the foundries increase the cost of components or subassemblies, our margins will be adversely affected, and we may not have alternative sources of supply to manufacture such components.

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.

We rely on a single supplier to manufacture our products in wafer form. The lead time required to establish a relationship with a new foundry is long, and it takes time to adapt a product’s design to a particular manufacturer’s processes. Accordingly, there is no readily available alternative source of supply for any specific product. This could cause significant delays in shipping products if we have to change our source of supply and manufacture quickly, which may result in lost revenues and damaged customer relationships.

The market price of our common stock has been, and may continue to be volatile.

The market price of our common stock has been, and may continue to be volatile. Factors such as new product announcements by us or our competitors, quarterly fluctuations in our operating results and unfavorable conditions in the digital media market, as well as the results of our investigation of our historical stock option grant practices and related issues, and any litigation or regulatory actions arising as a result, may have a significant impact on the market price of our common stock. These conditions, as well as factors that generally affect the market for stocks and stocks in high-technology companies in particular, could cause the price of our stock to fluctuate from time to time or to decline.

Our success depends to a significant degree on the continued employment of key personnel.

Our success depends to a significant degree upon the continued contributions of the principal members of our technical sales, marketing, engineering and management personnel, many of whom perform important management functions and would be difficult to replace. We are also currently searching for a new Chief Executive Officer, and are relying on the services of our Acting Chief Executive Officer. In addition, we depend upon the continued services of key management personnel at our overseas subsidiaries. Our officers and key employees are not bound by employment agreements for any specific term, and may terminate their employment at any time. In order to continue to expand our product offerings both in the U.S. and abroad, we must hire and retain a number of research and development personnel. Hiring technical sales personnel in our industry is very competitive due to the limited number of people available with the necessary technical skills and understanding of our technologies. Our ability to continue to attract and retain highly skilled personnel will be a critical factor in determining whether we will be successful in the future. Competition for highly skilled personnel continues to be increasingly intense, particularly in the areas where we principally operate, specifically in Shanghai, China; Taipei, Taiwan; and Northern California. If we are not successful in attracting, assimilating or retaining qualified personnel to fulfill our current or future needs, our business may be harmed.

Our success depends in part on our ability to protect our intellectual property rights, which may be difficult.

The digital media market is a highly competitive industry in which we, and most other participants, rely on a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures and licensing arrangements to establish and protect proprietary rights. The competitive nature of our industry, rapidly changing technology, frequent new product introductions, changes in customer requirements and evolving industry standards heighten the importance of protecting proprietary technology rights. Since the United States Patent and Trademark Office keeps patent applications confidential until a patent is issued, our pending patent applications may attempt to protect proprietary technology claimed in a third party patent application. Our existing and future patents may not be sufficiently broad to protect our proprietary technologies as policing unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly in foreign countries where the laws may not protect our proprietary rights as fully as U.S. law. Our competitors may independently develop similar technology, duplicate our products or design around any of our patents or other intellectual property. If we are unable to adequately protect our proprietary technology rights, others may be able to use our proprietary technology without having to compensate us, which could reduce our revenues and negatively impact our ability to compete effectively. We have in the past, and may in the future, file lawsuits to enforce our intellectual property rights or to determine the validity or scope of the proprietary rights of others. As a result of any such litigation or resulting counterclaims, we could lose our proprietary rights and incur substantial unexpected operating costs. Any action we take to protect our intellectual property rights could be costly and could absorb significant

management time and attention. In addition, failure to adequately protect our trademark rights could impair our brand identity and our ability to compete effectively.

We have been involved in intellectual property infringement claims, and may be involved in others in the future, which can be costly.

Our industry is very competitive and is characterized by frequent litigation alleging infringement of intellectual property rights. Numerous patents in our industry have already been issued and as the market further develops and additional intellectual property protection is obtained by participants in our industry, litigation is likely to become more frequent. From time to time, third parties have asserted and are likely in the future to assert patent, copyright, trademark and other intellectual property rights to technologies or rights that are important to our business. Historically we have been involved in such disputes. For example, Trident was sued by MIPS Technologies, Inc. in federal court in the Northern District of California for patent infringement, trademark infringement and unfair competition. The case was filed on December 1, 2006 as MIPS Technologies, Inc. v. Trident Microsystems, Inc., Civ. No. 3:06-CV-07377-MMC. The parties reached a confidential business resolution and the case was dismissed with prejudice on April 5, 2007. In addition, we have and may in the future enter into agreements to indemnify our customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. Litigation or other disputes or negotiations arising from claims asserting that our products infringe or may infringe the proprietary rights of third parties, whether with or without merit, has been and may in the future be, time-consuming, resulting in significant expenses and diverting the efforts of our technical and management personnel. We do not have insurance against our alleged or actual infringement of intellectual property of others. Any such claims that may be filed against us in the future, if resolved adversely to us, could cause us to stop sales of our products which incorporate the challenged intellectual property and could also result in product shipment delays or require us to redesign or modify our products or to enter into licensing agreements. These licensing agreements, if required, would increase our product costs and may not be available on terms acceptable to us, if at all. If there is a successful claim of infringement or we fail to develop non-infringing technology or license the proprietary rights on a timely and reasonable basis, our business could be harmed.

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

We conduct a significant portion of our activities including manufacturing, administration and data processing at facilities located in the State of California, Taiwan and other seismically active areas that have experienced major earthquakes in the past, as well as other natural disasters. This coverage may not be adequate or continue to be available at commercially reasonable rates and terms. A major earthquake or other disaster affecting our suppliers’ facilities and our administrative offices could significantly disrupt our operations, and delay or prevent product manufacture and shipment during the time required to repair, rebuild or replace our suppliers’ manufacturing facilities and our administrative offices; these delays could be lengthy and result in large expenses. In addition, our administrative offices in the State of California may be subject to a shortage of available electrical power and other energy supplies. Any shortages may increase our costs for power and energy supplies or could result in blackouts, which could disrupt the operations of our affected facilities and harm our business. In addition, our products are typically shipped from a limited number of ports, and any natural disaster, strike or other event blocking shipment from these ports could delay or prevent shipments and harm our business.

The effect of terrorism or an outbreak of epidemic diseases may negatively affect sales and hinder our operations

Concerns about terrorism or an outbreak of epidemic diseases such as Severe Acute Respiratory Syndrome and Avian Influenza, especially in our major markets in China, Japan, South Korea and Taiwan, could have a negative effect on travel and our business operations, and result in adverse consequences on our revenues and financial performance.

Changes in our business organization will affect our operations.

Our principal design, development and marketing effort focuses primarily on our digital media products. These products are now our only product line and our success in the near term depends upon the growth of the market for these products and our success in this market. Our success in the longer term will also depend on our ability to develop and introduce other digital media products. We plan to continue developing the next generation DPTV and HDTV, as well as other advanced products for digital TV and digital STB for the digital media market in the United States, China, Japan, South Korea, Taiwan and Europe. While we anticipate this market to generate an increasing percentage of our revenues, we have limited experience with digital video television. There can be no guarantee that our digital media products will be accepted by the market or increase our revenues or profitability.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We lease a building of approximately 30,500 square feet on 3408-3410 Garrett Drive in Santa Clara, California, pursuant to a lease which expires in July 2011. This building is used as our headquarters and includes development, marketing, and administrative offices. Our other leases include a 7,000 square-foot office in Hong Kong, China, for the Hong Kong branch office of our Trident Microsystems (Far East) Ltd. subsidiary, a sales office and a research facility located in Taipei, Taiwan totaling 26,000 square-feet, a 7,000 square-foot sales office in Shenzhen, China; a 44,000 square-foot research and development facility in Shanghai, China, a 1,000 square-foot sales office in Beijing, China and a branch office in Tokyo, Japan totaling 2,000 square feet. We are currently in the process of constructing a new 115,000 square foot research and development facility in Shanghai, China, estimated to be completed during the first quarter of fiscal 2008.

We are utilizing substantially all of our currently available productive space to develop, manufacture, service and market our products. We believe that our facilities and equipment generally are well maintained, in good operating condition and adequate for present operations.

ITEM 3. LEGAL PROCEEDINGS

Shareholder Derivative Litigation

Trident has been named as a nominal defendant in several purported shareholder derivative lawsuits concerning the granting of stock options. The federal court cases have been consolidated as In re Trident Microsystems Inc. Derivative Litigation, Master File No. C-06-3440-JF. A case also has been filed in State court, Limke v. Lin et al., No. 1:07-CV-080390. Plaintiffs in all cases allege that certain of our current or former officers and directors caused us to grant options at less than fair market value, contrary to our public statements (including our financial statements); and that this represented a breach of their fiduciary duties to us, and that as a result those officers and directors are liable to us. No particular amount of damages has been alleged, and by the nature of the lawsuit no damages will be alleged against us. Our Board of Directors has appointed a Special Litigation Committee (“SLC”) composed solely of independent directors to review and manage any claims that we may have relating to our historical stock option grant practices and related issues investigated by the Special Committee. The scope of the SLC’s authority includes the claims asserted in the derivative actions. In federal court, Trident has moved to stay the case pending the assessment by the SLC that was formed to consider nominal plaintiffs’ claims. In State court, Trident moved to stay the case in deference to the federal lawsuit, and the parties have agreed, with the Court’s approval, to take that motion off of the Court’s calendar to await the assessment of the SLC. We cannot predict whether these actions are likely to result in any material recovery by, or expense to, Trident. We expect to continue to incur legal fees in responding to these lawsuits, including expenses for the reimbursement of legal fees of present and former officers and directors under indemnification obligations.

Intellectual Property Litigation

Trident was sued by MIPS Technologies, Inc. in federal court in the Northern District of California for patent infringement, trademark infringement and unfair competition. The case was filed on December 1, 2006 as MIPS Technologies, Inc. v. Trident Microsystems, Inc., Civ. No. 3:06-CV-07377-MMC. The parties reached a confidential business resolution and the case was dismissed with prejudice on April 5, 2007.

From time to time, we are involved in other legal proceedings arising in the ordinary course of our business. While we cannot be certain about the ultimate outcome of any litigation, management does not believe any pending legal proceeding will result in a judgment or settlement that will have a material adverse effect on our business, financial position, results of operation or cash flows.

Regulatory Actions

directors and/or employees and might result in such sanctions against us and/or our current officers, directors and/or employees. Any regulatory action could result in the filing of additional restatements of our prior financial statements or require that we take other actions. If we are subject to an adverse finding resulting from the SEC and DOJ investigations, we could be required to pay damages or penalties or have other remedies imposed upon us. The period of time necessary to resolve the investigation by the DOJ and the investigation from the SEC is uncertain, and these matters could require significant management and financial resources which could otherwise be devoted to the operation of our business.

Nasdaq Proceedings

As a result of the delayed filing of our periodic reports with the SEC, on October 2, 2006, we received a Nasdaq staff determination letter indicating that we had failed to comply with the filing requirement for continued listing set forth in Nasdaq Marketplace Rule 4310(c)(14), due to our failure to timely file our Annual Report on Form 10-K for fiscal 2006, and that our securities are, therefore, subject to delisting from the Nasdaq Global Market. We received and announced three additional Nasdaq staff determination letters with respect to our failure to timely file our Quarterly Reports on Form 10-Q for the first, second and third quarters of fiscal 2007, as well as with respect to our failure to hold an annual meeting of stockholders during fiscal 2007. We requested and subsequently attended a hearing before the Listing Panel, which was held on November 16, 2006, to appeal the staff determination and presented a plan to cure the three filing deficiencies and regain compliance. On January 16, 2007, Nasdaq notified us that the exception had been granted, and that it would continue to list our shares on the Nasdaq Global Market, provided that we file our Form 10-K for fiscal 2006, our Form 10-Q for the first quarter of fiscal 2007, and all required restatements on or before April 2, 2007. We appealed this decision to the Listing Council, which decided to review the decision of the Listing Panel, and stayed the decision to suspend our securities from trading, pending further action by the Listing Council.

Indemnification Obligations

We indemnify, as permitted under Delaware law and in accordance with our Bylaws, our officers, directors and members of our senior management for certain events or occurrences, subject to certain limits, while they were serving at our request in such capacity. In this regard, we have received, or expect to receive, requests for indemnification by certain current and former officers, directors and employees in connection with our investigation of our historical stock option grant practices and related issues, and the related governmental inquiries and shareholder derivative litigation described above. The maximum amount of potential future indemnification is unknown and potentially unlimited; therefore, it cannot be estimated. We have directors’ and officers’ liability insurance policies that may enable us to recover a portion of such future indemnification claims paid, subject to coverage limitations of the policies, and plans to make claim for reimbursement from our insurers of any potentially covered future indemnification payments.

From time to time, we are involved in other legal proceedings arising in the ordinary course of our business in which a customer or other third party may assert a right to indemnification. While we cannot be certain about the ultimate outcome of any litigation, management does not believe any such pending legal proceeding will result in a judgment or settlement that will have a material adverse effect on our business.

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

None.

Part II


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

Our common stock has been traded on the NASDAQ National Market since our initial public offering on December 16, 1992 under the symbol “TRID.”

As discussed under “Legal Proceedings” above, on October 2, 2006, we received a Nasdaq staff determination letter indicating that we had failed to comply with the requirements for continued listing due to our failure to timely file our Annual Report on Form 10-K for fiscal 2006, and that our securities are, therefore, subject to delisting from the Nasdaq Global Market. We received three additional Nasdaq staff determination letters with respect to our failure to timely file our Quarterly Reports on Form 10-Q for the first, second and third quarters of fiscal 2007, as well as with respect to our failure to hold an annual meeting of stockholders during fiscal 2007. We appealed the staff determination, and requested an extension within which to comply, and on January 16, 2007, Nasdaq notified us that the exception had been granted, and that it would continue to list our shares on the Nasdaq Global Market, provided that we file our outstanding periodic reports and all required restatements on or before April 2, 2007. We appealed this decision to the Listing Council, which decided to review the decision of the Listing Panel, and stayed the decision to suspend our securities from trading, pending its further action. Our stock will continue to be listed on the Nasdaq Global Market pending the decision by the Listing Council on our request for a further extension within which to comply with the listing rules.

The following table sets forth, for the periods indicated, the quarterly high and low sales prices for our common stock as reported by NASDAQ in fiscal years 2007 and 2006:


	High		Low
Fiscal Year 2007
First Quarter		25.24		14.85
Second Quarter		25.54		18.17
Third Quarter		23.16		16.54
Fourth Quarter		23.59		18.00

Fiscal Year 2006
First Quarter		18.59		11.23
Second Quarter		21.38		13.95
Third Quarter		31.14		18.55
Fourth Quarter		31.49		16.87

Approximate Number of Stockholders

As of June 30, 2007, there were approximately 70 registered holders of record of our common stock. The number of beneficial stockholders of our shares is greater than the number of stockholders of record.

Dividends

Our present policy is to retain earnings, if any, to finance future growth. We have never paid cash dividends and have no present intention to pay cash dividends.

Issuer Repurchases of Equity Securities

We did not repurchase any of our equity securities during the quarter ended June 30, 2007, nor issue any securities that were not registered under Securities Act of 1933.

Stock Performance Graphs and Cumulative Total Return

The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on the Nasdaq Stock Market Index (U.S. Companies) and the S&P Semiconductors Index for each of the last five fiscal years ended June 30, 2007, assuming an investment of $100 at the beginning of such period and the reinvestment of any dividends. The comparisons in the graphs below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Trident Microsystems, Inc., The NASDAQ Composite Index
And The S&P Semiconductors Index


*		$100 invested on 6/30/02 in stock or index-including reinvestment of dividends. Fiscal year ending June 30.

Copyright © 2007, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.
www.researchdatagroup.com/S&P.htm

ITEM 6. SELECTED FINANCIAL DATA

The following tables include selected consolidated summary financial data for each of our last five fiscal years.


	Fiscal Years
(In millions, except per share amounts)	2007 (1)		2006 (1)		2005 (2)			2004 (2)			2003 (2)(3)
Summary of Operations:
Revenues	$	270.8	$	171.4	$	69.0		$	52.6		$	52.8
Income (loss) from operations	$	40.1		28.4		(29.9	)		(11.9	)		(19.8	)
Net income (loss)	$	30.1		26.2		(30.2	)		(4.8	)		(26.1	)
Net income (loss) per share — Basic		0.52		0.48		(0.64	)		(0.11	)		(0.64	)
Net income (loss) per share — Diluted		0.48		0.42		(0.64	)		(0.11	)		(0.64	)

Financial Position at Fiscal Year End:
Cash, cash equivalents, and short-term investments	$	199.3	$	152.7	$	92.2		$	84.3		$	49.9
Working capital	$	158.3		125.3		81.6			75.5			41.2
Total assets	$	283.9		207.2		135.0			96.3			70.1
Stockholders’ equity	$	201.8		153.7		109.3			74.4			52.2


(1)		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.

(2)		Information regarding the effect of the restatement on our financial position and results of operations is provided in Note 3 of Notes to Consolidated Financial Statements, included in Part II, Item 8 of the Annual Report for the fiscal year ended June 30, 2006 on Annual Report on Form 10-K.

(3)		The statements of operations for the year ended June 30, 2003 included the graphics division, which was transferred to XGI Technology, Inc. in July 2003.


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.

The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto.

Overview

We design, develop and market integrated circuits for digital media applications, such as digital television or digital TV, liquid crystal display television, or LCD television, and digital set-top boxes. Our system-on-chip semiconductors provide the “intelligence” for these new types of displays by processing and optimizing video and computer graphic signals to produce high-quality and realistic images. Many of the world’s leading manufacturers of consumer electronics and computer display products utilize our technology to enhance image quality and ease of use of their products. Our goal is to provide the best image quality enhanced digital media integrated circuits at competitive prices to users.

We sell our products primarily to digital television original equipment manufacturers in China, South Korea, Taiwan and Japan. Historically, significant portions of our revenues have been generated by sales to a relatively small number of customers. Our top five customers accounted for 82% of our total revenues for the fiscal year ended June 30, 2007. Substantially all of our revenues to date have been denominated in U.S. dollars. Our products are manufactured primarily by United Microelectronics Corporation (UMC), a semiconductor manufacturer located in Taiwan.

Since June 2003, we have focused our business primarily in the rapidly growing digitally processed television (DPTV) market and related areas. Since September 1, 2006, we have conducted this business primarily through our subsidiary, Trident Microsystems (Far East) Ltd., or TMFE, located in the Cayman Islands, with research and development services relating to existing projects and certain new projects, conducted by both Trident Microsystems, Inc. and its subsidiary, Trident Multimedia Technologies (Shanghai) Co. Ltd., or TMT, located in Shanghai, China. Operations and field application engineering support and certain sales activities are conducted through our subsidiary, Trident Microelectronics Co. Ltd., or TML, located in Taiwan and other affiliates. Trident Technologies, Inc., which was 99.9% owned by Trident at June 30, 2007, 2006 is in the process of being dissolved.

References to “we,” “our,” “Trident,” or the “Company” in this report refer to Trident Microsystems, Inc. and its subsidiaries, including TMT, TML, TTI and TMFE.

Critical Accounting Estimates

The preparation of our financial statements and related disclosures in conformity with generally accepted accounting principles in the United States of America, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical experience and on various other factors that we believe are reasonable under the circumstances. We periodically review our accounting policies and estimates and make adjustments when facts and circumstances dictate. In addition to the accounting policies that are more fully described in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K, we consider the critical accounting policies described below to be affected by critical accounting estimates. Our critical accounting policies that are affected by accounting estimates include revenue recognition, stock-based compensation expense, investments, allowance for sales returns, inventories, intangible assets, product warranty, income taxes and litigation and other loss contingencies. Such accounting policies are impacted

significantly by judgments, assumptions and estimates used in the preparation of the Consolidated Financial Statements, and actual results could differ materially from these estimates. For a discussion of how these estimates and other factors may affect our business, also see “Risk Factors” In Item 1A.

Revenue Recognition

We recognize revenues in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectibility is reasonably assured. We record estimated reductions to revenue for customer incentive offerings and sales returns allowance in the same period that the related revenue is recognized. Our customer incentive offerings primarily involve volume rebates for our products in various target markets. If market conditions were to decline, we may take actions to increase customer incentive offerings, possibly resulting in an incremental reduction of revenue at the time the incentive is offered. A sales returns allowance is established based primarily on historical sales returns, analysis of credit memo data and other known factors at that time. Additional reductions to revenue would result if actual product returns or pricing adjustments exceed our estimates.

Stock-based Compensation Expense

Effective July 1, 2005, we adopted SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), 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. SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), which we previously followed in accounting for stock-based awards. In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”) to provide guidance on SFAS 123(R). We have applied SAB 107 in its adoption of SFAS 123(R).

We adopted SFAS 123(R), which requires the measurement and recognition of compensation expense for all stock-based payment awards made to our employees and directors including stock options based on fair values. Our financial statements for the years ended June 30, 2007 and 2006 reflect the impact of SFAS 123(R) using the modified prospective transition method. In accordance with the modified prospective transition method, our financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation expense is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense recognized in our Consolidated Statements of Operations for the years ended June 30, 2007 and 2006 included compensation expense for stock-based payment awards granted prior to, but not yet vested as of June 30, 2005, based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and compensation expense for the stock-based payment awards granted subsequent to June 30, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). In conjunction with the adoption of SFAS 123(R), we elected to attribute the value of stock-based compensation to expense using the straight-line method, which was previously used for our pro forma information required under SFAS 123.

Upon adoption of SFAS 123(R), we elected to value our stock-based payment awards granted beginning in July 1, 2005 using the Black-Scholes option-pricing model (the “Black-Scholes model”), which was previously used for our pro forma information required under SFAS 123 for fiscal year 2005. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Black-Scholes model requires the input of certain assumptions. Trident’s stock options have characteristics significantly different from those of traded options, and changes in the assumptions can materially affect the fair value estimates. See Note 9 of the Notes to the Consolidated Financial Statements for a detailed discussion of SFAS 123(R).

The expected term of stock options represents the weighted average period the stock options are expected to remain outstanding. The expected term is based on the observed and expected time to exercise and post-vesting cancellations of options by employees. Upon the adoption of SFAS 123(R), we continued to use historical volatility in deriving our expected volatility assumption as allowed under SFAS 123(R) and SAB 107 because we believe that future volatility over the expected term of the stock options is not likely to materially differ from the past. Prior to July 1, 2005, we used our historical stock price volatility in accordance with SFAS 123 for purposes of our pro forma information. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of our stock options. The expected dividend assumption is based on our history and expectation of dividend payouts.

For the years ended June 30, 2007 and 2006, stock-based compensation expense, before income taxes, was $15.6 million and $13.2 million, respectively, which consisted primarily of stock-based compensation expense related to employee stock options recognized under SFAS 123(R). For the year ended June 30, 2005 stock-based compensation expense, before income taxes, was $30.5 million, which was recorded under APB 25.

Prior to the adoption of SFAS 123(R) on July 1, 2005 we accounted for stock-based employee compensation arrangements in accordance with the provisions of APB 25 and its related implementation guidance, and complying with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB 25, compensation expense is generally recognized based on the difference, if any, between the quoted market price of our stock on the date of grant and the amount an employee must pay to acquire the stock. Before our acquisition of the minority interest in our TTI subsidiary, we estimated the fair value of non-public common stock in our then majority owned TTI subsidiary. We relied in part on valuations implied from fairness opinions received in connection with TTI related transactions, investment banking valuations at different points in time, the prices of occasional third- party transactions in TTI stock and interpolations between these data points to estimate fair value of the non- public common stock at the date of grant of any options in these securities to employees. We made these interpolations and estimates in good faith, recognizing that establishing a fair value is difficult and requires an appropriate degree of judgment and experience in the absence of an independent liquid market to establish fair value in any given security. The fairness opinions and third party valuations in part relied upon valuation metrics of comparable publicly traded securities in Taiwan. These metrics change constantly and reflect the relative high volatility of these securities. In general management believes that there is also a high correlation between the value of TTI common stock and the U.S. market-based characteristics, such as volatility of the Trident common stock. This correlation was also factored into the valuation of TTI stock for the purposes of measuring compensation expense. As these characteristics and factors can vary over time, we used an average over a period of time to minimize potential distortion of the measurement at any one point in time.

Investments

We hold minority interests in companies having operations or technology in areas generally within our strategic focus, one of which is publicly traded and has highly volatile share prices. For investments in privately-held companies, we monitor the investments for impairment quarterly based on the investees’ most recent financial statements, which may not have been audited and may not have been timely provided to us. We record an investment impairment charge when we believe an investment has experienced a decline in value that is other-than-temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

Allowance for Sales Returns

We maintain a sales returns allowance for estimated product returns based primarily on historical sales returns, analysis of credit memo data and other known factors at that time. If product returns for a particular fiscal period exceed historical return rates, the Company may determine that additional sales returns allowance are required to properly reflect its estimated exposure for product returns.

Inventories

Inventories are stated principally at standard cost adjusted to approximate the lower of cost (first-in, first-out method) or market (net realizable value). Finished goods are reported as inventories until the point of title transfer to the customer. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. When we introduce new products that are designed to enhance or replace our older products, we typically provide inventory reserves on our older products based on the expected timing and volume of customer purchases of the new product over a six month period. The timing and volume of the new product introductions can be impacted significantly by events out of our control including changes in customer product introduction schedules. Accordingly, we may end up selling more of our older fully-reserved product until the customer is able to execute on his changeover plan.

Intangible Assets

We assess the carrying value of our intangible assets if events or circumstances indicate the carrying value of the assets exceeds the future undiscounted cash flows attributable to such assets. With respect to long lived assets, various factors which could trigger an impairment review include significant negative industry or economic trends, exiting an activity in conjunction with a restructuring of operations, current, historical or projected losses that demonstrate continuing losses associated with an asset or a significant decline in our market capitalization for an extended period of time, relative to net book value. Impairment evaluations involve management estimates of asset useful lives and future cash flows. These estimates include assumptions about future conditions such as future revenues, gross margins, operating expenses, the fair values of certain assets based on appraisals and industry trends. Actual useful

lives and cash flows could be different from those estimated by our management. This could have a material effect on our operating results and financial position.

We account for our purchases of acquired companies in accordance with SFAS No. 141, Business Combinations, and account for the related acquired intangible assets in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. In accordance with SFAS No. 141, we allocate the cost of the acquired companies to the identifiable tangible and intangible assets acquired and liabilities assumed, with the remaining amount being classified as goodwill. Certain intangible assets, such as “developed technologies,” are amortized to expense over time. We assess the technological feasibility of in-process research and development projects and determine the number of alternative future uses for the technology being developed. To the extent there are no alternative future uses, we allocate a portion of the purchase price to in-process research and development, which is immediately expensed in the period when the acquisition is completed. This expense is generally estimated based upon the projected fair value of the technology, as determined by a discounted future cash flow reduced by the cost to complete. This includes certain estimates and assumptions made by management. For larger acquisitions, we engage independent valuation specialists to assist with the assumptions and models used in this type of analysis.

Product Warranty

We provide for the estimated cost of product warranties at the time revenue is recognized based on historical information or specific product issues. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates and material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required. As of June 30, 2007, accrued product warranty totaled $0.8 million.

Income Taxes

We account for income taxes in accordance with SFAS No. 109 (“SFAS 109”), Accounting for Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process requires us to estimate our actual current tax exposure and to assess temporary differences resulting from differing treatment of items for tax and accounting purposes. We maintain reserves for potential tax contingencies arising in the jurisdictions in which we do business. Such reserves are based on our assessment of the likelihood of an unfavorable outcome and the potential loss from such contingencies, and may be adjusted from time to time in light of changing facts and circumstances. These reserves are maintained until such time as the matter is settled or the statutory period for adjustment has passed. Adjustments could be required in the future if we determine that our reserves for tax contingencies are inadequate. The provision for income taxes includes the effect of changes to these reserves that are considered appropriate. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $23.6 million as of June 30, 2007 due to uncertainties related to our ability to utilize all of our deferred tax assets before they expire, primarily consisting of certain net operating loss carry forwards. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to establish an additional valuation allowance which could materially impact our financial position and results of operations.

Litigation and Other Loss Contingencies

We account for litigation and other loss contingencies in accordance with SFAS No. 5, Accounting for Contingencies. SFAS No. 5 requires that we record an estimated loss from a loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. While we believe that our accruals for these matters are adequate, if the actual losses from loss contingencies or restructuring liabilities are significantly different than the estimated loss, our results of operations may be materially affected. We have been required to make such adjustments to these types of estimates in the past.

Results of Operations

On October 24, 2005, the Board of Directors approved a two-for-one stock split in the form of a 100% stock dividend to stockholders of record as of November 9, 2005, payable on or after November 18, 2005. Our common stock began trading on a split-adjusted basis on November 21, 2005. Unless otherwise stated, all references in the consolidated financial statements to the number of shares and per share amounts of our common stock for the periods prior to November 21, 2005 have been retroactively restated to reflect the increased number of shares resulting from the two-for-one stock split.

Financial Data for Fiscal Years Ended June 30, 2007, 2006 and 2005

Revenues


	Fiscal Years
Revenues by region (1)	2007		% Change			2006		% Change			2005
(Dollars in million)
South Korea		115.5		107	%		55.7		436	%		10.4
Japan		91.7		37	%		66.7		215	%		21.2
China		31.3		13	%		27.6		-9	%		30.2
Taiwan		14.4		15	%		12.5		136	%		5.3
Europe		17.5		108	%		8.4		1100	%		0.7
Others		0.4		-20	%		0.5		-58	%		1.2

Total		270.8		58	%		171.4		148	%		69.0


(1)		Revenues by region are classified based on the locations of the customers’ principal offices even though our customers’ revenues are attributable to end customers that are located in a different location.

Digital media product revenues accounted for all of our revenues in fiscal 2007, after representing approximately 99% of total revenues for each of fiscal years 2006 and 2005. The increase in digital media product revenues in fiscal 2007 from fiscal 2006 was primarily attributed to continued success of our digital media products comprising predominantly our Super Video Processor (“SVP”) family of products in the digital television markets. Our unit sales volume of digital media products increased by 91% in fiscal 2007 compared to fiscal 2006, however, as is typical with consumer electronics markets, the year-over-year average selling prices decreased by approximately 17% over the same time period. The significant increase in digital media product revenues in fiscal 2006 was primarily attributed to the success of our digital media products in the digital television markets. During fiscal 2006, the volume of digital media units sold increased by more than 170% while the year-over-year average selling price declined by approximately 8%.

Revenues from customers located in Asia, primarily in South Korea, Japan, China and Taiwan, accounted for an aggregate of 93%, 95%, and 97% of our total revenues in fiscal 2007, 2006 and 2005, respectively. Revenues in fiscal 2007 increased in all regions primarily due to continued success of our standalone image process controllers largely in the digital process television markets. Revenues from Europe in fiscal 2007 increased primarily due to the increase sales of SVP-CX to a major OEM customer in Europe. Revenues in fiscal 2006 increased significantly in South Korea, Japan, Taiwan and Europe, compared to fiscal 2005. Revenues in China decreased in fiscal 2006 compared to fiscal 2005 principally due to intense price competition in that particular market. We expect customers located in Asia will continue to account for a significant portion of our revenues in future periods.

During the years ended June 30, 2007 and 2006, two customers each accounted for more than 10% of total revenues. During the year ended June 30, 2005, three customers each accounted for more than 10% of total revenues. Substantially all of our sales transactions were denominated in U.S. dollars during all reported periods. Approximately 48% of revenues in fiscal 2007 were generated through sales to distributors, compared to approximately 51% of revenues in fiscal 2006 and 38% of revenues in fiscal 2005.

Gross Margin


	Fiscal Years
(Dollars in millions)	2007			% Change			2006			% Change			2005
Gross profit	$	132.7			50	%	$	88.4			142	%	$	36.5
Gross margin		49.0	%					51.6	%					52.9	%

Gross margin decreased 2.6 percentage points in fiscal 2007 compared to fiscal 2006, primarily due to: (i) product mix shift with a higher proportion of revenue associated with SVP-PX which had a lower gross margin than some of our previous products and comprised 45% of our total revenues during fiscal 2007 as compared to 26% of our total revenues during fiscal 2006, (ii) decreased

revenue and average selling price from a previous generation product that had higher gross margin (iii) higher ramp-up costs associated with our new products such as SVP-LX and SVP UX/WX, which were introduced in fiscal 2007 and in late fiscal 2006, respectively. Gross margin decreased 1.3 percentage points in fiscal 2006 compared to fiscal 2005, primarily due to increased amortization expense of intangible assets relating to the acquisition of the minority interest in TTI, completed at the end of the third quarter of fiscal 2005. In addition, we launched our SVP–PX product in fiscal 2006, which has a slightly lower gross margin than some of our previous products.

In fiscal 2007, revenues from the sale of previously reserved products were $4.5 million or 1.6% of total revenues, as compared to $4.6 million or 2.7% of total revenues in fiscal 2006 and $3.3 million or 4.8% of total revenues in fiscal 2005. Due to the previously recorded reserves, there was no cost of revenues reflected with respect to these product sales, which in effect, provided a benefit to the current income statement to the extent of the selling price. At the same time, we recorded additional inventory reserves for fiscal 2007 in the amount of approximately $2.2 million as compared to approximately $2.9 million for fiscal 2006 and $2.5 million for fiscal 2005.

Sales of previously reserved inventory largely depend on the timing of transitions to newer generations of similar products. When we introduce new products that are designed to enhance or replace our older products, we typically provide inventory reserves on our older products based on the expected timing and volume of customer purchases of the new product. The timing and volume of the new product introductions can be significantly affected by events out of our control, including changes in customer product introduction schedules. Accordingly, we may end up selling more of our older fully reserved product until the customer is able to execute on its changeover plan.

We believe that the prices of our products will continue to decline over time as competition increases and new and more advanced products are introduced. We expect average selling prices of existing products to continue to decline, although the average selling prices of our entire product line may remain relatively constant or increase as a result of introductions of new, higher-performance products that may have additional functionality and that may or may not have higher relative gross margins as a percentage of revenues. Our strategy is to maintain and optimize gross margins by (i) managing average selling price erosion in pricing negotiations with customers, (ii) developing new and more advanced products that can add relative value to the selling price, (iii) reducing manufacturing costs by improving production yields, (iv) aggressively developing more cost effective products and (v) negotiating with the foundry and other manufacturing partners to receive more competitive pricing. There is no assurance that we will be able to develop and introduce new products on a timely basis or that we can reduce manufacturing costs or improve margins.

Research and Development


	Fiscal Years
(Dollars in millions)	2007			% Change			2006			% Change			2005
Research and development	$	44.5			32	%	$	33.8			(9	)%	$	37.3
As a percentage of total revenues		16	%					20	%					54	%

The increase in research and development expenses for fiscal 2007 compared to fiscal 2006 was primarily the result of (i) increased new product development expenditures of $4.2 million relating to our SVP-UX/WX, SVP-AX and HiDTV Pro CX/FX products, (ii) increased spending on additional personnel of $3.6 million due to increases in headcount and salaries, (iii) increased depreciation expense of $1.0 million due to purchase of additional property equipment and (iv) increased stock-based compensation expense of $0.4 million. The decrease in research and development expenses as a percentage of revenues in fiscal 2007 compared to fiscal 2006 reflects revenues increasing at a proportionately higher rate than research and development expenses.

The decrease in research and development expenses for fiscal 2006 compared to fiscal 2005 was primarily attributable to decreased stock-based compensation expense of $10.4 million, partially offset by (i) increased employee-related expenses of $4.5 million resulting from an increase in employee headcount, salaries and bonuses, (ii) additional tape-out expenses of $2.5 million due to increased research expenditures relating to our SVP-LX and SVP-CX products and (iii) increased facilities expenses of $0.5 million. The decrease in research and development expenses as a percentage of revenues in fiscal 2006 compared to fiscal 2005 was primarily attributable to revenues increasing at a higher rate than research and development expenses.

We are currently planning to continue development of the next generation DPTV products as well as other advanced products for the digital television market in the United States, Japan, South Korea, China, Taiwan and Europe, and therefore we expect research and development expense to continue to increase.

Selling, General and Administrative


	Fiscal Years
(Dollars in millions)	2007			% Change			2006			% Change			2005
Sales, general and administrative	$	48.0			83	%	$	26.2			10	%	$	23.9
As a percentage of total revenues		18	%					15	%					35	%

The increase in selling, general and administrative expenses for fiscal 2007 compared to fiscal 2006 was primarily due to (i) increased professional fees of $18.1 million, of which $16.8 million related to the cost of the investigation into our historical stock option practices and the remaining $1.3 million represented legal, accounting and other professional fees incurred in connection with our business operations and (ii) increased third-party sales representative commission expenses of $3.1 million due to increased product sales. The increase in selling, general and administrative expenses as a percentage of revenues was attributable to increases in professional fees primarily relating to the cost of the investigation into our historical stock option practices. Although we will continue to monitor and control our selling, general and administrative expenses on an ongoing basis, we may continue to incur significant legal and other professional expenses related to the formal investigation into our historical stock option practices by the Department of Justice and the Securities and Exchange Commission.

The increase in selling, general and administrative expenses for fiscal 2006 compared to fiscal 2005 was primarily attributable to: (i) increased commission expenses of $3.1 million due to increased product sales, (ii) increased employee-related expenses of $2.8 million comprising principally increased accrued bonuses of $1.3 million, increased payroll taxes of $1.1 million associated with stock option exercises, and increased salaries of $0.4 million associated with additional headcount, (iii) increased professional fees of $1.8 million primarily relating to higher audit fees of $0.6 million for compliance with the requirements of the Sarbanes-Oxley Act of 2002 and higher legal fees of $1.4 million due to the absence of the $0.8 million benefit of a legal reserve reversal associated with the settlement of the Neomagic lawsuit in our favor in fiscal 2005, and (iv) increased amortization expense of intangible assets of $0.3 million, partially offset by decreased stock-based compensation expenses of $6.6 million. The decrease in selling, general and administrative expenses as a percentage of total revenues was primarily attributable to revenues increasing at a higher rate than sales, general and administrative expenses.

In-Process Research and Development


	Fiscal Years
(Dollars in millions)	2007		% Change		2006		% Change			2005
In-process research and development	$	—		—	$	—		(100	)%	$	5.2
As a percentage of total revenues		—				—					7	%

During fiscal 2005, in connection with our acquisition of the minority interests in TTI, we allocated approximately $5.2 million of the purchase price to in-process research and development which had not yet reached technological feasibility and had no alternative future use. The amounts allocated to the acquired in-process research and development were immediately expensed in the period that the acquisition was completed because the projects associated with the in-process research and development efforts had not yet reached technological feasibility and no future alternative uses existed for the technology. As of June 30, 2007, the products developed with the acquired DPTV and HDTV products technology are available for production with the exception of the HDTV-Pro product which is undergoing customer validation.

Interest Income


	Fiscal Years
(Dollars in millions)	2007			% Change			2006			% Change			2005
Interest income	$	4.9			113	%	$	2.3			320	%	$	0.5
As a percentage of total revenues		2	%					1	%					1	%

The increases in interest income in fiscal 2007 compared to fiscal 2006 and in fiscal 2006 compared to fiscal 2005 were primarily attributable to an increase in cash balances in fiscal 2007 and 2006, and to a lesser extent to improvement in interest rates. The amount of interest income we earn varies directly with the amount of our cash and cash equivalents balances and prevailing interest rates.

Other Income (Expense), Net


	Fiscal Years
(Dollars in thousands)	2007		% Change			2006			% Change			2005
Other income/(expense), net	$	1,947		15077	%		($13	)		(103	)%	$	425
As a percentage of total revenues		—					—						—

Other income/(expense), net included gain or loss on sale of stock of privately-held companies. The increase in other income/(expense) net in fiscal 2007 compared to fiscal 2006 was primarily attributable to (i) an increase in dividends of $1 million received from UMC, (ii) an increase in net currency transaction gains of $0.2 million due to weakness of the U.S. dollar and (iii) $0.2 million gain on the sale of investment in Afa Technologies, Inc. in fiscal 2007.

The decrease in other income/(expense), net in fiscal 2006 compared to fiscal 2005 was primarily attributable to a $0.6 million impairment loss on investments in privately-held companies, partially offset by $0.4 million of net currency transaction gains and $0.2 million dividend income in fiscal 2006 compared to a $0.3 million gain on the sale of privately-held companies in fiscal 2005.

Provision for Income Taxes


	Fiscal Years
	2007			Change			2006			Change			2005
Effective tax rate		35	%		14	%		21	%		26	%		(5	)%

A provision for income taxes of $16.7 million, $6.3 million and $1.4 million was recorded for the fiscal years 2007, 2006 and 2005, respectively. The increase in our effective tax rate from fiscal 2006 to fiscal 2007 was primarily due to increased profits generated from our operations in foreign jurisdictions where we were subject to tax and the amortization of foreign taxes associated with intercompany profit on assets remaining within Trident’s consolidated group. The increase in our effective tax rate from fiscal 2005 to fiscal 2006 was primarily the result of an increase in our foreign operations pre-tax financial accounting income partially offset by a release of foreign operations valuation allowance. A tax benefit was recorded in fiscal 2006 as a result of eliminating this valuation allowance for deferred tax assets of $1.4 million.

Cumulative Effect of Change in Accounting Principle


	Fiscal Years
(Dollars in millions)	2007			% Change			2006		% Change			2005
Cumulative effect of change in accounting principle, net of tax	$	(0.2	)		(110	)%	$	1.8		100	%	$	—

In fiscal 2007, we adopted Emerging Issue Task Force Issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for compensated absences,” or EITF 06-2, which addressed the accounting for sabbatical leave and other similar benefits and recorded a cumulative charge from change in accounting principle totaling $0.2 million, net of tax. In fiscal 2006, the adoption of SFAS 123(R) resulted in a cumulative benefit from change in accounting principle of $1.8 million net of tax, reflecting the net cumulative impact of estimated forfeitures that were previously not included in the determination of historic stock-based compensation expense in periods prior to July 1, 2005.

Liquidity and Capital Resources

Our financial condition remains strong. Cash and cash equivalents and short-term investments at the end of each year were as follows:


(In millions)	June 30, 2007		June 30, 2006
Cash and cash equivalents and short-term investments:
Cash and cash equivalents	$	147.6	$	103.0
Short-term investments		51.7		49.6

Total	$	199.3	$	152.6

Our primary cash inflows and outflows for fiscal years 2007, 2006 and 2005 were as follows:


	Years Ended June 30,
(In millions)	2007			2006			2005
Net cash flow provided by (used in):
Operating activities	$	62.1		$	60.8		$	9.3
Investing activities		(17.7	)		(5.4	)		(8.1	)
Financing activities		0.1			10.0			3.9

Net increase in cash and cash equivalents	$	44.5		$	65.4		$	5.1

Operating Activities

Cash provided by operating activities consists of net income (loss) adjusted for certain non-cash items and changes in assets and liabilities. For fiscal 2007 compared to fiscal 2006, cash provided by operating activities increased slightly, as higher net income, a reduced increase in inventories and a decrease in prepaid expenses and other current assets (after excluding a noncash transaction that significantly increased other current assets as explained in the following paragraph), was largely offset by increased accounts receivable and significantly smaller increases in accounts payable and accrued expenses. For fiscal 2006 compared to fiscal 2005, the majority of the significant increase in cash provided by operating activities was from significantly higher net income (net income in fiscal 2006 versus net loss in fiscal 2005), increases in accounts payable and accrued expenses, partially offset by an increase in inventories. Fiscal years 2007, 2006 and 2005 included stock-based compensation charges of approximately $15.6 million, $13.2 million and $30.5 million, respectively.

On our consolidated balance sheet as of fiscal year end 2007, prepaid expenses and other current assets increased from fiscal 2006 to fiscal 2007 primarily due to the recording of prepaid taxes in connection with intercompany profit on assets remaining within Trident’s consolidated group. Excluding this noncash transaction, prepaid expenses and other current assets decreased primarily due to amortization of prepaid software license fees. Accounts receivable increased due to increased sales volume to our customers and timing of collections. Accounts payable increased primarily due to the timing of payments to vendors. Accrued expenses increased primarily due to accrued professional fees relating to the cost of the investigation into our historical stock option grants. Income taxes payable increased primarily due to the tax provision made for profitable operations in fiscal 2007 and foreign taxes resulting from the recording of income taxes payable in connection with intercompany profit on assets remaining within Trident’s consolidated group. On our consolidated balance sheet as of fiscal year end 2006, accounts payable increased from fiscal 2005 to fiscal 2006 due to increases in inventories and cost of revenues, which related to increased revenues. Accrued expenses increased primarily due to accrued commissions and bonuses largely relating to our increased revenues and to an increase in accrued stock option exercise proceeds resulting from an increase in employee stock option exercises in fiscal 2006. Inventories increased primarily due to anticipated customer demands for our products.

Investing Activities

Investing cash flows consist primarily of capital expenditures and payments for stock of privately-held companies, partially offset by proceeds from sale of stock of privately-held companies. The increase in net cash used in investing activities in fiscal 2007 compared to fiscal 2006 was primarily due to cash payments totaling approximately $15 million for constructing our new research and development building in Shanghai, China, which we expect to be completed in the first quarter of fiscal 2008. We also received cash proceeds of $1.2 million from the sale of stock of Afa Technologies, Inc. in fiscal 2007. The decrease in net cash used in investing activities in fiscal 2006 compared to fiscal 2005 was primarily due to $5.2 million lower net cash used for the purchase of our TTI subsidiary’s stock as we have already purchased 99.9% of TTT subsidiary stock in fiscal 2005, partially offset by higher cash of $1.6 million and $0.5 million used for the purchase of property and equipment and of stock of a privately-held company.

Financing Activities

Financing cash flows consist primarily of proceeds from issuance of common stock to employees and excess tax benefit from stock-based compensation. The lower cash provided by financing activities in fiscal 2007 compared to fiscal 2006 was due to the approximately $7.5 million decrease in cash proceeds from issuance of common stock to employees resulting from employees’ temporary inability to exercise vested options and the approximately $0.9 million decrease in excess tax benefit from stock-based compensation, partially offset by $1.5 million net cash paid to employees in connection with the amendment of options to meet the requirements of United States Internal Revenue Code Section 409A (“Section 409A”). See Note 2 of the Notes to Consolidated Financial Statements as disclosed in Item 8, “Financial Statements and Supplementary Data” for more information on the impact of Section 409A. For fiscal 2006 compared to fiscal 2005, the higher cash provided by financing activities resulted from approximately $5.0 million increase in cash proceeds from issuance of common stock to employees upon exercise of stock options and approximately $1.7 million of excess tax benefit from stock-based compensation due to the adoption of SFAS 123(R).

Liquidity

Our liquidity is affected by many factors, some of which result from the normal ongoing operations of our business and some of which arise from uncertainties and conditions in Asia and the global economy. Although our cash requirements will fluctuate as a result of the shifting influences of these factors, we believe our current resources are sufficient to meet our needs for at least the next twelve months. We regularly consider transactions to finance our activities, including debt and equity offerings and new credit facilities or other financing transactions. We believe our current reserves are adequate.

Contractual Obligations

The following summarizes our contractual obligations as of June 30, 2007 and the effect such obligations are expected to have on our liquidity and cash flows in future periods:


	Payments due by period
	Less than		1 - 3		3 - 5		More than
Contractual Obligations	1 year		years		Years		5 years		Total
Operating Leases (1)	$	1.1	$	1.5	$	0.6	$	—	$	3.2
New Building construction Contract (2)		2.6		—		—		—		2.6
Purchase Obligations (3)		22.8		0.6		—		—		23.4

Total	$	26.5	$	2.1	$	0.6	$	—	$	29.2


(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, 2007.

(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

Trident has been named as a nominal defendant in several purported shareholder derivative lawsuits concerning the granting of stock options. The federal court cases have been consolidated as In re Trident Microsystems Inc. Derivative Litigation, Master File No. C-06-3440-JF. A case also has been filed in State court, Limke v. Lin et al., No. 1:07-CV-080390. Plaintiffs in all cases allege that certain of our current or former officers and directors caused us to grant options at less than fair market value, contrary to our public statements (including our financial statements); and that as a result those officers and directors are liable to us. No particular amount of damages has been alleged, and by the nature of the lawsuit no damages will be alleged against us. Our Board of Directors has appointed a Special Litigation Committee (“SLC”) composed solely of independent directors to review and manage any claims that we may have relating to the stock options practices investigated by the Special Committee. The scope of the SLC’s authority includes the claims asserted in the derivative actions. In federal court, Trident has moved to stay the case pending the assessment by the SLC that was formed to consider nominal plaintiffs’ claims. In State court, Trident moved to stay the case in deference to the federal lawsuit, and the parties have agreed, with the Court’s approval, to take that motion off of the Court’s calendar to await the assessment of the SLC. We cannot predict whether these actions are likely to result in any material recovery by, or expense to, Trident. We expect to continue to incur legal fees in responding to these lawsuits, including expenses for the reimbursement of legal fees of present and former officers and directors under indemnification obligations.

Intellectual Property Litigation

From time to time, we are involved in other legal proceedings arising in the ordinary course of our business. While we cannot be certain about the ultimate outcome of any litigation, management does not believe any pending legal proceeding will result in a judgment or settlement that will have a material adverse effect on our business, our consolidated financial position, results of operations, or cash flows.

Regulatory Actions

The Department of Justice is currently conducting an investigation of us in connection with our investigation into our historical stock option grant practices and related issues and we are subject to a subpoena from the DOJ. We are also subject to a formal investigation from the Securities and Exchange Commission on the same issue. We have been cooperating with, and continue to cooperate with, investigations from the SEC and DOJ. In addition, our 401(k) plan and its administration are being audited by the Department of Labor as a result of actions taken in response to the findings from our investigation. The Department of Labor has recently advised us that because of the appointment of an independent fiduciary for the 401(k) plan, and assuming the Company will provide the Department of Labor with relevant information concerning any claims that may be brought, the Department of Labor will take no future action with respect to the 401(k) plan’s potential claims arising from its investment in Company stock. We are unable to predict what consequences, if any, that any investigation by any regulatory agency may have on us. Any regulatory investigation could result in substantial legal and accounting expenses, divert management’s attention from other business concerns and harm our business. If a regulatory agency were to commence civil or criminal action against us, it is possible that we could be required to pay significant penalties and/or fines and could become subject to administrative orders, and could result in civil or criminal sanctions against certain of our former officers, directors and/or employees and might result in such sanctions against us and/or our current officers, directors and/or employees. Any regulatory action could result in the filing of additional restatements of our prior financial statements or require that we take other actions. If we are subject to an adverse finding resulting from the SEC and DOJ investigations, we could be required to pay damages or penalties or have other remedies imposed upon us. The period of time necessary to resolve the investigation by the DOJ and the investigation from the SEC is uncertain, and these matters could require significant management and financial resources which could otherwise be devoted to the operation of our business.

Nasdaq Proceedings

Indemnification Obligations

We indemnify, as permitted under Delaware law and in accordance with our Bylaws, our officers, directors and members of our senior management for certain events or occurrences, subject to certain limits, while they were serving at our request in such capacity. In this regard, we have received, or expect to receive, requests for indemnification by certain current and former officers, directors and employees in connection with our investigation of our historical stock option grant practices and related issues, and the related governmental inquiries and shareholder derivative litigation described above under Item 3 “Legal Proceedings.” The maximum amount of potential future indemnification is unknown and potentially unlimited; therefore, it cannot be estimated. We have directors’ and officers’ liability insurance policies that may enable us to recover a portion of such future indemnification claims paid, subject to

coverage limitations of the policies, and plans to make claim for reimbursement from our insurers of any potentially covered future indemnification payments.

In connection with certain agreements that we have executed in the past, we have on occasion included intellectual property indemnification provisions in our technology related agreements with third parties. Historically, these provisions have not resulted in any material liability for us; however, there can be no assurance that will be the case in the future. In addition, maximum potential future payments cannot be estimated because many of these agreements do not have a maximum stated liability. As such, we have not recorded any liability in our consolidated financial statements for such indemnifications.

Off-Balance Sheet Arrangements

None

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for our fiscal years beginning July 1, 2008. We are evaluating the impact of the provisions of this statement on our consolidated financial position, results of operations or cash flows.

In June 2006, the FASB published FIN 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation is effective for our fiscal years beginning July 1, 2007. We are evaluating the impact of the provisions of this interpretation on our consolidated financial position, results of operations or cash flows.

In June 2006, the FASB issued EITF No. 06-2,a sabbatical leave is a benefit provided to employees whereby the employee is entitled to time off with pay, over and above routine vacation time, after working for a specified period of time. EITF 06-2 concluded that an employee’s right to a compensated absence under a sabbatical or similar benefit arrangement does accumulate pursuant to FASB Statement No. 43, Accounting for Compensated Absences and therefore, a liability should be accrued over the service period in which employees earn the right to sabbatical leave. We offer up to two sabbatical leaves to full-time U.S. employees upon completion of 15 years of service and 20 years of service. Each sabbatical leave is four weeks and must be taken at one time. We adopted EITF 06-2 in the first quarter of fiscal 2007 and recorded a cumulative effect of change in accounting principle totaling $0.2 million.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115. This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for our first quarter of fiscal year 2008. We are currently evaluating the impact that this pronouncement may have on our consolidated financial position, results of operations or cash flows.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to three primary types of market risks: foreign currency exchange rate risk, interest rate risk and investment risk.

Foreign currency exchange rate risk

We currently have operations in the United States, Taiwan and China. The functional currency of all our operations is the U.S. dollar. However, a portion of our cash is denominated in foreign currencies and could be subject to foreign currency exchange rate risk. Although some expenses are incurred in local currencies by our Taiwan and China operations, substantially all of our transactions are made in U.S. dollars. Therefore, we have minimal exposure to foreign currency rate fluctuations relating to our transactions.

While we expect our international revenues to continue to be denominated primarily in U.S. dollars, an increasing portion of our international revenues may be denominated in foreign currencies in the future. In addition, we plan to continue to expand our overseas operations. As a result, our operating results may become subject to significant fluctuations based upon changes in foreign currency exchange rates of certain currencies in relation to the U.S. dollar. We will analyze our exposure to currency fluctuations and may engage in financial hedging techniques in the future to attempt to minimize the effect of these potential fluctuations; however, exchange rate fluctuations may adversely affect our financial results in the future. Since we have a research and development facility in Shanghai, China and sales offices in Beijing and Shenzhen, China, our operating expenses may increase in the future due to the continued appreciation of China’s currency, Renminbi, compared to the U.S. dollar.

Interest rate risk

We currently maintain our cash equivalents primarily in money market funds, time certificate of deposits and other highly liquid marketable securities. We do not have any derivative financial instruments. As of June 30, 2007, we have approximately $147.6 million in cash and cash equivalent, of which $66.5 million are cash equivalents, which mature in less than three months. We will continue to invest a significant portion of our existing cash equivalents in interest bearing, investment grade securities, with maturities of less than three months. We do not believe that our investments, in the aggregate, have significant exposure to interest rate risk.

Investment risk

We are exposed to market risk as it relates to changes in the market value of our investments in public companies. We invest in equity instruments of public companies for business and strategic purposes and we have classified these securities as available-for-sale. These available-for-sale equity investments are invested in a foreign technology company and are subject to significant fluctuations in fair market value due to the volatility of the stock market and the industry in which this company participates. As of June 30, 2007, we had available-for-sale equity investments with a fair market value of $51.7 million. Our objective in managing our exposure to stock market fluctuations is to minimize the impact of stock market declines to our earnings and cash flows. However, the existence of a number of external factors such as continued market volatility, as well as mergers and acquisitions, could have a negative material impact on our results of operations in future periods.

We are also exposed to changes in the value of our investments in privately-held companies, including privately-held start-up companies. During the year ended June 30, 2007, we invested an additional $0.5 million in one privately-held company. Long-term equity investments in technology companies are subject to significant fluctuations in fair value due to the volatility of the industries in which these companies participate and other factors. As of June 30, 2007, the balance of our long-term equity investments in privately-held companies was approximately $3.1 million.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

TRIDENT MICROSYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


Three Years Ended June 30, 2007
(In thousands, except per share data)	2007			2006			2005
Revenues	$	270,795		$	171,442		$	69,011
Cost of revenues (1)		138,142			83,061			32,562

Gross profit		132,653			88,381			36,449
Operating expenses:
Research and development (1)		44,516			33,809			37,295
Selling, general and administrative (1)		47,993			26,178			23,870
In-process research and development		—			—			5,171

Total operating expenses		92,509			59,987			66,336

Income (loss) from operations		40,144			28,394			(29,887	)
Interest income		4,890			2,293			546
Other income (expense), net		1,947			(13	)		425
Minority interests in subsidiaries		—			—			158

Income (loss) before provision for income taxes and cumulative effect of change in accounting principle		46,981			30,674			(28,758	)
Provision for income taxes		16,673			6,317			1,426

Income (loss) before cumulative effect of change in accounting principle		30,308			24,357			(30,184	)
Cumulative effect of change in accounting principle, net of tax		(190	)		1,819			—

Net income (loss)	$	30,118		$	26,176		$	(30,184	)


Net income (loss) per share — Basic:
Income (loss) before change in accounting principle		0.52			0.45			(0.64	)
Cumulative effect of change in accounting principle		—			0.03			—

Net income (loss) per share — Basic		0.52			0.48			(0.64	)


Net income (loss) per share — Diluted:
Income (loss) before change in accounting principle		0.48			0.39			(0.64	)
Cumulative effect of change in accounting principle		—			0.03			—

Net income (loss) per share — Diluted	$	0.48		$	0.42		$	(0.64	)

Shares used in computing net income per share — Basic		57,637			54,822			47,418

Shares used in computing net income per share — Diluted		63,380			62,526			47,418


(1)		Effective July 1, 2005, we adopted SFAS 123 (R), Share-Based Payments and used the modified prospective method to value our stock-based payments. Accordingly, for the fiscal years ended June 30, 2007 and 2006, stock-based compensation was accounted under SFAS 123(R), while for the year ended June 30, 2005, 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.

TRIDENT MICROSYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS


June 30, 2007 and 2006
(In thousands, except par values)	2007		2006
ASSETS
Current assets:
Cash and cash equivalents	$	147,562	$	103,046
Investments		51,744		49,612
Accounts receivable, net of allowances for sales returns of $1,101 and $1,475 in 2007 and 2006, respectively.		9,161		4,278
Inventories		16,263		14,641
Prepaid expenses and other current assets		13,668		5,659

Total current assets		238,398		177,236
Property and equipment, net		19,581		3,451
Intangible assets, net		12,845		19,190
Other assets		13,055		7,313

Total assets	$	283,879	$	207,190


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	20,683	$	19,472
Accrued expenses		23,235		21,332
Income taxes payable		36,171		11,125

Total current liabilities		80,089		51,929
Deferred income tax liabilities		1,942		1,604

Total liabilities		82,031		53,533

Commitments and contingencies (Note 7)

Stockholders’ equity:
Preferred stock, $0.001 par value; 500 shares authorized; none issued and outstanding		—		—
Common stock, $0.001 par value; 95,000 shares authorized; 57,748 and 57,206 shares issued and outstanding at June 30, 2007 and 2006, respectively		58		57
Additional paid-in capital		179,390		162,801
Retained earnings (accumulated deficit)		18,798		(11,320	)
Accumulated other comprehensive income		3,602		2,119

Total stockholders’ equity		201,848		153,657

Total liabilities and stockholders’ equity	$	283,879	$	207,190

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

TRIDENT MICROSYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


Three Years Ended June 30, 2007	2007			2006			2005
(In thousands)
Cash flows from operating activities:
Net income (loss)	$	30,118		$	26,176		$	(30,184	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Cumulative effect of change in accounting principle		190			(1,819	)		—
Stock-based compensation expense		15,607			13,183			30,500
Excess tax benefit from stock-based compensation		(855	)		(1,742	)		—
Depreciation and amortization		1,501			1,230			1,010
Provision for (reversal of) sales returns		(374	)		1,062			113
Amortization of intangible assets		6,345			5,469			1,155
Loss on disposal of property and equipment		59			106			253
(Gain) loss on investments		(216	)		560			(331	)
Deferred income taxes		1,179			(1,378	)		—
Minority interests in subsidiaries		—			—			(158	)
In-process research and development		—			—			5,171
Changes in assets and liabilities:
Accounts receivable		(4,509	)		976			(3,994	)
Inventories		(1,622	)		(11,906	)		368
Prepaid expenses and other current assets		5,742			(2,728	)		(1,221	)
Accounts payable		1,211			12,795			3,213
Accrued expenses		1,571			11,553			2,581
Income taxes payable		6,145			7,259			818

Net cash provided by operating activities		62,092			60,796			9,294

Cash flows from investing activities:
Purchases of property and equipment		(17,690	)		(2,633	)		(1,045	)
Purchases of stock of privately held companies		(500	)		(1,492	)		(1,012	)
Proceeds from sale of stock of privately held companies		1,228			—			22
Other assets		(748	)		(1,189	)		(824	)
Purchase of minority interests in subsidiary		—			(61	)		(6,145	)
Proceeds from sale of minority interests in subsidiaries		—			—			877

Net cash used in investing activities		(17,710	)		(5,375	)		(8,127	)

Cash flows from financing activities:
Proceeds from issuance of common stock to employees		805			8,285			3,253
Excess tax benefit from stock-based compensation		855			1,742			—
Net cash settlements of stock options in connection with IRC Section 409A		(1,526	)		—			—
Proceeds from exercise of TTI options		—			—			690

Net cash provided by financing activities		134			10,027			3,943

Net increase in cash and cash equivalents		44,516			65,448			5,110
Cash and cash equivalents at beginning of year		103,046			37,598			32,488

Cash and cash equivalents at end of year	$	147,562		$	103,046		$	37,598

Supplemental 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	$	2,080		$	44		$	553

Prepaid taxes in connection with intercompany profit on assets remaining within consolidated group	$	20,583		$	—		$	—

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

TRIDENT MICROSYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME


											Retained			Accumulated
					Additional			Deferred			Earnings			Other			Total
	Common Stock				Paid-in			Stock-based			(Accumulated			Comprehensive			Stockholders’
(In thousands)	Shares		Amount		Capital			Compensation			Deficit)			Income (Loss)			Equity
Balance at June 30, 2004		45,762	$	46	$	101,868		$	(22,853	)	$	(7,312	)	$	3,887		$	75,636
Net loss		—		—		—			—			(30,184	)		—			(30,184	)
Unrealized gain on investments, net of tax		—		—		—			—			—			1,454			1,454

Comprehensive loss																		(28,730	)

Stock compensation expense related to minority interest		—		—		(2,485	)		—			—			—			(2,485	)
Issuance of common stock		6,078		6		34,393			—			—			—			34,399
Deferred stock-based compensation		—		—		30,834			(30,834	)		—			—			—
Amortization of deferred stock-based compensation		—		—		—			30,500			—			—			30,500

Balance at June 30, 2005		51,840		52		164,610			(23,187	)		(37,496	)		5,341			109,320
Net income		—		—		—			—			26,176			—			26,176
Elimination 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																		22,954

Issuance of common stock		5,366		5		8,272			—			—			—			8,277
Stock-based compensation expense		—		—		13,183			—			—			—			13,183
Excess tax benefit from stock-based compensation		—		—		1,742			—			—			—			1,742
Cumulative effect of change in accounting principle, net of tax		—		—		(1,819	)		—			—			—			(1,819	)

Balance at June 30, 2006		57,206		57		162,801			—			(11,320	)		2,119			153,657
Net income		—		—		—			—			30,118			—			30,118
Unrealized gain on investments, net of tax		—		—		—			—			—			1,483			1,483

Comprehensive income																		31,601

Issuance of common stock		542		1		804			—			—			—			805
Stock-based compensation expense		—		—		15,607			—			—			—			15,607
Tax benefit from stock-based compensation		—		—		1,704			—			—			—			1,704
Net cash settlement of stock options in connection with IRC Section 409A		—		—		(1,526	)		—			—			—			(1,526	)

Balance at June 30, 2007		57,748	$	58	$	179,390			—		$	18,798		$	3,602		$	201,848

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

TRIDENT MICROSYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Trident Microsystems, Inc. (“Trident”) and its subsidiaries (collectively the “Company”) designs, develops and markets integrated circuits for video graphics, multimedia and digital process television products for the desktop and notebook personal computer (“PC”) market and consumer television market.

Since June 2003, the Company has focused its business primarily in the rapidly growing digital process television (“DPTV”) market and related areas. Since September 1, 2006, the Company has conducted this business primarily through its subsidiary, Trident Microsystems (Far East) Ltd. (“TMFE”), located in the Cayman Islands, with research and development services relating to existing projects and certain new projects conducted by both Trident and its subsidiary, Trident Multimedia Technologies (Shanghai) Co. Ltd., (“TMT”), located in Shanghai, China. Operations and field application engineering support and certain sales activities are conducted through its subsidiary, Trident Microelectronics Co. Ltd. (“TML”), located in Taiwan and other affiliates. Trident Technologies, Inc., which was 99.9% owned by Trident at June 30, 2007, is in the process of being dissolved.

Principles of Consolidation

The consolidated financial statements include those of Trident and its subsidiaries. Significant intercompany balances, transactions, and stock holdings have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments including cash and cash equivalents, investments, accounts receivable, accounts payable, accrued expenses and income taxes payable approximate fair value due to their short maturities.

Foreign Currency Transactions

Trident uses the U.S. dollar as the functional currency for all of its foreign subsidiaries. Sales and purchase transactions are generally denominated in U.S. dollars. Accordingly, gains and losses from foreign currency transactions are included in “Other income (expenses), net” in the Consolidated Statements of Operations. The aggregate foreign currency exchange net gains or losses were not material for each period presented.

Cash and Cash Equivalents

Cash equivalents consist of highly liquid investments in money market accounts and certificates of deposits purchased with an original maturity of ninety days or less from the date of purchase.

Investments

The Company’s investments comprise publicly traded equity securities. At June 30, 2007 and 2006, the Company’s investments were classified as available-for-sale. These investments are recorded at fair value with the unrealized gains and losses included as a separate component of accumulated other comprehensive income (loss), net of tax. The average method is used to determine the cost basis of publicly traded equity securities disposed of.

The Company recognizes an impairment charge when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the length of time and extent to which the fair value has been less than the Company’s cost basis, the financial condition and near-term prospects of the investee, economic outlook of the relevant industry sector and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

The Company also has investments in privately-held companies. These investments are included in “Other assets” in the Consolidated Balance Sheets and are primarily carried at cost. The Company monitors these investments for impairment and makes appropriate reductions in carrying values if the Company determines that an impairment charge is required based primarily on the financial condition and near-term prospects of these companies.

Concentrations of Credit Risk and Other Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash and cash equivalents, investments and trade accounts receivable. Cash and cash equivalents held with financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation on such deposits. The Company has not experienced any losses on its deposits of cash and cash equivalents.

The Company performs ongoing credit evaluations of its customers and generally does not require collateral from its customers. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments.

The Company relies principally upon one third-party foundry to manufacture its products in wafer form, and other contract manufacturers for assembly and testing of its products. The lead time required to establish a relationship with a new foundry is long, and it takes time to adapt a product’s design to a particular manufacturer’s processes. If this supplier fails to deliver the Company’s purchases on schedule, there is no readily available alternative source of supply for any specific product. This could cause significant delays in shipping products if the Company has to change our source of supply and manufacture quickly, which may result in lost revenues and damaged customer relationships.

Inventories

Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost on a first-in-first-out basis. Inventory components are work-in-process and finished goods. Finished goods are reported as inventories until the point of title and risk of loss transfer to the customer. The Company writes down its inventory value for estimated obsolescence equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization. Major improvements are capitalized, while repairs and maintenance are expensed as incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Furniture and fixtures are depreciated over five years. Machinery, equipment and software are depreciated over three years. Leasehold improvements are amortized over the shorter of the estimated useful lives of the assets or the lease terms. Construction in progress is not subject to depreciation until the asset is placed in service. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed from the accounts. Gains or losses resulting from retirements or disposals are included in income (loss) from operations.

Long-lived Assets

The Company reviews long-lived assets and identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company assesses these assets for impairment based on estimated undiscounted future cash flows from these assets. If the carrying value of the assets exceeds the estimated future undiscounted cash flows, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. The Company did not recognize any impairment loss for long-lived assets in fiscal years 2007, 2006 or 2005.

Intangible Assets

The Company accounts for acquired intangible assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. Acquired intangible assets are carried at cost, net of accumulated amortization. Intangible assets with finite lives are amortized over their estimated useful lives of approximately seven to eight years using a method that reflects the pattern in which the economic benefits of the intangible asset are consumed. The Company assesses the technological feasibility of acquired in-process research and development projects and determines the number of alternative future uses for the technology being developed. To the extent there are no alternative future uses, a portion of the allocated purchase price to in-process

research and development is immediately expensed in the period the acquisition is completed. This expense is generally estimated based upon the projected fair value of the technology, as determined by a discounted future cash flow reduced by the cost to complete.

Revenue Recognition

The Company recognizes revenues in accordance with Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectibility is reasonably assured. The Company uses either a binding purchase order or a contractual agreement as persuasive evidence of an arrangement. For sales to end user customers, the Company considers delivery to occur upon product shipment provided that title and risk of loss have passed to the customer. For sales to distributors, recognition of revenues and related cost of revenues are deferred until the distributors resell the product. At the time revenue is recognized, the Company assesses whether the arrangement fee is fixed or determinable and whether collection of the accounts receivable is reasonably assured.

A significant amount of the Company’s revenues was generated through its distributors. During the years ended June 30, 2007, 2006 and 2005, approximately 48%, 51% and 38%, respectively, of revenues were recognized upon sales through distributors. Sales to distributors, which may be subject to rights of return and price protection, are deferred and recognized when these rights or expectations expire upon sale and shipment to the end user customers.

The Company records estimated reductions to revenue for customer incentive offerings in the same period that the related revenue is recognized. The Company’s customer incentive offerings primarily involve volume rebates for its products in various target markets. The Company accounts for rebates in accordance with Emerging Issues Task Force Issue (“EITF”) 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products) and, as such, the Company accrues for 100% of the potential rebates and does not apply a breakage factor. Unclaimed rebates, which historically have not been significant, are reversed to revenue upon expiration of the rebate.

The Company also records a reduction to revenue by establishing a sales returns allowance for estimated product returns based primarily on historical sales returns, analysis of credit memo data and other known factors at that time. If product returns for a particular fiscal period exceed historical return rates, the Company may determine that additional sales returns allowance are required to properly reflect its estimated exposure for product returns.

Stock-based Compensation

Effective July 1, 2005, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), 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. SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), which the Company previously followed in accounting for stock-based awards. In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”) to provide guidance on SFAS 123(R). The Company has applied SAB 107 in its adoption of SFAS 123(R).

The Company adopted SFAS 123(R), which requires the measurement and recognition of compensation expense for all stock-based payment awards made to the Company’s employees and directors including stock options based on fair values. The Company’s financial statements for the years ended June 30, 2007 and 2006 reflect the impact of SFAS 123(R) using the modified prospective transition method. In accordance with the modified prospective transition method, the Company’s financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation expense is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense recognized in the Company’s Consolidated Statements of Operations for the years ended June 30, 2007 and 2006 included compensation expense for stock-based payment awards granted prior to, but not yet vested as of June 30, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and compensation expense for the stock-based payment awards granted subsequent to June 30, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). In conjunction with the adoption of SFAS 123(R), the Company elected to attribute the value of stock-based compensation to expense using the straight-line method, which was previously used for its pro forma information required under SFAS 123.

Upon adoption of SFAS 123(R), the Company elected to value its stock-based payment awards granted beginning in July 1, 2005 using the Black-Scholes option-pricing model (the “Black-Scholes model”), which was previously used for its pro forma information required under SFAS 123 for fiscal year 2005. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Black-Scholes model requires the input of certain assumptions. Trident’s stock options have characteristics significantly different from those of traded options, and changes in the assumptions can

materially affect the fair value estimates. See Note 9 of the Notes to the Consolidated Financial Statements for a detailed discussion of SFAS 123(R).

In accordance with Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) No. FAS123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-based Payment Awards,” as of June 30, 2006, the Company elected to use the long-form method to establish the beginning balance of the additional paid-in capital pool related to the tax effects of employee stock-based awards granted prior to the adoption of SFAS No. 123(R). The Company has also elected to use the “with and without” approach as described in EITF Topic No. D-32 in determining the order in which tax attributes is utilized. As a result, the Company will recognize a tax benefit from stock-based awards in additional paid-in capital only if an incremental tax benefit is realized after all other tax attributes currently available to the Company have been utilized.

Shipping and Handling Costs

Shipping and handling costs are included as a component of cost of revenues.

Research and Development

To date, research and development costs have been expensed as incurred. These costs primarily include employees’ compensation, consulting fees, software licensing fees and tape-out expenses.

Software Development Costs

Costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized in accordance with SFAS No. 86, Computer Software to be Sold, Leased, or Otherwise Marketed. The costs to develop software have not been capitalized as the Company believes its current software development process is essentially completed concurrent with the establishment of technological feasibility.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Income taxes are based on pretax financial accounting income. Deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.

Cumulative Effect of Change in Accounting Principle

During the year ended June 30, 2007, the Company recorded a cumulative charge from change in accounting principle of $0.2 million, net of tax, in connection with the adoption of EITF No. 06-2, Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences. During the year ended June 30, 2006, the adoption of SFAS 123(R) resulted in a cumulative benefit from change in accounting principle of $1.8 million net of tax, reflecting the net cumulative impact of estimated forfeitures that were previously not included in the determination of historic stock-based compensation expense in periods prior to July 1, 2005.

Net Income (Loss) per Share

Basic net income (loss) per share is computed by dividing net income by the weighted average number of shares of common stock outstanding for the reporting period. Diluted net income per share is computed by dividing net income by the combination of dilutive common share equivalents, comprised of shares issuable under the Company’s stock-based compensation plans and the weighted average number of shares of common stock outstanding during the reporting period. Dilutive common share equivalents include the dilutive effect of in-the-money options to purchase shares, which is calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of an option, the amount of compensation cost, if any, for future service that the Company has not yet recognized, and the amount of estimated tax benefits that would be recorded in paid-in capital, if any, when the option is exercised are assumed to be used to repurchase shares in the current period.

Accumulated Other Comprehensive Income (Loss)

The unrealized gains and losses on investments are comprehensive income items applicable to the Company, and are reported as a separate component of equity as “Accumulated other comprehensive income (loss).”

Reclassifications

Certain financial statement items have been reclassified to conform to the current year’s presentation. These reclassifications had no impact on previously reported net income (loss).

Critical Accounting Policies and Estimates Applied to the Restatement of Trident’s Consolidated Financial Statements for the Years Ended June 30, 2006 and 2005

In calculating the amount of incremental stock-based compensation expense to record for the fiscal years prior to June 30, 2006, the Company had to make certain interpretations and assumptions and draw certain conclusions from and regarding the internal investigation findings, as discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2006 (filed on August 7, 2007). The interpretations and assumptions the Company made and the conclusions it has drawn could be disputed by others. These risks increase where there was incomplete documentation of particular grants. Where the Company had incomplete documentation, the Company considered the guidance provided by the SEC, and used all reasonably available relevant information to form reasonable conclusions as to the most likely option granting actions that occurred and the dates on which such actions occurred.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for the Company for fiscal years beginning July 1, 2008. The Company is evaluating the impact of the provisions of this statement on its consolidated financial position, results of operations or cash flows.

In June 2006, the FASB published FIN 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation is effective for the Company in fiscal years beginning July 1, 2007. The Company is evaluating the impact of the provisions of this interpretation on its consolidated financial position, results of operations or cash flows.

In June 2006, the FASB issued EITF No. 06-2 to address the accounting for sabbatical leave and other similar benefits. A sabbatical leave is a benefit provided to employees whereby the employee is entitled to time off with pay, over and above routine vacation time, after working for a specified period of time. EITF 06-2 concluded that an employee’s right to a compensated absence under a sabbatical or similar benefit arrangement does accumulate pursuant to FASB Statement No. 43, Accounting for Compensated Absences and therefore, a liability should be accrued over the service period in which employees earn the right to sabbatical leave. The Company offers up to two sabbatical leaves to full-time U.S. employees upon completion of 15 and 20 years of service, respectively. Each sabbatical leave has duration of four weeks and must be taken at one time. The Company adopted EITF 06-2 in the first quarter of fiscal 2007 and recorded a cumulative effect of change in accounting principle totaling $0.2 million.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115. This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for the Company in the first quarter of fiscal year 2008. The Company is currently evaluating the impact that this pronouncement may have on its consolidated financial position, results of operations or cash flows.

2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS AND SPECIAL COMMITTEE AND COMPANY FINDINGS

Special Committee Investigation of Historical Stock Option Grant Practices and Related Issues

In July 2007, the Company completed an independent investigation into its historical stock option grant practices and related issues. This investigation was conducted by a Special Committee of the Company’s Board of Directors. In response to a Wall Street Journal article that questioned the stock option practices at Trident and several other companies, published on May 22, 2006, the Board of Directors initiated a preliminary internal review, conducted by its outside legal counsel, into its historical stock option grant practices and related issues. Based upon the preliminary findings of that review, the Board of Directors determined that it was appropriate to conduct a formal and independent investigation of the Company’s historical stock option grant practices and related issues, and on May 26, 2006, formed a Special Committee of the Board of Directors with responsibility for the independent investigation.

The investigation was conducted by the Special Committee with the assistance of independent legal counsel and forensic accountants retained by such legal counsel. Throughout the investigation, the Special Committee’s advisers reported directly to the Special Committee. The Special Committee is composed of two independent directors who have not previously served as members of the Compensation Committee, one of whom was newly appointed to the Board of Directors on July 6, 2006 and currently serves as Chairman of the Audit Committee.

Findings

As a result of the investigation and reporting to its Board of Directors, the Board of Directors of the Company determined that the Company used incorrect measurement dates with respect to more than half of the stock options granted during the date of its initial public offering in December 1992 through June 2006 (the “Review Period”). Accordingly, based on information obtained from the Special Committee and additional work conducted by the Company and its advisors, the Company revised the measurement dates for approximately 57% of the grants made during the Review Period, representing options to acquire approximately 38 million shares. In addition, the Company identified modifications of certain stock options that increased or decreased the number of shares, that should have been accounted for by applying variable accounting as required by the provisions of FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, or FIN 44. As a result, revised measurement dates and variable accounting, where applicable, were applied to the affected option grants and the Company recorded a total of approximately $33.8 million in additional pre-tax, non-cash, stock-based compensation expense for the years 1993 through 2005 and approximately $3.1 million for fiscal 2006.

During the course of the investigation, the Company also adjusted its accounting for all of the options granted by its Taiwanese subsidiary, Trident Technologies, Inc. (“TTI”), and by its Chinese subsidiary, Trident Multimedia Technologies (Shanghai) Co., Ltd. (“TMT”), that should have been accounted for by applying variable accounting as required by the provisions of FIN 44 and the provisions of Emerging Issues Task Force No. 00-23, Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44, or EITF 00-23, either because 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, or the option was modified. The application of FIN 44 and EITF 00-23 resulted in additional compensation expense totaling approximately $24.1 million. The additional expense resulting from the application of EITF 00-23 did not stem from inappropriate stock option 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.

After related income tax adjustments and minority interest, the restatement resulted in total adjustments of approximately $51.9 million for the years 1993 through 2005 and approximately $3.9 million for fiscal 2006. The additional stock-based compensation expense is being amortized over the service period relating to each option, typically four years. Upon the adoption of SFAS 123(R) in the year ended June 30, 2006, the Company recorded additional $1.6 million cumulative benefit from change in accounting principle, net of tax, reflecting the net cumulative impact of estimated forfeitures that were previously not included in the determination of historic stock-based compensation expense in periods prior to July 1, 2005.

Accordingly, in its Annual Report on Form 10-K for the year ended June 30, 2006 (“Fiscal 2006 Form 10-K”), the Company included restatements of the following previously filed financial statements and data (and related disclosures): (1) its condensed consolidated financial statements as of and for the fiscal years ended June 30, 2005 and 2004; (2) its selected condensed consolidated financial data as of and for the fiscal years ended June 30, 2005, 2004, 2003 and 2002; and (3) its unaudited quarterly financial data for all quarters in fiscal 2005 and 2006. Please see Note 3, “Restatement of Consolidated Financial Statements and Special Committee and Company Findings” to the consolidated financial statements included in the Company’s Fiscal 2006 Form 10-K, and Management’s Discussion & Analysis of Financial Condition and Results of Operations therein, for a detailed discussion of the effect of the restatements and a period-by-period reconciliation of the adjustments. The effects of this restatement on the Company’s consolidated financial statements for the years ended June 30, 2006 and 2005 are reflected in this Annual Report on Form 10-K.

Impact of Internal Revenue Code Section 409A

In December 2006, certain Company employees subject to taxation in the United States held options that had original exercise prices per share that were less than the fair market value per share of the common stock underlying the option on the option’s grant date. Such options fell into two categories: (i) those that were remeasured for financial accounting purposes as a result of the Company’s investigation into its historical stock option practices, and (ii) those that were originally granted to purchase shares of the Company’s Taiwanese subsidiary, TTI, at a low fixed exercise price, below fair market value, as provided by the terms of the TTI equity plan. In December 2006, and as further described below, the Company allowed these employees to amend such options to potentially meet the requirements of United States Internal Revenue Code Section 409A (“Section 409A”) and avoid unfavorable tax consequences by (i) retroactively increasing the exercise price on such options that vested in calendar 2005 or calendar 2006 and were exercised during calendar 2006, and/or (ii) retaining the same exercise price as to any vested options that were not exercised through December 31, 2006 and unvested options that would vest in calendar 2007 or beyond, provided the exercise of such options was scheduled under a formal plan specifying the year of exercise.

As disclosed previously in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2006, approximately 237,000 options were held by employees as to which the exercise price was increased due to the modification of measurement dates as a result of the findings of the Company’s internal investigation into its stock option granting practices and related accounting. Accordingly, non-officer employees holding such options became obligated to pay the Company an additional $1 million upon exercise of such options. In the fiscal year 2007, the Company paid bonuses to such employees to reimburse and compensate them for such increase in their option exercise price. Approximately $0.7 million of the bonuses paid had already been collected from the employees via share exercise in calendar 2006. The remaining $0.3 million of these bonuses could effectively be repaid to the Company only if and when the remaining options are exercised. In addition, options to purchase approximately 1 million of such shares were voluntarily scheduled to be exercised by employees to meet the requirements of Section 409A.

In addition, approximately 3.2 million options, issued in exchange for options originally granted by TTI, were held by employees who are subject to the unfavorable tax consequences of Section 409A. The original grant of these options at a low fixed exercise price, as provided by the terms of the TTI equity plan, resulted in the options being granted at less than the underlying fair market value per share. The application of Section 409A to these options was not the result of the modification of measurement dates due to the Company’s investigation into its historical stock option granting practices. The Company adjusted the exercise prices for approximately 2.0 million of these options and employees holding such options became obligated to pay the Company an additional $1.6 million upon exercise of such options. In the fiscal year 2007, the Company paid bonuses to such employees to reimburse and compensate them for such increase in their option exercise price. Approximately $0.3 million of the bonuses paid had already been collected from the employees via share exercise in calendar 2006. The remaining $1.3 million of these bonuses could effectively be repaid to the Company only if and when the remaining options are exercised. In addition, options to purchase approximately 1.2 million of such shares vesting in 2007 and beyond were voluntarily scheduled to be exercised by employees to meet the requirements of Section 409A.

In aggregate, during the year ended June 30, 2007, the Company amended options to purchase 2.2 million shares of Trident common stock. The Company made aggregate cash payments of $2.4 million to participating employees during the year ended June 30, 2007. The remaining liability of $0.2 million was included as a component of “Accrued expenses” in the consolidated balance sheet as of June 30, 2007. During the year ended June 30, 2007, the Company recorded compensation cost of $0.1 million and $1.5 million as a decrease in additional paid-in capital in connection with Section 409A. In addition, these employees became obligated to pay the Company an additional $2.6 million should they choose to exercise their stock options as to which the exercise price was increased. During the year ended June 30, 2007, the Company collected approximately $1.0 million from employees following exercises of a portion of these options.

3. INVESTMENTS AND RELATED PARTY TRANSACTIONS

In August 1995, the Company invested $49.3 million in United Integrated Circuits Corporation, which was subsequently acquired by United Microelectronics Corporation (“UMC”) on January 3, 2000. UMC is listed on the Taiwan Stock Exchange. As a result of this merger, the Company received approximately 46.5 million shares of UMC common stock, and has subsequently received approximately 44.4 million additional shares as a result of stock dividends, including 0.8 million shares received in September 2006. During the year ended June 30, 2004, the Company sold 7.3 million shares of UMC common stock for cash of $7.4 million, resulting in a gain of $2.7 million. As of June 30, 2007, the Company held approximately 83.6 million shares of UMC, which are treated as available-for-sale securities and are classified as short-term investments in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.

During the year ended June 30, 2007, one of the Company’s privately-held companies became a public company through an initial public offering. As a result, the Company reclassified this investment totaling $1.2 million from “Other assets” to short-term investments. Accumulated other comprehensive income increased $1.5 million primarily representing an increase in the market value of the Company’s short-term investments of $2.1 million less $0.9 million deferred income taxes relating to the unrealized gain on investment in these companies from July 1, 2006 to June 30, 2007. The Company received cash dividends from UMC in aggregate totaling $1.0 million, which was recorded in “Other income (expense), net” in the Statement of Operations during the year ended June 30, 2007.

The Company also has investments in privately-held companies. These investments are included in “Other assets” in the Consolidated Balance Sheets and are primarily carried at cost. In July 2006, the Company made a $0.5 million additional investment in Anchor Semiconductor, Inc. (“Anchor”). Mr. Frank Lin, the Company’s former Chairman and Chief Executive Officer, has also made a concurring $0.5 million investment and serves as a director on Anchor’s Board. The combined ownership in Anchor is less than 10% of the total outstanding shares. The Company’s investment is accounted for under the cost method.

In December 2005, the Company entered into an investment agreement (the “Agreement”) with Parade Technologies, Inc. (“Parade”). In accordance with the Agreement, the Company invested $0.5 million in Parade’s Series A Preferred Stock. In September 2006, Mr. Frank Lin, the Company’s former Chairman and Chief Executive Officer, also made a $160,000 investment in Parade’s Series A Preferred Stock. The combined ownership in Parade is less than 10% of the total outstanding shares. The Company’s investment is accounted for under the cost method.

In November 2005, the Company entered into an investment agreement with Nanovata Design Automation, Inc. (“Nanovata”). In accordance with the investment agreement, the Company invested $0.5 million in Nanovata’s Series A Preferred Stock. Mr. Frank Lin, the Company’s former Chairman and Chief Executive Officer, and Dr. Jung-Herng Chang, the Company’s President, also made an indirect investment in Nanovata’s Series A Preferred Stock. Mr. Lin served as a director on Nanovata’s Board. The combined ownership in Nanovata is 13.6% of the total outstanding shares of Nanovata’s common stock. The Company’s investment is accounted for under the cost method.

In March 2005, the Company made a $1.1 million investment in Afa Technologies, Inc. (“Afa”). In March 2005, Dr. Jung-Herng Chang, the Company’s President, also made a $150,000 indirect investment in Afa’s common stock. The combined ownership in Afa is less than 10% of the total outstanding shares of Afa’s common stock. The Company’s investment is accounted for under the cost method. In March 2007, the Company sold its investment in Afa Technologies, Inc. for approximately $1.2 million.

4. BALANCE SHEET COMPONENTS


	June 30,
(In thousands)	2007			2006
*Inventories:*
Work in process	$	9,416		$	9,566
Finished goods		6,847			5,075

Total inventories	$	16,263		$	14,641


*Property and equipment, net:*
Machinery, equipment and software	$	9,882		$	8,937
Leasehold improvements		1,044			944
Furniture and fixtures		974			1,237
Construction in progress		15,148			17

		27,048			11,135
Accumulated depreciation and amortization		(7,467	)		(7,684	)

Total property and equipment, net	$	19,581		$	3,451


*Accrued expenses :*
Accrued compensation and benefits	$	6,644		$	9,633
Professional fees		4,269			1,527
Deferred revenue		1,448			1,665
Others		10,874			8,507

Total accrued expenses	$	23,235		$	21,332

5. INTANGIBLE ASSETS

The carrying values of the Company’s amortized acquired intangible assets as of fiscal years ended June 30, 2007 and 2006 are as follows:


	2007							2006
			Accumulated							Accumulated
(In thousands)	Gross		Amortization			Net		Gross		Amortization			Net
Core and developed technologies	$	23,694	$	(11,991	)	$	11,703	$	23,694	$	(6,249	)	$	17,445
Customer relationships		2,120		(978	)		1,142		2,120		(375	)		1,745


Total	$	25,814	$	(12,969	)	$	12,845	$	25,814	$	(6,624	)	$	19,190

Amortization of core and developed technologies is recorded in cost of revenues, and the amortization of customer relationships is included in selling, general and administrative expenses. The following summarizes the amortization expense of acquired intangible assets for the periods indicated (in thousands):


(In thousands)	2007		2006		2005
*Reported as:*
Cost of revenues	$	5,742	$	5,128	$	1,121
Selling, general and administrative		603		341		34

Total	$	6,345	$	5,469	$	1,155

As of the fiscal year end June 30, 2007, the Company estimates the amortization expense of acquired intangible assets for fiscal years 2008 through 2012, to be as follows: $5.6 million, $3.6 million, $2.2 million, $1.2 million and $0.3 million.

6. GUARANTEES

The Company provides for estimated future costs of warranty obligations in accordance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others which requires an entity to disclose and recognize a liability for the fair value of the obligation it assumes upon issuance of a guarantee. The Company warrants its products against material defects for a period of time usually between 90 days and one year.

The Company did not have an accrual for product warranty as of June 30, 2005. The following table reflects the changes in the Company’s accrued product warranty during the years ended June 30, 2007 and 2006:


(In thousands)	2007			2006
Accrued product warranty, beginning of fiscal year	$	1,082		$	—
Charged to cost of revenues		1,171			1,190
Actual product warranty expenditures		(1,453	)		(108	)

Accrued product warranty, end of fiscal year	$	800		$	1,082

7. COMMITMENTS AND CONTINGENCIES

Commitments

Lease Commitments

The Company leases facilities under noncancelable operating lease agreements, which expire at various dates through 2011. At June 30, 2007, future minimum lease payments under these non-cancelable operating leases from fiscal years 2008 to 2011 were as follows (in millions): $1.1, $0.8, $0.7 and $0.6. Rental expense for the years ended June 30, 2007, 2006 and 2005 was $2.0 million, $3.5 million and $2.8 million, respectively.

Purchase Commitments

At June 30, 2007, the Company had purchase commitments in the amount of $26.0 million which were not included in the consolidated balance sheet at that date. Purchase commitments represent $2.6 million obligations under a construction contract for our new research and development building in Shanghai, China and unconditional purchase order commitments of $23.4 million primarily with contract manufacturers and suppliers for wafers and chipsets.

Contingencies

Shareholder Derivative Litigation

Trident has been named as a nominal defendant in several purported shareholder derivative lawsuits concerning the granting of stock options. The federal court cases have been consolidated as In re Trident Microsystems Inc. Derivative Litigation, Master File No. C-06-3440-JF. A case also has been filed in State court, Limke v. Lin et al., No. 1:07-CV-080390. Plaintiffs in all cases allege that certain of the Company’s current or former officers and directors caused it to grant options at less than fair market value, contrary to its public statements (including its financial statements); and that as a result those officers and directors are liable to the Company. No particular amount of damages has been alleged, and by the nature of the lawsuit no damages will be alleged against the Company. The Board of Directors has appointed a Special Litigation Committee (“SLC”) composed solely of independent directors to review and manage any claims that the Company may have relating to the stock option grant practices investigated by the Special Committee. The scope of the SLC’s authority includes the claims asserted in the derivative actions. In federal court, Trident has moved to stay the case pending the assessment by the SLC that was formed to consider nominal plaintiffs’ claims. In State court, Trident moved to stay the case in deference to the federal lawsuit, and the parties have agreed, with the Court’s approval, to take that motion off of the Court’s calendar to await the assessment of the SLC. The Company cannot predict whether these actions are likely to result in any material recovery by, or expense to, Trident. The Company expects to continue to incur legal fees in responding to these lawsuits, including expenses for the reimbursement of legal fees of present and former officers and directors under indemnification obligations.

Intellectual Property Litigation

From time to time, the Company is involved in other legal proceedings arising in the ordinary course of its business. While the Company cannot be certain about the ultimate outcome of any litigation, management does not believe any pending legal proceeding

will result in a judgment or settlement that will have a material adverse effect on its business, its consolidated financial position, results of operation, or cash flows.

Regulatory Actions

The Department of Justice is currently conducting an investigation of the Company in connection with its investigation into its stock option grant practices and related issues, and the Company is subject to a subpoena from the DOJ. The Company is also subject to a formal investigation from the Securities and Exchange Commission on the same issue. The Company has been cooperating with, and continues to cooperate with, these investigations by the SEC and DOJ. In addition, the Company’s 401(k) plan and its administration are being audited by the Department of Labor as a result of actions taken in response to the findings from the investigation. The Department of Labor has recently advised us that because of the appointment of an independent fiduciary for the 401(k) plan, and assuming the Company will provide the Department of Labor with relevant information concerning any claims that may be brought, the Department of Labor will take no future action with respect to the 401(k) plan’s potential claims arising from its investment in Company stock. The Company is unable to predict what consequences, if any, that any investigation by any regulatory agency may have on it. Any regulatory investigation could result in substantial legal and accounting expenses, divert management’s attention from other business concerns and harm the Company’s business. If a regulatory agency were to commence civil or criminal action against the Company, it is possible that the Company could be required to pay significant penalties and/or fines and could become subject to administrative orders, and could result in civil or criminal sanctions against certain of its former officers, directors and/or employees and might result in such sanctions against the Company and/or its current officers, directors and/or employees. Any regulatory action could result in the filing of additional restatements of the Company’s prior financial statements or require that the Company take other actions. If the Company is subject to an adverse finding resulting from the SEC and DOJ investigations, it could be required to pay damages or penalties or have other remedies imposed upon it. The period of time necessary to resolve the investigation by the DOJ and the investigation from the SEC is uncertain, and these matters could require significant management and financial resources which could otherwise be devoted to the operation of its business.

Nasdaq Proceedings

As a result of the delayed filing of its periodic reports with the SEC, on October 2, 2006, the Company received a Nasdaq staff determination letter indicating that it had failed to comply with the filing requirement for continued listing set forth in Nasdaq Marketplace Rule 4310(c)(14), due to its failure to timely file its Annual Report on Form 10-K for fiscal 2006, and that its securities are, therefore, subject to delisting from the Nasdaq Global Market. The Company received and announced three additional Nasdaq staff determination letters with respect to its failure to timely file its Quarterly Reports on Form 10-Q for the first, second and third quarters of fiscal 2007, as well as with respect to its failure to hold an annual meeting of stockholders during fiscal 2007. The Company requested and subsequently attended a hearing before the Listing Panel, which was held on November 16, 2006, to appeal the staff determination and presented a plan to cure the three filing deficiencies and regain compliance. On January 16, 2007, Nasdaq notified the Company that the exception had been granted, and that it would continue to list the Company’s shares on the Nasdaq Global Market, provided that the Company file its Form 10-K for fiscal 2006, its Form 10-Q for the first quarter of fiscal 2007, and all required restatements on or before April 2, 2007. The Company appealed this decision to the Listing Council, which decided to review the decision of the Listing Panel, and stayed the decision to suspend the Company’s securities from trading, pending further action by the Listing Council.

On July 6, 2007, the Company received the decision of the Listing Council concerning its appeal of the Listing Panel’s decision described above. In its decision, the Listing Council exercised its maximum discretionary authority and according to the limits of its authority, under Marketplace Rule 4802(b), granted the Company an extension to demonstrate compliance with all of the Nasdaq continued listing requirements until July 16, 2007. The Company has submitted a request to the Nasdaq Board of Directors for a further extension of time, beyond July 16, 2007, by which it must come into compliance with all of the listing requirements, and requested a continued stay of the decision to delist its common stock. On August 17, 2007, the Nasdaq Board of Directors informed the Company of its decision to provide the Company until September 13, 2007 to file all delinquent periodic reports necessary to regain compliance with the listing requirements. As a result of filing, on August 21, 2007, its Quarterly Reports on Form 10-Q for the periods ended September 30, 2006, December 31, 2006, and March 31, 2007, the Company believes that it has now filed all of its delinquent reports.

The Company has also requested an extension of time from the Listing Panel within which to comply with the requirement to hold an annual meeting of shareholders, to solicit proxies and to provide proxy statements to Nasdaq. The Nasdaq Board of Directors has determined that if the Company regains compliance with its filing requirements, it will remand the matter back to the Listing Panel for further consideration of the extension of time within which to hold an annual meeting of shareholders.

Indemnification Obligations

The Company indemnifies, as permitted under Delaware law and in accordance with its Bylaws, its officers, directors and members of its senior management for certain events or occurrences, subject to certain limits, while they were serving at the Company’s request in

such capacity. In this regard, the Company has received, or expects to receive, requests for indemnification by certain current and former officers, directors and employees in connection with the Company’s investigation of its historical stock option grant practices and related issues, and the related governmental inquiries and shareholder derivative litigation. The maximum amount of potential future indemnification is unknown and potentially unlimited; therefore, it cannot be estimated. The Company has directors’ and officers’ liability insurance policies that may enable it to recover a portion of such future indemnification claims paid, subject to coverage limitations of the policies, and plans to make claim for reimbursement from its insurers of any potentially covered future indemnification payments.

From time to time, the Company is involved in other legal proceedings arising in the ordinary course of its business in which a customer or other third party may assert a right to indemnification. While the Company cannot be certain about the ultimate outcome of any litigation, Company management does not believe any such pending legal proceeding will result in a judgment or settlement that will have a material adverse effect on the Company’s business.

8. STOCKHOLDERS’ EQUITY

Preferred Shares Rights

On July 24, 1998, the Company’s Board of Directors adopted a Preferred Shares Rights Agreement (“Agreement”). Pursuant to the Agreement, the Company’s Board of Directors authorized and declared a dividend of one preferred share purchase right (“Right”) for each share of the Company’s common stock outstanding on August 14, 1998. The Rights are designed to protect and maximize the value of the outstanding equity interests in Trident in the event of an unsolicited attempt by an acquirer to take over Trident, in a manner or terms not approved by Trident’s Board of Directors. Each Right becomes exercisable to purchase one-hundredth of a share of Series A Preferred Stock of Trident at an exercise price of $16.67. The Rights will expire on July 23, 2008, unless earlier redeemed by Trident at $0.001 per Right.

Stock Split

On October 24, 2005, Trident’s stockholders approved an increase in the number of shares of its authorized common stock from 60 million shares to 95 million shares. On October 24, 2005, Trident’s Board of Directors approved a two-for-one stock split in the form of a 100% stock dividend to stockholders of record as of November 9, 2005, payable on or after November 18, 2005. Trident’s common stock began trading on a split-adjusted basis on November 21, 2005. Unless otherwise stated, all references in the consolidated financial statements to the number of shares and per share amounts of Trident’s common stock for the periods prior to November 21, 2005 have been retroactively restated to reflect the increased number of shares resulting from the two-for-one stock split.

Comprehensive Income (Loss)

Under SFAS No. 130, any unrealized gains or losses on investments which are classified as available-for-sale equity securities are to be reported as a separate adjustment to equity. As of June 30, 2007 and June 30, 2006, the components of accumulated other comprehensive income related to accumulated unrealized gains and losses, net of tax, totaling $3.6 million and $2.1 million, respectively, on the Company’s investments. During the years ended June 30, 2007, 2006 and 2005, the Company recorded unrealized (loss) or gain on investments, net of tax, totaling $1.5 million, $(3.2) million and $1.5 million, respectively.

9. EMPLOYEE STOCK PLANS

Equity Incentive Plans

The Company grants nonstatutory and incentive stock options, restricted stock and restricted stock units to attract and retain officers, directors, employees and consultants. As of June 30, 2007, the Company had four equity incentive plans: the 2006 Equity Incentive Plan (the “2006 Plan”), the 2005 Stock Option Plan (the “2005 Plan”), the 2002 Stock Option Plan (the “2002 Plan”) and the 2001 Employee Stock Purchase Plan. Options to purchase the Company’s common stock remain outstanding under three incentive plans which have expired or been terminated: the 1992 Stock Option Plan, the 1994 Outside Directors Stock Option Plan and the 1996 Nonstatutory Stock Option Plan (the “1996 Plan”). All equity incentive plans have been approved by stockholders except the 1996 Plan.

In May 2006, Trident’s stockholders approved the 2006 Equity Incentive Plan (the “2006 Plan”), which provides for the grant of equity incentive awards, including stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock, performance units, deferred compensation awards and other stock-based and cash-based awards of up to 4,350,000 shares. For purposes of the total number of shares available for grant under the 2006 Plan, any shares that are subject to awards of stock options, stock appreciation rights, deferred compensation award or other award that requires the option holder to purchase shares for monetary

consideration equal to their fair market value determined at the time of grant shall be counted against the available-for-grant limit as one share for every one share issued, and any shares issued in connection with awards other than stock options, stock appreciation rights, deferred compensation award or other award that requires the option holder to purchase shares for monetary consideration equal to their fair market value determined at the time of grant shall be counted against the available-for-grant limit as 1.38 shares for every one share issued. Stock options granted under the 2006 Plan must have an exercise price equal to the closing market price of the underlying stock on the grant date and generally expire no later than ten years from the grant date. Options generally become exercisable beginning one year after date of grant and vest as to a percentage annually over a period of generally three to five years following the date of grant.

In 2003, Trident’s subsidiary in Taiwan adopted a 2003 Employee Option Plan (“TTI’s 2003 Employee Option Plan”), which provides for the grant of options to purchase TTI common stock to officers, employees and consultants. Upon the completion of the acquisition of the minority equity interest in TTI on March 31, 2005, the Company adopted the 2005 Plan, which constitutes an assumption and renaming of TTI’s 2003 Employee Option Plan. The maximum number of shares issuable over the term of the 2005 Stock Plan was limited to 5,867,800 shares. Stock options granted under the 2005 Plan expire no later than ten years from the grant date. Options granted under the 2005 Plan were generally exercisable one or two years after date of grant and vest over a requisite service period of generally two or four years following the date of grant. No further awards may be made under the 2005 Plan.

In December 2002, Trident adopted the stockholder-approved 2002 Plan under which shares of common stock could be issued to officers, directors, employees and consultants. The maximum number of shares that could have been issued was limited to 2,025,000 shares. Stock options granted under the 2002 Plan must have an exercise price equal to at least 85% of the closing market price of the underlying stock on the grant date and expire no later than ten years from the grant date. Options granted under the 2002 Plan were generally exercisable in cumulative installments of one-third or one-fourth each year, commencing one year following date of grant.

Effective July 1, 2005, the Company adopted SFAS 123(R), which requires the measurement and recognition of compensation expense for all stock-based payment awards made to the Company’s employees and directors including stock options based on fair values. The Company’s financial statements for the years ended June 30, 2007 and 2006 reflect the impact of SFAS 123(R) using the modified prospective transition method. In accordance with the modified prospective transition method, the Company’s financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation expense is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense recognized in the Consolidated Statements of Operations for the years ended June 30, 2007 and 2006 included compensation expense for stock-based payment awards granted prior to, but not yet vested as of, June 30, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123, and compensation expense for the stock-based payment awards granted subsequent to June 30, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). In conjunction with the adoption of SFAS 123(R), the Company elected to attribute the value of stock-based compensation to expense using the straight-line method, which was previously used for its pro forma information required under SFAS 123.

Upon adoption of SFAS 123(R), the Company elected to value its stock-based payment awards granted beginning in fiscal 2006 using the Black-Scholes model, which was previously used for its pro forma information required under SFAS 123 for fiscal year 2005. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Black-Scholes model requires the input of certain assumptions. Trident’s stock options and the option component of the Employee Stock Purchase Plan shares have characteristics significantly different from those of traded options, and changes in the assumptions can materially affect the fair value estimates.

The fair value of options granted and the option component of the Employee Stock Purchase Plan shares were estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions:


	Equity Incentive Plans									Employee Stock Purchase Plan
Year Ended June 30,	2007			2006			2005			2007 (1)		2006 (1)		2005
Expected terms (in years)		4.25			5			5			—		—		0.5
Volatility		61.92	%		68.81	%		48.00	%		—		—	39% to 64%
Risk-free interest rate		4.77	%		4.14	%		3.25% – 4.33	%		—		—	1.17% to 3.19%
Expected dividend rate		—			—			—			—		—		—
Weighted average fair value	$	10.65		$	10.37		$	7.95			—		—	$	3.14


(1)		Beginning on May 2, 2005, the Employee Stock Purchase Plan was suspended.

the adoption of SFAS 123(R), the Company continued to use historical volatility in deriving its expected volatility assumption as allowed under SFAS 123(R) and SAB 107 because it believes that future volatility over the expected term of the stock options is not likely to differ from the past. Prior to July 1, 2005, the Company used its historical stock price volatility in accordance with SFAS 123 for purposes of its pro forma information. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of the Company’s stock options. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts.

As stock-based compensation expense recognized in the Consolidated Statements of Operations for the years ended June 30, 2007 and 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. For the years ended June 30, 2007 and 2006, the Company adjusted stock-based compensation expense based on its actual forfeitures. In the Company’s pro forma information required under SFAS 123 for the periods prior to July 1, 2005, the Company accounted for forfeitures as they occurred.

The adoption of SFAS 123(R) resulted in a cumulative benefit from change in accounting principle of $1.8 million net of tax for the year ended June 30, 2006, reflecting the net cumulative impact of estimated forfeitures that were previously not included in the determination of historic stock-based compensation expense in periods prior to July 1, 2005.

The following table summarizes the impact of recording stock-based compensation expense under SFAS 123(R) for the years ended June 30, 2007 and 2006.


	Year Ended June 30,
(In thousands)	2007		2006
Cost of revenues	$	526	$	113
Research and development		9,271		8,912
Selling, general and administrative		5,810		4,158


Total stock-based compensation expense	$	15,607	$	13,183

During the year ended June 30, 2007, total stock-based compensation expense recognized in income before taxes was $15.6 million and the related recognized tax benefit was $1.7 million. During the years ended June 30, 2006 and 2005, total stock-based compensation expense recognized in income before taxes were $13.2 million and $30.5 million respectively, and there was no related recognized tax benefit. There was no stock-based compensation expense related to employee stock purchases recognized under the intrinsic value method of APB 25 for all periods presented. Deferred stock-based compensation cost as of June 30, 2005 was reversed against paid-in-capital upon the Company’s adoption of SFAS 123(R) on July 1, 2005.

The following table summarizes the Company’s stock option activities for the years ended June 30, 2005, 2006 and 2007:


				Options Outstanding
	Shares Available for						Weighted Average
(In thousands, except per share amounts)	Grant			Number of Shares			Exercise Price
Balance at June 30, 2004		3,560			9,065		$	1.89
Additional shares reserved		5,868			—			—
Plan shares expired		(36	)		—			—
Options granted		(308	)		308			7.86
Options assumed through acquisition		(5,868	)		5,868			0.79
Options exercised		—			(2,351	)		1.35
Options cancelled, forfeited or expired		120			(120	)		1.27

Balance at June 30, 2005		3,336			12,770		$	1.65
Additional shares reserved		4,350			—			—
Plan shares expired		(161	)		—			—
Options granted		(2,423	)		2,423			12.99
Options exercised		—			(5,366	)		1.54
Options cancelled, forfeited or expired		233			(233	)		3.43

Balance at June 30, 2006		5,335			9,594		$	4.49
Plan shares expired		(622	)		—			—
Options granted		(1,553	)		1,553			20.17
Restricted stock granted (1)		(380	)		—			—
Options exercised		—			(541	)		1.49
Options cancelled, forfeited or expired		804			(804	)		8.34

Balance at June 30, 2007		3,584			9,802		$	6.82


Vested and expected to vest at June 30, 2007					9,647		$	6.70


(1)		Restricted stock is deducted from shares available for grant under the 2006 Plan at a 1 to 1.38 ratio.

At June 30, 2007, 2006 and 2005, the total number of stock options exercisable was approximately 4,879,000, 2,660,000, and 4,936,000, respectively.

All options granted under TTI’s 2003 Employee Option Plan were granted at exercise prices below the fair market value of the TTI common stock on the date of grant. The options held by TTI option holders were assumed in connection with the acquisition of the minority interests (See Note 12), and as a result, non-qualified options to purchase approximately 5.6 million Trident common stock shares were issued at an exercise price of $0.79 per share, and with the same term and vesting provisions as the TTI options (a contractual term of ten years from the date of the original grant by TTI). Of the 5.6 million Trident common shares issued, approximately 1.4 million were granted to employees during fiscal 2005 and the balance were outstanding at the beginning of the fiscal year. Additionally, during fiscal 2005, an equivalent of 1.0 million shares of Trident common stock were issued upon exercise of TTI options and then exchanged for Trident common stock and 0.2 million shares were cancelled.

During the years ended June 30, 2007 and 2006, the total pre-tax intrinsic value of stock options exercised was $11.2 million and $105.5 million, respectively. The following table summarizes information about the Company’s stock options outstanding and exercisable at June 30, 2007 (in thousands except per share data):


	Options Outstanding						Options Exercisable
			Weighted Average		Weighted				Weighted
			Remaining		Average				Average
			Contractual Term		Exercise				Exercise
Range of Exercise Prices	Number of Shares		(in Years)		Price		Number of Shares		Price
$ 0.79 — $ 0.79		3,519		6.7	$	0.79		1,814	$	0.79
$ 0.88 — $ 6.89		2,599		5.1	$	2.54		2,320	$	2.17
$ 8.75 — $20.22		2,562		8.4	$	13.17		714	$	11.84
$20.36 — $29.65		1,122		9.6	$	21.19		31	$	23.32

Total		9,802		7.0	$	6.82		4,879	$	3.20

The aggregate intrinsic values of options outstanding at June 30, 2007 were $116.8 million. The aggregate intrinsic value represents the total pre-tax intrinsic value, which is computed based on the difference between the exercise price and Trident’s closing common stock price of $18.35 as of June 30, 2007, which would have been received by the option holders had all option holders exercised and sold their options as of that date.

The aggregate intrinsic value and weighted average remaining contractual term of options vested and expected to vest at June 30, 2007 was $115.9 million and 7.0 years, respectively. The aggregate intrinsic value and weighted average remaining contractual term of options exercisable at June 30, 2007 was $74.1 million and 6.0 years, respectively. The aggregate intrinsic value is calculated based on the Company’s closing stock price for all in-the-money options as of June 30, 2007.

As of June 30, 2007, there was $32.6 million of total unrecognized compensation cost related to stock options granted under all employee stock plans. This unrecognized compensation cost is expected to be recognized over a weighted average period of 1.2 years.

Stock-Based Compensation Expense Computed in Accordance with SFAS 123

In accordance with the requirements of the disclosure-only alternative of SFAS 123, set forth below is a pro forma illustration of the effect on net loss and net loss per share information for the year ended June 30, 2005, computed as if the Company had valued stock-based awards to employees using the Black-Scholes option pricing model instead of applying the guidelines provided by APB 25:


	Year Ended June 30,
(In thousands, except per share data)	2005
Net loss:
Net loss as reported	$	(30,184	)
Add: stock-based employee compensation included in reported net loss		30,500
Less: stock-based employee compensation determined under the fair value based method for all rewards		(7,761	)

Pro forma net loss	$	(7,445	)


Net loss per share — Basic:
As reported:	$	(0.64	)

Pro forma:	$	(0.16	)


Net loss per share — Diluted:
As reported:	$	(0.64	)

Pro forma:	$	(0.16	)

Basic and diluted shares		47,418

The activity for restricted stock for the year ended June 30, 2007 is summarized as follows:


			Weighted Average
			Grant-Date Fair
(In thousands, except per share amounts)	Shares		Value
Nonvested balance at June 30, 2006		—	$	—
Granted		275		19.98
Vested		—		—
Forfeited		—		—

Nonvested balance at June 30, 2007		275	$	19.98

As of June 30, 2007, there was $4.6 million of total unrecognized compensation cost related to restricted stock granted under the Employee Stock Plans. This unrecognized compensation cost is expected to be recognized over a weighted average period of 3.6 years.

Modification of Certain Options

Effective at the close of trading on Monday, September 25, 2006, the Company temporarily suspended the ability of optionees to exercise vested options to purchase shares of the Company’s common stock, until the Company became current in the filing of its periodic reports with the SEC and filed a Registration Statement on Form S-8 for the shares issuable under the 2006 Plan (“2006 Plan S-8”). This suspension continued in effect through August 22, 2007, the date of the filing of the 2006 Plan S-8, which followed the Company’s filing, on August 21, 2007, of its Quarterly Reports on Form 10-Q for the periods ended September 30, 2006, December 31, 2006 and March 31, 2007. As a result, the Company extended the exercise period of approximately 550,000 fully vested options held by 9 employees, who were terminated during the suspension period, giving them either 30 days or 90 days after the Company became current in the filings of its periodic reports with the SEC and filed the 2006 Plan S-8 in order to exercise their vested options. The Company recorded incremental stock-based compensation expense totaling approximately $0.5 million related to these modifications.

During the year ended June 30, 2007, one executive terminated his employment and became a consultant to the Company. As part of his consulting agreement, the Company extended the vesting of his 56,000 unvested options to purchase Trident common stock until the end of the consulting period. This resulted in additional stock-based compensation expense, which is recognized over the remaining requisite service period. As a result, the Company recorded incremental stock-based compensation expense totaling approximately $0.3 million related to this modification during the year ended June 30, 2007.

Employee Stock Purchase Plan

In December 2001, the Company’s stockholders approved the 2001 Employee Stock Purchase Plan (the “ESPP Plan”), under which 750,000 shares of the Company’s common stock can be issued to all Trident employees. The ESPP Plan replaced the 1998 Employee Stock Purchase Plan. The participants’ purchase price for Trident’s common stock under the ESPP Plan is the lower of 85% of the closing market price on the first trading day of each six-month period in the fiscal year or the last trading day of the same six-month period. During the fiscal year ended June 30, 2005, the Company issued 7,000 shares under the ESPP Plan. As of April 30, 2005, an aggregate of 299,000 shares have been issued under the ESPP Plan. Beginning on May 2, 2005, the ESPP Plan was suspended. If the Company resumes the ESPP Plan in the future, approximately 902,000 shares (adjusted for the two-for-one stock split) will be available for issuance under the ESPP Plan.

10. INCOME TAXES

The Company accounts for income taxes using SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). SFAS 109 provides for an asset and liability approach under which deferred income taxes are based upon enacted tax laws and rates applicable to the periods in which the taxes become payable.

The components of income (loss) before income taxes are as follows:


	Year Ended June 30,
(In thousands)	2007			2006			2005
Loss subject to domestic income taxes only	$	(20,358	)	$	(12,243	)	$	(11,200	)
Income (loss) subject to foreign income taxes, and in certain cases, domestic income taxes		67,339			42,917			(17,558	)

	$	46,981		$	30,674		$	(28,758	)

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


			Year Ended June 30,
(in thousands)	2007		2006			2005
Current:
Federal	$	180	$	(610	)	$	66
State		2		2			2
Foreign		15,312		8,303			1,358

	$	15,494	$	7,695		$	1,426


Deferred:
Federal		—		197			(197	)
State		—		—			—
Foreign		1,179		(1,575	)		197

		1,179		(1,378	)		—

	$	16,673	$	6,317		$	1,426

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


	June 30,
(in thousands)	2007			2006
Deferred income tax assets:
Reserves and accruals	$	790		$	2,184
Research and development credits		12,054			14,706
Net operating loss carryforwards		6,623			6,893
Other		6,593			7,718

Deferred income tax assets		26,060			31,501
Valuation allowance		(23,641	)		(24,151	)

Deferred income tax assets, net		2,419			7,350

Total deferred income tax liabilities:
Capital gains not recognized for tax		(1,860	)		(1,413	)
Unremitted earnings of foreign subsidiaries		(2,220	)		(5,972	)

Total deferred income tax liabilities		(4,080	)		(7,385	)

Net deferred income tax assets	$	(1,661	)	$	(35	)


	June 30,
	2007			2006
*Reported As:*
Current deferred income tax assets (included in “Prepaid expenses and other current assets”)	$	83		$	622
Noncurrent deferred income tax assets (included in “Other assets”)		338			947
Current deferred income tax liabilities (included in “Accrued expenses”)		(140	)		—
Noncurrent deferred tax liabilities		(1,942	)		(1,604	)

Net deferred income tax liabilities	$	(1,661	)	$	(35	)

As of June 30, 2007, the Company’s federal and state net operating loss carryforwards for income tax purposes were approximately $131.1 million and $114.8 million, respectively. Federal and state net operating losses will begin to expire in fiscal years ending 2015

and 2013, respectively. Federal and state tax credit carryforwards were $10.7 million and $8.2 million, respectively. Federal tax credits will begin to expire in the fiscal year ending 2017. SFAS 109 requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. The valuation allowance relates to research and development credits, net operating loss carryforwards, reserves and accruals and other for which the Company believes realization is uncertain.

In fiscal 2006, the Company chose to reverse both the gross deferred income tax assets and the offsetting valuation allowance pertaining to net operating loss and tax credit carryforwards that represent excess tax benefits from stock-based awards due to a change in presentation as a result of the adoption of SFAS No. 123(R). In prior years, such excess tax benefits, with an offsetting valuation allowance, were recorded in the Company’s consolidated balance sheet. As the excess tax benefits were realized, the valuation allowance was released and additional paid-in capital was increased. SFAS No. 123(R) prohibits recognition of a deferred tax asset for excess tax benefits due to stock-based compensation deductions that have not yet been realized through a reduction in income taxes payable. For the fiscal year ended June 30, 2007, the Company’s non-recognized deferred tax asset and the offsetting valuation allowance relating to excess tax benefits for stock-based compensation deductions was $30.4 million. Such unrecognized deferred tax benefits will be accounted for as a credit to additional paid-in capital, if and when realized through a reduction in income taxes payable.

The reconciliation of the income tax provisions computed at the United States federal statutory rate to the effective tax rate for the recorded provision for income taxes is as follows:


	Year Ended June 30,
	2007			2006			2005
Federal statutory rate		35.0	%		35.0	%		35.0	%
State taxes, net of federal tax benefit		5.8			5.0			5.0
Research and development credit		1.4			(6.5	)		6.1
Foreign rate differential		(15.1	)		(27.0	)		(26.8	)
Valuation allowance		8.0			15.5			(24.7	)
Other		0.4			(1.3	)		0.5

Effective income tax rate		35.5	%		20.7	%		(4.9	)%

The Company has provided for U.S. federal income and foreign withholding taxes on non-U.S. subsidiaries’ undistributed earnings of approximately $17.3 million as of June 30, 2007. No provision has been made for taxes that might be payable upon remittance of the Company’s non-U.S. subsidiaries’ undistributed earnings of approximately $131.3 million as of June 30, 2007, which are indefinitely reinvested in foreign operations.

11. NET INCOME (LOSS) PER SHARE

The following table sets forth the computation of net basic and diluted net income (loss) per share:


	Year Ended June 30,
(In thousands, except per share data)	2007		2006		2005
Net income (loss)	$	30,118	$	26,176	$	(30,184	)

Shares used in computing basic per share amounts		57,637		54,822		47,418
Dilutive potential common shares		5,743		7,704		—

Shares used in computing diluted per share amounts		63,380		62,526		47,418


Net income (loss) per share:
Basic	$	0.52	$	0.48	$	(0.64	)

Diluted	$	0.48	$	0.42	$	(0.64	)

Dilutive potential common shares consist of stock options. Stock options to purchase approximately 751,137 and 837,083 shares were excluded from the computation of diluted weighted average shares outstanding during fiscal years ended June 30, 2007 and 2006, respectively, because these options were anti-dilutive. The anti-dilutive effects of stock options totaling approximately 12,770,000 shares were excluded from diluted net loss per share during fiscal year ended June 30, 2005.

12. BUSINESS COMBINATION

During the years ended June 30, 2006 and 2005, the Company acquired in aggregate an additional 19.99% of the equity interests in TTI. held by TTI’s minority shareholders for approximately $6.2 million in cash and approximately 3.8 million shares of Trident’s common stock shares. The average value of the share consideration issued was $8.39 per share and was based upon the average of the closing market prices of Trident’s common stock on the various agreement dates and the two trading days before and two trading days after each agreement date of each minority interest acquisition transaction.

These transactions were accounted for as purchase transactions in accordance with SFAS No. 141, Business Combinations. The total purchase price was allocated to net tangible assets acquired, in-process research and development and the tangible and identifiable intangible assets assumed on the basis of their fair values on the date of acquisition. The following tables summarize the components of the estimated total purchase price and the allocation (in thousands):


Fair value of TMI common stock	$	31,146
Cash		6,206
Transaction costs		501

Total purchase price	$	37,853

Purchase price allocation:
Net tangible assets acquired	$	6,176
In-process research and development		5,171
Inventory write-up		366
Customer relationships		2,147
Core and developed technologies		23,993

Total purchase price	$	37,853

As of June 30, 2007, the Company holds 99.99% of TTI’s equity interests. The core and developed technology related to Digitally Processed Television (“DPTV) and High Definition Television (HDTV), product technologies, and the acquired intangible assets are being amortized over the expected one to six year life of the cash flows from these products and technologies. Acquired in-process research and development, or IPR&D, consisted of next generation of DPTV and HDTV products technology, which had not yet reached technological feasibility and had no alternative future use as of the date of acquisition. As of the valuation date, the next generation of DPTV and HDTV products technology is under development and requires additional software and hardware development. The Company determined the value of IPR&D using a valuation analysis from an independent appraiser and by estimating the net cash flows from potential sales of the products resulting from completion of these projects, reduced by the portion of net cash flows from revenue attributable to core and developed technology. In calculating the value of the IPR&D, the independent appraiser gave consideration to relevant market size and growth factors, expected industry trends, the anticipated nature and timing of new product introductions by the Company and its competitors, individual product sales cycles, and the estimated lives of each of the products derived from the underlying technology. The value of the acquired IPR&D reflects the relative value and contribution of the acquired research and development. Consideration was given to the stage of completion, the complexity of the work completed to date, the difficulty of completing the remaining development, costs already incurred, and the expected cost to complete the project in determining the value assigned to the acquired IPR&D. The fair value assigned to the acquired IPR&D was expensed at the time of the acquisition because the projects associated with the IPR&D efforts had not yet reached technological feasibility and no future alternative uses existed for the technology. As of June 30, 2007, the products developed with the acquired DPTV and HDTV products technology are available for production with the exception of the HDTV-Pro product which is undergoing customer validation.

All of the Company’s acquired identifiable intangible assets, including the core and developed technology acquired including DPTV and HDTV product technologies, and customer relationships are subject to amortization and have approximate original estimated weighted average useful lives of seven to eight years. See Note 5 of the Notes to the Consolidated Financial Statements for additional details.

The stock options held by TTI option holders were assumed as part of the acquisition, and as a result, non-qualified stock options to purchase approximately 5.6 million of Trident’s common stock shares were issued at an exercise price of $0.79 per share, and with the same term and vesting provisions as the TTI options (a total contractual term of ten years from the date of the original grant by TTI). See Note 9 of the Notes to the Consolidated Financial Statements for additional details.

The following table represents unaudited pro forma financial information for the year ended June 30, 2005 had the Company completed the acquisition of minority interests as of July 1, 2004. The pro forma results include the effects of the amortization of identifiable intangible assets and stock-based compensation. The pro forma results for the year ended June 30, 2005 excluded $366,000 of cost of revenues related to inventory write-up and $5.2 million of in-process research and development charges. The unaudited pro forma financial information is presented for illustrative purposes only and does not necessarily reflect the results of

operations that would have occurred had the combined companies constituted a single entity during such periods, and is not necessarily indicative of results which may be obtained in the future.


	For the Years Ended
(In thousands except per share amounts, unaudited)	June 30, 2005
Revenue	$	69,011
Pro forma net loss	$	(31,311	)
Pro forma net loss per share — basic and fully diluted	$	(0.64	)
Shares used in calculating basic and fully diluted amounts		49,274

13. SEGMENT AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS

Segment and Geographic Information

The Company operates in one reportable segment: digital media. The digital media business segment designs, develops and markets integrated circuits for video graphics, multimedia and digitally processed television products for the desktop and notebook PC market and consumer television market.

Revenues by region are classified based on the locations of the customers’ principle offices even though our customers’ revenues are attributable to end customers that are located in a different location. The following is a summary of the Company’s net revenues by geographic operations:


	Year Ended June 30,
(In thousands)	2007		2006		2005
Revenues:
South Korea	$	115,513	$	55,742	$	10,461
Japan		91,721		66,705		21,190
China		31,337		27,573		30,176
Taiwan		14,388		12,512		5,318
Europe		17,421		8,383		721
Others		415		527		1,145

Total	$	270,795	$	171,442	$	69,011


	June 30,
(In thousands)	2007		2006
Long-lived assets:
China	$	17,401	$	1,884
United States		1,681		1,134
Taiwan		425		385
Japan		74		48

Total	$	19,581	$	3,451

Long-lived assets comprise property and equipment. Long-lived assets in China increased significantly because the Company is currently constructing and outfitting a new research and development building, which is expected to be completed during the first quarter of fiscal 2008.

Major Customers

The following table shows the percentage of the Company’s revenues during the years ended June 30, 2007, 2006 and 2005 that was derived from customers who individually accounted for more than 10% of revenues in that year:


	Years Ended June 30,
Revenue:	2007			2006			2005
Customer A		41	%		31	%		10	%
Customer B		25	%		30	%		22	%
Customer C		—			—			14	%

The Company had a high concentration of accounts receivable with one customer. As of June 30, 2007, Customer A accounted for 64% of total gross accounts receivable.

14. SUBSEQUENT EVENTS

On July 6, 2007, the Company received the decision of the Listing Council concerning its appeal of the Listing Panel’s decision described above. In its decision, the Listing Council exercised its maximum discretionary authority and according to the limits of its authority, under Marketplace Rule 4802(b), granted the Company an extension to demonstrate compliance with all of the Nasdaq continued listing requirements until July 16, 2007. The Company has submitted a request to the Nasdaq Board of Directors for a further extension of time, beyond July 16, 2007, by which it must come into compliance with all of the listing requirements, and requested a continued stay of the decision to delist its common stock. On August 17, 2007, the Nasdaq Board of Directors informed the Company of its decision to provide the Company until September 13, 2007 to file all delinquent periodic reports necessary to regain compliance with the listing requirements. As a result of filing, on August 21, 2007, its Quarterly Reports on Form 10-Q for the periods ended September 30, 2006, December 31, 2006 and March 31, 2007, the Company believes that it has now filed all of its delinquent reports.

15. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of the Company’s quarterly consolidated results of operations (unaudited) for the fiscal years ended June 30, 2007 and 2006.


	Fiscal 2007
	First			Second		Third		Fourth
(In thousands, except per share amounts)	Quarter			Quarter		Quarter		Quarter		Total
Revenues	$	71,363		$	68,260	$	60,579	$	70,593	$	270,795


Gross margin	$	35,332		$	34,613	$	29,586	$	33,122	$	132,653

Income from cumulative effect of change in accounting principle	$	10,703		$	7,229	$	5,615	$	6,761	$	30,308
Cumulative effect of change in accounting principle		(190	)		—		—		—		(190	)


Net income	$	10,513		$	7,229	$	5,615	$	6,761	$	30,118


Net income per share — Basic:
Income from cumulative effect of change in accounting principle	$	0.18		$	0.13	$	0.10	$	0.12	$	0.52
Cumulative effect of change in accounting principle		—			—		—		—		—

Net income per share — Basic	$	0.18		$	0.13	$	0.10	$	0.12	$	0.52


Net income per share — Diluted:
Income from cumulative effect of change in accounting principle	$	0.17		$	0.11	$	0.09	$	0.11	$	0.48
Cumulative effect of change in accounting principle		—			—		—		—		—

Net income per share — Diluted	$	0.17		$	0.11	$	0.09	$	0.11	$	0.48


Shares used in computing net income per share — Basic		57,303			57,748		57,748		57,748		57,637


Shares used in computing net income per share — Diluted		63,116			63,501		63,440		63,571		63,380


	Fiscal 2006
	First		Second		Third		Fourth
(In thousands, except per share amounts)	Quarter		Quarter		Quarter		Quarter		Total
Revenues	$	33,203	$	40,614	$	44,743	$	52,882	$	171,442


Gross margin	$	17,551	$	20,883	$	22,790	$	27,157	$	88,381


Income from cumulative effect of change in accounting principle	$	3,823	$	7,193	$	5,588	$	7,753	$	24,357
Cumulative effect of change in accounting principle		1,819		—		—		—		1,819

Net income	$	5,642	$	7,193	$	5,588	$	7,753	$	26,176


Net income per share — Basic:
Income from cumulative effect of change in accounting principle	$	0.08	$	0.13	$	0.10	$	0.14	$	0.45
Cumulative effect of change in accounting principle		0.03		—		—		—		0.03

Net income per share — Basic	$	0.11	$	0.13	$	0.10	$	0.14	$	0.48


Net income per share — Diluted:
Income from cumulative effect of change in accounting principle	$	0.06	$	0.12	$	0.09	$	0.12	$	0.39
Cumulative effect of change in accounting principle		0.03		—		—		—		0.03

Net income per share — Diluted	$	0.09	$	0.12	$	0.09	$	0.12	$	0.42


Shares used in computing net income per share — Basic		52,560		53,591		56,025		57,160		54,822


Shares used in computing net income per share — Diluted		62,049		62,418		63,716		63,738		62,526

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, cash flows and stockholders’ equity and comprehensive income present fairly, in all material respects, the financial position of Trident Microsystems, Inc. and its subsidiaries (the “Company”) at June 30, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2007 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of June 30, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because material weaknesses in internal control over financial reporting related to (1) failure to maintain an effective control environment and (2) insufficient controls relating to the Company’s stock-based compensation expense existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the June 30, 2007 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in management’s report referred to above. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 9 to the consolidated financial statements, the Company changed the manner in which it accounts for stock-based compensation in fiscal 2006.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,


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

None.

ITEM 9A. CONTROLS AND PROCEDURES

Stock Option Investigation

As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2006 (“Fiscal 2006 10-K”), and in our Quarterly Reports on Form 10-Q for the quarters ended September 30, 2006, December 31, 2006 and March 31, 2007, we have been engaged in an investigation into our historical stock option grant practices and related issues. As a result of the findings from this investigation, which was completed in July 2007, we restated certain previously filed annual and quarterly financial statements to record additional stock-based compensation expense, as disclosed in our Fiscal 2006 10-K. In our Fiscal 2006 10-K, we identified two material weaknesses in our internal control over financial reporting.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Acting Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such terms are defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of June 30, 2007, the end of the period covered by this Annual Report on Form 10-K.

Disclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed our reports filed under the Exchange Act, such as this Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Acting Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As a result of the material weaknesses in our internal control over financial reporting identified by our management in our Fiscal 2006 10-K, which material weaknesses existed as of June 30, 2007, our Acting Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable level of assurance as of June 30, 2007. Notwithstanding the continuation of these material weaknesses, however, our management has concluded that our consolidated financial statements for the periods covered by and included in this Annual Report on Form 10-K are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States of America for each of the periods presented herein.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our company. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Exchange Act as a process designed by, and under the supervision of, a company’s principal executive and principal financial officers, and effected by a company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:

•		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

•

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.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our Acting Chief Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of June 30, 2007. In making this assessment, our management used the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management determined that we did not maintain effective internal control over financial reporting as of June 30, 2007, due to the material weaknesses described below.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. In our Fiscal 2006 10-K, management identified and reported to our Audit Committee and independent registered public accounting firm the following material weaknesses in our internal control over financial reporting as of June 30, 2006, which also existed as of June 30, 2007.

(1) Failure to Maintain Effective Control Environment. We did not maintain an effective control environment based on criteria established in the COSO framework. Specifically, we did not maintain effective controls, including monitoring and adequate communication, to ensure the accuracy, valuation and presentation of activity related to our stock option granting practices and procedures. Controls were not adequate to prevent or detect instances of misconduct that occurred under the direction or supervision of our former Chief Executive Officer. This lack of an effective control environment permitted circumvention of controls relating to the accounting for our stock option grants and enabled our former Chief Executive Officer to administer our stock option grants in a manner inconsistent with existing policies. This control deficiency also contributed to the following material weakness:

(2) Insufficient controls relating to our stock-based compensation expense. We did not maintain effective controls over the accounting for and disclosure of our stock-based compensation expense. Specifically, we did not maintain effective controls to ensure the accuracy, valuation and presentation of our stock-based compensation expense. We determined that each of the deficiencies described below existed:

•		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.

We determined that each of the above deficiencies could result in misstatements of our stock-based compensation expense, additional paid-in capital accounts, tax related accounts, and related financial disclosures that could result in a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected. As a result, we determined that these control deficiencies constituted material weaknesses as of June 30, 2007.

The effectiveness of our internal control over financial reporting as of June 30, 2007 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included in this Annual Report on Form 10-K.

Limitations on the Effectiveness of Disclosure Controls and Procedures

Our management, including our Acting Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within a company are detected. The inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2007, in order to continue the remediation of our material weaknesses, we completed the following changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

•		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. We terminated our employment relationship with our former Chief Accounting Officer. One of our other executives resigned in May 2007, at our request, although he continues to provide consulting service to us. The Board of Directors is searching for a new Chief Executive Officer.

•		Two members of our Board of Directors resigned from the Board of Directors effective May 1, 2007, and we appointed two new independent members of the Board of Directors in May 2007. As a result of the resignation of these two directors, Mr. Phelps and Mr. Ostby were appointed to the Compensation Committee in May 2007. In addition, Mr. Bachman, one of our newly-appointed independent directors, was appointed to the Compensation Committee on May 16, 2007, and elected Chairperson of the Compensation Committee on May 23, 2007.

•		The Audit Committee of the Board of Directors determined to establish an internal audit function that will report to the Audit Committee.

•		In May 2007 we amended our code of conduct. Throughout the quarter we continued to review our corporate governance practices and considered 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 continued to make recommendations for certain improvements in corporate governance policies and procedures that might be implemented by the Board of Directors to enhance corporate governance.

Status of Remediation of Material Weaknesses in Internal Control over Financial Reporting

In addition to the remedial changes in our internal control over financial reporting referenced above, in July 2007 we hired a senior stock option administrator with public company experience to administer our global equity programs as a member of our finance department. We also continued our review of our existing internal controls, together with an independent third party, and continued evaluating further improvements that might be made to our internal controls in connection with our ongoing effort to improve our control processes and corporate governance.

We intend to continue our remediation of the material weaknesses discussed above. For example, 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.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information about the Members of the Board of Directors

The information required by Item 401 of Regulation S-K is included in the Trident Microsystems Inc. Notice of Annual Meeting of Shareholders and Proxy Statement to be filed within 120 days of Trident’s fiscal year end of June 30, 2007 (the “Proxy Statement”) and is incorporated herein by reference.

Information about the Executive Officers

As of September 7, 2007, our executive officers, who were elected by and serve at the discretion of the Board of Directors, were as follows:


Name	Age		Position
Glen M. Antle		69	Acting Chief Executive Officer and Chairman of the Board of Directors
Dr. Jung-Herng Chang		51	President
John S. Edmunds		50	Chief Financial Officer
David L. Teichmann (1)		51	General Counsel, Vice President of Human Resources & Corporate Secretary
Chris P. Siu (2)		36	Chief Accounting Officer and Director of Finance

Former Officers
Frank C. Lin (3)		62	Former President, Chief Executive Officer and Chairman of the Board
Peter 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 joined Trident in July 1992. He was appointed to his present position in November 2005. He was appointed Vice President, Engineering in January 1995, and served as Chief Technical Officer from July 1992 through January 1995. From October 1988 through July 1992, he was a hardware design manager at Sun Microsystems, Inc. From September 1985 through September 1988, he was a research member at IBM’s Thomas J. Watson Research Center. Dr. Chang holds a Ph.D. in Computer Science and a M.S. in electrical engineering and computer science from the University of California, Berkeley, and a B.S. in electrical engineering from the National Taiwan University.

John S. Edmunds joined Trident in June 2004. Mr. Edmunds was formerly with Zoran Corporation, where he was Vice President of Finance. Previously he served as Senior Vice President/CFO of Oak Technology which was acquired by Zoran in August 2003. Prior to Oak Technology, Mr. Edmunds was Corporate Controller/Director of Internal Audit at Electronics for Imaging. Mr. Edmunds previously held several senior level finance positions during his eleven years at Tandem Computers Corporation as well as during six years with the international accounting firm Coopers and Lybrand. Mr. Edmunds is a Certified Public Accountant and has a B.S. in finance and accounting from University of California, Berkeley.

David L. Teichmann joined Trident in April 2007. Previously, he was the Senior Vice President, General Counsel and Secretary of GoRemote Internet Communications, Inc., a secure managed global remote access solutions provider, from July 1998 until its acquisition by iPass, Inc. in February 2006. From 1993 to July 1998, he served in various positions at Sybase, Inc., an enterprise software company, including Vice President, International Law as well as Director of European Legal Affairs based in The Netherlands. From 1989 to 1993, Mr. Teichmann was Assistant General Counsel for Tandem Computers Corporation, a fault tolerant computer company, handling legal matters in Asia-Pacific, Japan, Canada and Latin America. He began his legal career as an attorney with the Silicon Valley-based Fenwick & West LLP. Mr. Teichmann holds a B.A. degree in Political Science from Trinity College, an M.A.L.D. degree in Law & Diplomacy from the Fletcher School of Law & Diplomacy and a J.D. degree from the University of Hawaii School of Law. He was also a Rotary Foundation Scholar at the Universidad Central de Venezuela, where he did post-graduate work in Latin American Economics and Law.

Chris P. Siu joined Trident in February 2007. Mr. Siu was formerly with Varian Medical Systems, Inc., a medical device manufacturer, where he served as Corporate Accounting Manager and External Reporting/Consolidation Manager from 2004 to February 2007. Prior to Varian Medical Systems, he was previously associated with the international accounting firms Deloitte & Touche LLP from 2001 to 2004 and Ernst & Young LLP from 1996 to 2001. Mr. Siu holds a B.S. degree in Accounting from Brigham Young University and is a Certified Public Accountant in California.

Former Officers

Frank C. Lin founded Trident in July 1987 and was its Chief Executive Officer until his resignation, effective November 15, 2006. His career spanned 25 years in the computer and communications industries. Prior to Trident, he was Vice President of Engineering and co-founder of Genoa Systems, Inc., a graphics and storage product company. Before Genoa, Mr. Lin worked for GTE, ROLM, and was a senior manager at Olivetti Advanced Technical Center in Cupertino, California. He holds a M.S. degree in electrical engineering from the University of Iowa and a B.S. in electrical engineering from National Chiao Tung University in Taiwan.

Peter Jen joined Trident in August 1988 and resigned as its Senior Vice President, Asia Operations and Chief Administrative Officer effective December 3, 2006. In February 2006, Mr. Jen was appointed to the position of Chief Administrative Officer. From September 1998 through February 2006, he was Chief Accounting Officer, and from January 1998 to his resignation, he was Senior Vice President, Asia Operations. In April 1995 he was appointed to the position of Vice President, Asia Operations, and served as General Manager of Asia Operations from April 1994 to April 1995. He served as Vice President, Operations from September 1992 to March 1994, and served as Vice President, Finance from October 1990 through August 1992. From September 1985 to July 1988, he was Controller at Genoa Systems, Inc. Prior to that time, Mr. Jen served in finance and operations positions for various corporations, including Bristol-Myers (Taiwan), Pacific Glass Corporation, a subsidiary of Corning Glass Works, and Philips Telecommunicatie Industrie, B.V. Mr. Jen holds an M.B.A. in marketing from Central Missouri State University and a B.S. in Accounting from National Taiwan University.

Independence of the Board of Directors

The Board of Directors has determined that each of the current members of the Board of Directors is an independent director for purposes of the Nasdaq Marketplace Rules. The Board of Directors has determined the independence of the Directors by thoroughly reviewing the information provided by the Directors and our management concerning each Director’s business and personal activities as they may relate to the management team.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors and persons who beneficially own more than 10% of our common stock to file initial reports of beneficial ownership and reports of changes in beneficial ownership with the Securities and Exchange Commission. Such persons are required by Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) forms filed by such person.

Based solely on our review of such forms furnished to us and written representations from certain reporting persons, we believe that all filing requirements applicable to our executive officers, directors and greater-than-10% stockholders were complied with during fiscal 2007.

Code of Conduct and Committee Charters

We have adopted the Trident Microsystems, Inc. Code of Conduct and Policy Regarding Reporting of Possible Violations (“Code of Conduct”) that applies to all of our officers, directors and employees. It was most recently amended in May 2007. The Code of Conduct and the charters of our Board Committees are available on our website at http://www.tridentmicro.com. If we make any substantive amendments to the Code of Conduct or grant any waiver from a provision of the Code to any of our executive officers or directors, we will promptly disclose the nature of the amendment or waiver on our website.

ITEM 11. EXECUTIVE COMPENSATION

Executive Compensation

Information required by Item 402 and 407(e) (4), and (e) (5) of Regulation S-K is included in the Proxy Statement and is incorporated herein by reference.

Director Compensation

Information regarding Trident’s compensation of its directors is included in the Proxy Statement under “Director Compensation” and is incorporated herein by reference.

Compensation Committee Interlocks and Insider Participation in Compensation Decisions

No interlocking relationship exists between any member of our Board of Directors or our Compensation Committee and any member of the Board of Directors or Compensation Committee of any other company, and no such relationship has existed in the past.


ITEM 12.		SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information regarding security ownership is included in the Proxy Statement under “Security Ownership of Certain Beneficial Owners and Management” and is incorporated herein by reference.

Equity Compensation Plan Information

We currently maintain four equity incentive plans that provide for the issuance of our common stock to officers, directors, employees and consultants. These plans consist of the 2006 Equity Incentive Plan (the “2006 Plan”), the 2005 Stock Option Plan (Option Plan renamed and assumed by us in connection with the TTI acquisition), 2002 Stock Option Plan (the “2002 Plan”) and the 2001 Employee Stock Purchase Plan (the “Purchase Plan”). Options to purchase our common stock remain outstanding under three equity incentive plans which have expired or been terminated: the 1992 Stock Option Plan (the “1992 Plan”), the 1994 Outside Directors Stock Option Plan (the “1994 Plan”) and the 1996 Nonstatutory Stock Option Plan (the “1996 Plan”). All such plans have been approved by stockholders except the 1996 Plan. The following table sets forth information regarding outstanding options and shares reserved for future issuance under the foregoing plans as of June 30, 2007:

Number of

Weighted

Number of securities

securities to be

average exercise

remaining available

issued upon

price of

for future issuance

exercise of

outstanding

under equity

outstanding

options,

compensation plans

options, warrants

warrants and

(excluding securities

Plan Category

and rights

rights

reflected in column A)

Equity compensation plans approved by security holders

6,691,990

(1)

6.61

4,485,826

(2)

Equity compensation plans not approved by security holders (3)

3,110,166

(3)

7.28

—

Total

9,802,156

6.82

4,485,826

(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, 215,000 shares that are reserved and issuable upon exercise of options outstanding under the 1994 Plan, which expired on January 13, 2004, 1,854,735 shares that are reserved and issuable upon exercise of options outstanding under the 2002 Plan, 3,518,855 shares that are reserved and issuable upon exercise of options outstanding under the 2005 Stock Option Plan and 464,400 shares that are reserved and issuable upon exercise of options outstanding under the 2006 Plan.

(2)		Includes 901,128 shares reserved for future issuance under the Purchase Plan, 78,598 shares reserved for future issuance under the 2002 Plan and 3,506,100 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

An aggregate of 12,300,000 shares of common stock was reserved for issuance under the 1996 Plan, which plan was terminated on June 19, 2007. The 1996 Plan provides for the granting of nonstatutory stock options to employees and consultants who are not our officers or directors, with exercise prices per share equal to no less than 85% of the fair market value of our Common Stock on the date of grant. Options granted under the 1996 Plan generally have a 10-year term and vest at the rate of 25% of the shares subject to the option on each of the first four anniversaries of the date of grant. The vesting of options granted under the 1996 Plan will be accelerated in full in the event of a merger of us with or into another corporation in which the outstanding options are neither assumed nor replaced by equivalent options granted by the successor corporation or a parent or subsidiary of the successor corporation. The 1996 Plan was not required to be and has not been approved by our stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information required by Item 404 and 407(a) of Regulation S-K regarding this item is included in the Proxy Statement under “Certain Relationships and Related Transactions” and “Director Independence” and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Information required by Item 9(e) of Schedule 14A is included in the Proxy Statement under “Ratification of Appointment of Our Independent Registered Public Accounting Firm” and is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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


	Page Number
1. Financial Statements:
Report of Independent Registered Public Accounting Firm		64
Consolidated Statements of Operations — For the Years Ended June 30, 2007, 2006 and 2005		37
Consolidated Balance Sheets — As of June 30, 2007 and 2006		38
Consolidated Statements of Cash Flows For the Years Ended June 30, 2007, 2006 and 2005		39
Consolidated Statements of Changes in Stockholders’ Equity For the Years Ended June 30, 2007, 2006 and 2005		40
Notes to Consolidated Financial Statements		41
2. Financial Statement Schedules:
II – Valuation and Qualifying Accounts for each of the Years Ended June 30, 2007, 2006 and 2005		76

3. Exhibits:


Exhibit		Description
3.1		Restated Certificate of Incorporation.(1)

3.2		Certificate of Amendment of Restated Certificate of Incorporation.(11)

3.3		Amended and Restated Bylaws.(10)

3.4		Amendment to Article VIII of the Bylaws.(15)

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)

10.15 (*)		Form of Change of Control Agreement between the Company and Frank C. Lin.(8)

10.16		Foundry Venture Agreement dated August 18, 1995 by and between the Company and United Microelectronics Corporation.(5)(7)

10.18 (*)		Form of Nonstatutory Stock Option Agreement for non-plan grants to directors.(9)


Exhibit		Description
10.19 (+)		Form of 1996 Nonstatutory Stock Option Plan.(9)

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 (12)

10.21		2006 Executive Bonus Plan (13)

10.22		2006 Equity Incentive Plan.(14)

10.23		Form of Agreements under the 2006 Equity Incentive Plan.(16)

21.1		List of Subsidiaries.(6)

23.1		Consent of Independent Registered Public Accounting Firm(6)

24.1		Power of Attorney (included on signature page).(6)

31.1		Rule 13a-14(a) Certification of Chief Executive Officer(6)

31.2		Rule 13a-14(a) Certification of Chief Financial Officer(6)

32.1		Section 1350 Certification of Chief Executive Officer(6)

32.2		Section 1350 Certification of Chief Financial Officer (6)


1.		Incorporated by reference to 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 to exhibit of the same number to the Company’s Registration Statement on Form S-1 (File No. 33-53768).

3.		Incorporated by reference to exhibit 99.1 to the Company’s Current Report on Form 8-K filed August 21, 1998.

4.		Incorporated by reference to 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 to exhibit of the same number to the Company’s Annual Report on Form 10-K for the year ended June 30, 1995.

6.		Filed herewith.

7.		Confidential treatment has been requested for a portion of this document.

8.		Incorporated by reference to exhibit of the same number to the Company’s Annual Report on Form 10-K for the year ended June 30, 2001

9		Incorporated by reference to exhibit of the same number to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.

10.		Incorporated by reference to exhibit of the same number to the Company’s Form 10-Q dated December 31, 2003.

11.		Incorporated by reference to exhibit of the same number to the Company’s Form 10-Q dated March 31, 2004.

12.		Incorporated by reference to exhibit of the same number to the Company’s Form 10-Q dated March 31, 2006.

13.		Incorporated by reference to exhibit 99.1 to the Company’s Current Report on Form 8-K dated July 26, 2005 and filed August 1, 2005.

14.		Incorporated by reference to the Company’s Proxy Statement filed April 26, 2006.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: September 10, 2007


	TRIDENT MICROSYSTEMS, INC.
	By:	/s/ Glen M. Antle
		Glen M. Antle
		Acting Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Glen M. Antle and John S. Edmunds, each of them acting individually, as his attorney-in-fact, with the full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming our signatures as they may be signed by our said attorney-in-fact and any and all amendments to this Annual Report on Form 10-K.

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


Signature	Capacity	Date

/s/ Glen M. Antle	Acting Chief Executive Officer and Chairman of the Board	September 10, 2007
Glen M. Antle	and Director (Principal Executive Officer)

/s/ John S. Edmunds	Chief Financial Officer	September 10, 2007
John S. Edmunds	(Principal Financial Officer)

/s/ Chris P. Siu	Chief Accounting Officer and Director of Finance	September 10, 2007
Chris P. Siu	(Principal Accounting Officer)

/s/ Brian R. Bachman	Director	September 10, 2007
Brian R. Bachman

/s/ Hans Geyer	Director	September 10, 2007
Hans Geyer

/s/ Raymond K. Ostby	Director	September 10, 2007
Raymond K. Ostby

/s/ Millard Phelps	Director	September 10, 2007
Millard Phelps

INDEX TO EXHIBITS FILED TOGETHER WITH THIS ANNUAL REPORT


Exhibit		Description
3.1		Restated Certificate of Incorporation.(1)

3.2		Certificate of Amendment of Restated Certificate of Incorporation.(11)

3.3		Amended and Restated Bylaws.(10)

3.4		Amendment to Article VIII of the Bylaws.(15)

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)

10.15(*)		Form of Change of Control Agreement between the Company and Frank C. Lin.(8)

10.16		Foundry Venture Agreement dated August 18, 1995 by and between the Company and United Microelectronics Corporation.(5)(7)

10.18(*)		Form of Nonstatutory Stock Option Agreement for non-plan grants to directors.(9)

10.19(+)		Form of 1996 Nonstatutory Stock Option Plan.(9)

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 (12)

10.21		2006 Executive Bonus Plan.(13)

10.22		2006 Equity Incentive Plan.(14)

10.23		Form of Agreements under the 2006 Equity Incentive Plan.(16)

21.1		List of Subsidiaries.(6)

23.1		Consent of Independent Registered Public Accounting Firm(6)

24.1		Power of Attorney (included on signature page).(6)

31.1		Rule 13a-14(a) Certification of Chief Executive Officer(6)


Exhibit		Description
31.2		Rule 13a-14(a) Certification of Chief Financial Officer(6)

32.1		Section 1350 Certification of Chief Executive Officer(6)

32.2		Section 1350 Certification of Chief Financial Officer (6)


1.		Incorporated by reference to 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 to exhibit of the same number to the Company’s Registration Statement on Form S-1 (File No. 33-53768).

3.		Incorporated by reference to exhibit 99.1 to the Company’s Current Report on Form 8-K filed August 21, 1998.

4.		Incorporated by reference to 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 to exhibit of the same number to the Company’s Annual Report on Form 10-K for the year ended June 30, 1995.

6.		Filed herewith.

7.		Confidential treatment has been requested for a portion of this document.

8.		Incorporated by reference to exhibit of the same number to the Company’s Annual Report on Form 10-K for the year ended June 30, 2001

9.		Incorporated by reference to exhibit of the same number to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.

10.		Incorporated by reference to exhibit of the same number to the Company’s Form 10-Q dated December 31, 2003.

11.		Incorporated by reference to exhibit of the same number to the Company’s Form 10-Q dated March 31, 2004.

12.		Incorporated by reference to exhibit of the same number to the Company’s Form 10-Q dated March 31, 2006.

13.		Incorporated by reference to exhibit 99.1 to the Company’s Current Report on Form 8-K dated July 26, 2005 and filed August 1, 2005.

14.		Incorporated by reference to the Company’s Proxy Statement filed April 26, 2006.

15.		Incorporated by reference to exhibit 99.1 to the Company’s Current Report on Form 8-K dated July 24, 2007 and July 30, 2007.

16.		Incorporated by reference to exhibit of the same number to the Company’s Annual Report on Form 10-K/A filed August 22, 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.


	Page
PART I
Item 1. Business		3
Item 1A. Risk Factors		10
Item 1B Unresolved Staff Comments		18
Item 2. Properties		19
Item 3. Legal Proceedings		19
Item 4. Submission of Matters to a Vote of Security Holders		20
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		21
Item 6. Selected Financial Data		23
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		36
Item 8. Financial Statements and Supplementary Data		37
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		66
Item 9A. Controls and Procedures		66
Item 9B Other Information		68
PART III
Item 10. Directors, Executive Officers and Corporate Governance		69
Item 11. Executive Compensation		70
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		71
Item 13. Certain Relationships and Related Transactions, and Director Independence		71
Item 14. Principal Accounting Fees and Services		71
PART IV
Item 15. Exhibits and Financial Statement Schedules		72
Power of Attorney		75
Signatures		75
EXHIBIT 21.1
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


								Write-offs or
			Balance at		Charged as a			Adjustments
Fiscal			Beginning of		Reduction (Credit) to			Charged to		Balance at
Year		Description	Period		Revenue			Allowance		End of Period
					(In thousands)
	2007	Allowance for sales returns	$	1475	$	(374	)	$	—	$	1101
	2006	Allowance for sales returns	$	413	$	1062		$	—	$	1475
	2005	Allowance for sales returns	$	300	$	113		$	—	$	413


Name of Subsidiary	Jurisdiction of Incorporation	Ownership Percentage
Trident Microsystems (Far East) Ltd.	Cayman Islands, B.W.I.		100	%

Trident Technologies, Inc.	Taiwan, R.O.C.		99.99	%

Trident Microelectronics Ltd.	Taiwan, R.O.C.		100	%

Trident Multimedia Technologies (Shanghai) Co. Ltd.	People’s Republic of China		100	%


Dated: September 10, 2007		/s/ Glen M. Antle
		Glen M. Antle
		Acting Chief Executive Officer


Dated: September 10, 2007		/s/ John S. Edmunds
		John S. Edmunds
		Chief Financial Officer