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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

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

Registrant’s telephone number, including area code: (408) 991-8800

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

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

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

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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

     The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing price of the Common Stock on August 31, 2002 ($3.78 per share), as reported on the NASDAQ National Market was approximately $32,268,609. Shares of Common Stock held by executive officers and directors and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliate. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

     The number of shares of the registrant’s $0.001 par value Common Stock outstanding on August 31, 2002, was 13,603,855.

     Part III incorporates by reference from the definitive proxy statement for the registrant’s 2002 annual meeting of stockholders to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form.

Table of Contents

TABLE OF CONTENTS

						Page
PART I							3
		Item 1.		Business			3
		Item 2.		Properties			11
		Item 3.		Legal Proceedings			11
		Item 4.		Submission of Matters to a Vote of Security Holders			12
PART II							14
		Item 5.		Market for the Registrant’s Common Stock and Related Stockholder Matters			14
		Item 6.		Selected and Supplementary Financial Data			15
		Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
		Item 7A.		Quantitative and Qualitative Disclosures About Risk			28
		Item 8.		Financial Statements and Supplementary Data			29
		Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			29
PART III							30
		Item 10.	Directors and Executive Officers of the Registrant				30
		Item 11.	Executive Compensation				30
		Item 12.	Security Ownership of Certain Beneficial Owners and Management				30
		Item 13.	Certain Relationships and Related Transactions				30
PART IV							31
		Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K				31
POWER OF ATTORNEY							54
SIGNATURES							54
CERTIFICATIONS							55
INDEX TO EXHIBITS FILED TOGETHER WITH THIS ANNUAL REPORT							56

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PART I

Item 1.  Business

     We design, develop and market very large scale integrated circuits (“IC”) for videographics, multi-media and digitally processed television products for the desktop and notebook personal computer (“PC”) and consumer television market. Our graphics and video controllers typically are sold with software drivers, a BIOS and related system integration support. Our strategy is to apply our design expertise, which helped us succeed in the market for Super Video Graphics Array (“SVGA”) graphics controllers and Graphical User Interface (“GUI”) accelerators, to other high volume graphics, multimedia and digitally processed television markets for the general mass public, acceleration of Digital Versatile Disc (“DVD”) based live-video playback, and three-dimensional (“3D”) display for game and entertainment application markets.

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

     Our strategy is to capture these market opportunities by using our design expertise to develop and manufacture videographics and multimedia products that offer a superior combination of price, performance and features. We are employing this strategy in the graphics and multimedia markets, and we are focusing on providing high performance and feature-rich products that we believe will appeal to leading PC systems manufacturers.

Markets and Products

     We have targeted the PC desktop, notebook, multimedia and digitally processed television markets. The desktop market is the largest segment of the PC industry for our graphics and multimedia products. The desktop market includes adapter card manufacturers, who build graphics controllers onto adapter cards that serve as graphics subsystems, and PC systems manufacturers and motherboard suppliers, who may either include adapter cards in their systems or design graphics controllers onto their motherboards.

     We entered the notebook market in 1995 and in recent years, this market has accounted for the majority of our revenue. Our notebook strategy is to leverage our product positioning and continue to deliver a broad product offering. Our notebook product line includes: the CyberBLADE™ XP2, the CyberBlade™ XP, CyberALADDiN-P4™, CyberALADDiN-T™, CyberBlade™ Ai1, CyberBlade™ i1, and the CyberBlade™ i7.

     We are in the process of developing our next generation 3D graphics technology. The new technology, which we call XP4, will be used in both the discrete and integrated products. Our graphics product development strategy is to focus on a totally balanced design with consideration of not only high performance, but also low cost and low power consumption. Although our digital media segment accounted for only 6% and 2% of revenues for fiscal years ended June 30, 2002 and 2001, respectively, we plan to continue developing the next generation DPTV™ product as well as other advanced products for digital TV and digital STB for the digital television market in China, Japan, Korea and Taiwan. Designed for system design flexibility, our goal is for users of our single chip DPTV™ Video Processors(s) to benefit from feature rich devices at competitive prices with existing solution(s). The DPTV-DX converts analog TV into an advanced progressive digital quality TV. While we have limited experience with digital video television, we anticipate this market to generate an increasing percentage of our revenues. However, there can be no guarantee that our digital television product will be accepted by the market or increase our revenues or profitability.

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Current Graphics Products

Desktop Computer Market:

     Blade XP™. The Blade XP family brings seven major technical advances in video/graphics capability to mainstream desktop PCs: DirectX 7.0 Cubic Mapping, 256-bit pixel processing, dual memory bus architecture, AGP-4X bus interface, state-of-the-art video de-interlacing, high-resolution flat panel and only 2.8 watt power consumption at a blazing 200MHz clock rate.

Notebook Computer Market:

     CyberBLADE™ XP2. The CyberBLADE XP2 is a 3D/2D digital media flat panel graphics controller with 128-bit bus interface to external SDR/DDR SDRAM memory. It integrates two high speed LVDS transmitter for LCD panel support. The AGP bus interface supports 1X, 2X and 4X modes, enabling the highest level of 3D/2D performance. THAMA (Trident Hardware-Assisted MPEG-2 Acceleration) incorporates dedicated hardware for both Motion Compensation and Inverse Discrete Cosine Transform (IDCT), and brings digital media capability such as MPEG-2/Hardware DVD playback technologies to the notebook market.

     CyberBlade™ XP. In April 2000, Trident introduced the CyberBlade XP family for next generation high-end and mainstream AGP 4X/2X 128-bit 3D / DVD capable mobile PCs. The new line consists of the CyberBlade XP discrete device, which supports up to 32MB of external video memory, and Multi-Chip-Module (“MCM”) products — the CyberBlade XPm16 with 16MB SDRAM packaged and the CyberBlade XPm8 with 8MB SDRAM packaged — further removing board space and power constraints for ultra-notebook designs. The MCM devices offer AGP 4X / DX7 / memory upgrade and pin compatibility from Trident’s 4MB SDRAM embedded 3D product — the CyberBlade e4.

     CyberALADDiN-P4™. The CyberALADDiN-P4 is the latest generation of shared memory architecture (SMA) graphics and core logic chipset jointly developed by Trident Microsystems, Inc and Acer Laboratories, Inc (Ali). This SMA solution is designed to interface with Intel’s Pentium® 4 and Pentium® 4-M processors through the 400 MHz system bus. CyberALADDiN-P4 combines two proven production worthy cores in the industry: the CyberBlade XP2 graphics core from Trident and the M1671 North Bridge core from Ali to deliver a low-risk, cost-effective, and versatile Pentium® 4 SMA solution for notebook PCs targeted to OEMs and ODMs:

     CyberALADDiN-T™. CyberALADDiN-T is Trident and Acer Laboratories, Inc ‘s (Ali) jointly developed new generation of low-power integrated graphics and core logic supporting the latest Intel Pentium® III-M (Tualatin) processor family. CyberALADDiN-T combines Trident’s 2D/3D graphics core (CyberBLADE XP® and Acer Laboratories’s North Bridge (M1651T) to deliver numerous advanced features to value-priced notebook PCs.

     CyberBlade™ Ai1. This 3D/DVD integrated chipset for mobile PCs features our CyberBlade 3D/DVD video graphics and Ali’s Aladdin Slot 1/Socket 370 Northbridge. With the industry’s best power management and extensive integration, this chipset supports all Pentium ™ II, Pentium III and Celeron™ CPUs, providing notebook PC manufacturers with unprecedented price/performance advantages. This mobile chipset includes the CyberBlade Aladdin i1 3D/DVD Graphics with Intel Slot 1-licensed Northbridge and Ali’s Mobile Southbridge. The chipset is targeted at the value and mainstream notebook market segments.

     CyberBlade™ i1. This highly integrated, low power single device combines a LCD controller and North Bridge core for 66 MHz-100MHz Slot-1 based Notebook PCs. It reduces the system bill of materials (BOM) price by as much as $15, occupies less board space, and reduces power consumption by up to 1.5W. Its accelerated graphics port (AGP) Notebook graphics controller core incorporates a high performance 2D and 3D graphics engine, video accelerator, advanced DVD playback, video capture and TV output capabilities.

     CyberBlade™ i7. This highly integrated, low power single device, combines flat panel display controller and North Bridge cores for 66MHz-100MHz 64-bit Socket-7 based Notebook PCs. It reduces the system BOM price by as much as $15, occupies less board space, and reduces power consumption by up to 1.5W. The CyberBlade™i7’s notebook graphics controller core incorporates high performance 2D and 3D graphics engine, video accelerator, advanced DVD playback, video capture and TV output capabilities.

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New Graphics Products

     We will begin selling the following products within fiscal 2003. Our future success depends upon the successful market acceptance of these and other new products. There can be no assurance, however, that we will be able to ship these products in volume or in a timely manner or that they will be successful in the marketplace.

     XP4™. Trident has developed a new family of graphics chips for desktop and notebook personal computers known as XP4. The XP4 desktop family is based on UMC’s 0.13um CMOS technology that uses only 30 million transistors, which is less than half the number of transistors of the nearest competitive equivalent, to deliver top-of-the-line DX8.1/9.0 features and performance.

Other key capabilities of the XP4 family include:

	•		BrightPixelTM rendering engine with hardware vertex and pixel shaders
	•		SmartTileTM memory architecture for optimal memory bandwidth utilization
	•		CoolPowerTM for low power management
	•		Multiview with cathode ray tube (CRT), digital video interface (DVI) and TVout
	•		Resolution up to QXGA (2048x1536) with 420MHz RAMDAC
	•		DXVA hardware support with both inverse discrete cosine transformation (IDCT) and Motion Compensation
	•		Advanced de-interlacing for highest-quality DVD movies
	•		AGP-4X bus interface

The XP4 desktop product family is available in three versions:

	•		XP4 T3 supporting 128MBytes of up to 700MHz DDR memory with 128-bit bus;
	•		XP4 T2 supporting 64Mbytes of 500MHz DDR memory with 128-bit bus;
	•		XP4 T1 supporting 64Mbytes of 500MHz DDR memory with 64-bit bus.

     The XP4 T3 tops the performance chart with a 300MHz graphics engine and enables PC OEMs plus card makers to deliver advanced DX8.1/9.0 graphics card with 128MBytes memory. The 128-bit Double-Data-Rate (DDR) memory system reaches a bandwidth of up to 11.2 Gbytes/sec and the 3D graphics engine achieves a peak performance of 1.2 billion pixels/sec.

     The XP4 T3 offers a maximum power dissipation of less than four watts. This corresponds to only a fraction of competing alternatives, improving chip reliability in typical consumer-oriented operating environments where overheating could be the cause of system failure.

     The XP4 T2 provides mainstream DX8.1/9.0 performance with a 250MHz graphics engine. XP4 T2 memory bandwidth peaks at 8.0 Gbytes/sec and 3D graphics performance hits 1 billion pixels/sec, rivaling other high-end, competitive products.

     The XP4 T1 is an economical entry-level DX8.1/9.0 graphics card with a 250MHz graphics engine but in a 64-bit memory bus for lowest cost. The XP4 T1 memory bandwidth reaches 4.0 Gbytes/sec.

     The XP4 notebook version uses only 30 million transistors, and utilizes UMC’s 130nm technology. The XP4 has the capability to deliver the following functionality and performance:

	•		Faster transistors that enable higher clock rate, corresponding to higher performance. XP4 engine clock reaches 250MHz and DDR memory clock reaches 666MHz, both of which are the industry’s highest clock rate for notebooks with DX8.1 capability.
	•		Smaller device geometry that produces smaller chip sizes and results in lower production cost.
	•		Lower operating voltage which causes much less power dissipation. A voltage reduction from 1.8 volts (in 180nm process) to 1.2 volts (in 130nm process) can reduce the power dissipation to less than 50% assuming the operating frequency and the die area are the same.

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Current Digital Media Products:

     We believe our IC design and, in particular, our 3D Graphics and video expertise have applications in significant markets outside the PC industry. We have been developing products for other digital media applications, such as set top boxes and Digitally Processed TV (“DPTV”) for several years. The DPTV market in particular has begun to emerge as a high volume market for these products. Our DPTV products are designed to optimize and enhance video quality for various display devices, such as Cathode Ray Television (“CRTTV”), Liquid Crystal Display Television (“LCDTV”), Plasma Display Panel (“PDP”), Projection TV, Liquid Crystal Display projection.

     TVXpress. High quality TV encoder designed and optimized for Cyber9525DVD, CyberBlade e4-128, CyberBlade i7, Blade3D (desktop) and our other graphics controllers. It features support for NSTC and PAL as well as Macrovision protection for DVD playback.

     DPTV™-DX. The DPTV-DX is the main component in the premier TV chipset solution on the market. Designed for maximum system design flexibility, users of our single chip DPTV™ Video Processor(s) will benefit from one of the most feature rich devices available while maintaining a price competitive advantage over the existing solutions(s). The DPTV-DX converts today’s analog TV into an advanced progressive quality TV.

New Digital Media Product:

     DPTV™-3D. Trident’s advanced Digital Video Processing technology has been developed after years of R&D in the field of video and 2D/3D graphics. The DPTV™-3D is a highly integrated scan-conversion chipset solution that is designed for progressive TV/DVD player applications.

     Individuals using the DPTV™-3D Video Processor will have the benefit of using a multi-featured device while gaining a price competitive advantage over existing solutions. The chip is designed with external CPU(s) and Display & Deflection Processor (DDP) for maximum design flexibility. The DPTV™-3D incorporates features such as a programmable 3D comb filter and a NTSC/PAL/SECAM TV decoder, 14-D picture enhancement algorithm, panorama aspect ratio, PIP/POP display and programmable zooming capability, progressive scan, and adaptive motion detect capability by using an advanced .25 µm process technology. Also, the DPTV™-3D is designed for mass production and will support a 2, 4, or 8 MB SDRAM frame buffer configuration.

     Trident and TrueVideo are registered trademarks Blade XP™, CyberBLADE™ XP2, CyberBlade™ XP, CyberALADDiN-P4™, CyberALADDiN-T™, CyberBlade™ Ai1, CyberBlade™ i1, CyberBlade™ i7, XP4™, TVXpress, DPTV™-DX, DPTV™-3D, are trademarks of the Company. Other trademarks used herein are the property of their respective owners.

Sales, Marketing and Distribution

     We sell our products primarily through direct sales efforts. We have sales offices in Taipei, Taiwan; Hong Kong, China; Houston, Texas and Sunnyvale, California. Our offices are staffed with sales, applications engineering, technical support, customer service and administrative personnel to support its direct customers. We also market our products through independent sales representatives and distributors.

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

     Our notebook customers have been primarily worldwide brandname notebook PC manufacturers and Taiwanese OEM/ODM (original equipment manufacturers/original design manufacturers) notebook PC manufacturers. Whether manufactured by the PC company or an OEM/ODM, the notebook product is distributed primarily through brandname sales channels. With long design-in cycles, we have solid technical support required by these customers to ensure successful product launching and delivery.

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     Our future success depends in large part on the success of our sales to leading PC systems manufacturers and the sales of digital television manufacturers. We continue to focus our sales and marketing efforts with the goal of increasing sales to the leading PC systems manufacturers, digital television manufacturers and OEM channels. Competitive factors of particular importance in such markets include performance and the integration of functions on a single IC chip.

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

     During fiscal 2002, we generated 99% of our revenues from Asia. Major PC systems manufacturers often take delivery of their products in Asia for production purposes, and such sales by us are reflected in the Company’s revenues in Asia. Sales to one customer, Inno Micro, which is a supplier of Toshiba, accounted for approximately 58% of net sales for fiscal 2002. A small number of customers frequently account for a majority of our sales in any quarter. However, sales to any particular customer fluctuate significantly from quarter to quarter. Future operating performance will be dependent in part on the ability to replace significant customers or win new design-ins with current customers from one quarter to the next. Fluctuations in sales to key customers may adversely affect our operating results in the future. For additional information on foreign and domestic operations, see Note 11 to the Consolidated Financial Statements.

Manufacturing

     We have adopted a “fabless” manufacturing strategy whereby we contract-out our wafer fabricating needs to qualified contractors that we believe provide cost, technology or capacity advantages for specific products. As a result, we have generally been able to avoid the significant capital investment required for wafer fabrication facilities and to focus our resources on product design, quality assurance, marketing and customer support. We have, however, made a substantial investment to help ensure capacity, as described below. Our wholly-owned subsidiary, Trident Microsystems (Far East) Ltd. (“Trident Far East”), manages our manufacturing operations.

     In order to obtain an adequate supply of wafers, especially wafers manufactured using advanced process technologies, we entered into a joint venture agreement in August 1995 with United Microelectronics Corporation (“UMC”), a Taiwanese publicly traded company and one of our current foundries, under which we invested approximately U.S.$49.3 million for an equity interest in a joint venture with UMC and other venture partners known as United Integrated Circuits Corporation (UICC). We are guaranteed a maximum wafer capacity of approximately 3,000 wafers per month from the wafer fabrication facility of the venture. On January 3, 2000, UMC acquired UICC. As a result of this merger, and a 20% stock dividend payable to shareholders of record May 16, 2000, the total shares of our investment in UMC equals approximately 55.8 million shares as of June 30, 2001 which represents about 0.5% of the outstanding stock of UMC. In order to preserve our wafer capacity guarantee with UMC, there are certain limitations on our ability to sell the shares. If our total shareholdings fall below one-half of their initial percentage of shares, our production capacity will be reduced by at least 50%, and depending on the interpretation of the foundry capacity agreement between the parties, our production capacity could be reduced by substantially more than 50%. In addition, one-third of the shares is subject to a two-year lock-up period in accordance with an investment agreement entered into with UMC. After a two-year period, one-fifth of the shares will be available for sale from the lock-up portion every six months. As of June 30, 2002, approximately 12.9 million shares are subject to this lock-up restriction. While we are an operating company not in the business of investing, reinvesting, owning, holding or trading in securities, we do intend to monitor the advisability of disposing of our UMC stock and intend to sell all or part of the stock when it is in the best interests of our shareholders to do so, however, at present we do not have an intent to sell any of the stock in the immediate future.

     In fiscal 2002, our primary foundry was UMC. We will continue to explore arrangements for additional capacity commitments, although there is no assurance that any additional agreements will be executed, or that additional capacity is required.

     We purchase product in wafer form from the foundries and we manage the contracting with third parties for the chip packaging and testing. In order to manage the production back-end operations, we have been adding

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personnel and equipment to this area. Our goal is to increase the quality assurance of the products while reducing manufacturing cost. To ensure the integrity of the suppliers’ quality assurance procedures, we have developed and maintained test tools, detailed test procedures and test specifications for each product, and we require the foundry and third party contractors to use those procedures and specifications before shipping finished products. We have experienced few customer returns based on the quality of our products. However, our future return experience may vary because our more advanced, more complex products are more difficult to manufacture and test. In addition, some of our customers, including major PC systems manufacturers, may subject those products to more rigid testing standards than in the past.

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

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

Research and Development

     We have spent approximately $22.2 million, $20.0 million and $27.6 million on Company sponsored research and development activities during fiscal 2002, 2001 and 2000, respectively. We have conducted substantially all of our product development in-house and have a staff of 291 research and development personnel as of June 30, 2002. We are focusing our development efforts primarily on the development of more advanced graphics controllers, including 3D graphics controllers, multimedia products and digitally processed television. In addition, we intend to continue to devote significant resources to the development of a broad range of high-performance, proprietary software drivers. In anticipation of future market demand, we are investing in a variety of new technologies through licensing and purchase arrangements. These technologies may be incorporated in our future products, providing additional functionality and integration.

Competition

     The markets in which we compete are highly competitive and we expect that competition will increase. The principal factors of competition in our markets include, but are not limited to price, performance, the timing of new product introductions by us and our competitors, product features, the emergence of new graphics and other PC standards, level of integration of various functions, quality and customer support. Our principal current competitors in graphics include ATI Technologies, Inc., NVIDIA Corporation, S3 Graphics, Silicon Integrated Systems and Silicon Motion. In the digital television market our principal competitors are Toshiba, Philips Electronics and Micronas AG. Certain of our current competitors and many potential competitors have significantly greater technical, manufacturing, financial and marketing resources than we have.

     Leading PC systems manufacturers have increased market share in desktop and notebook PC systems in recent years. We believe that performance, features and quality are particularly important in the North American, Japanese and European systems manufacturer markets, and that integration of various functions on a single IC is becoming increasingly important in these markets. While we have recently gained entry to the system manufacturers who are headquartered in these geographic markets, there can be no assurance that we will continue to be able to compete successfully as to price or any other factor or that we will continue to be successful in our efforts to expand

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sales in these markets. Our failure to meet the technological and pricing challenges of our competition would have an adverse effect on our results of operations.

     We also plan to continue developing the next generation DPTV™ product as well as other advanced products for digital TV and digital STB for the digital television market in China, Japan, Korea and Taiwan. We believe the market for digital television will be competitive, and will require substantial research and development, sales and other expenditures to stay competitive in this market. In the digital television market our principal competitors are Toshiba, Philips Electronics, and Micronas AG. However, we believe that DPTV™ products will have a longer product life cycle than other current products. Therefore we expect to devote significant resources to the DPTV™ market even though competitors are substantially more experienced than we are in this market. These efforts may not be successful, however.

International Operations

     Our wholly-owned subsidiary, Trident Far East, maintains offices in Hong Kong, and China. Trident Far East is responsible for the manufacturing of our products and is principally responsible for international sales activities and for operation of the Hong Kong and Taiwan offices. The Hong Kong office provides sales and technical support for customers in Hong Kong and logistical support for customers in Hong Kong and Taiwan. The Taiwan office provides sales and technical support for customers in their respective regions. The Taiwan office directly hires its own employees. We have established research and development facilities in Hsinchu, Taiwan and Shanghai, China. Management has combined the Taiwan office and the Taiwan research and development facility into one company Trident Technologies Inc. On January 18, 2000, our Board of Directors approved a spin-off of our Trident Technologies Inc. subsidiary and our Trident Multimedia Technologies (Shanghai) Co. Ltd. subsidiary. The structure and timing of these spin-offs, and the nature of the operations at the time of spin-off will depend on a number of organizational, operational and marketing factors. We have not made all of the decisions necessary to complete these spin-offs, and the spin-offs may not occur in 2003. While we intend to structure the transactions in a manner to enhance our overall operations, the spin-offs will dilute the interests of our shareholders in the operations of the spun off entities and, particularly if the spin-offs do not increase their revenue and profitability, could adversely affect our financial results.

     During fiscal 2002, 2001 and 2000, sales to OEM, ODM and adapter card customers in Asia accounted for approximately 99% of our net sales of graphic chips in all three years, and all of our DPTV sales in fiscal 2002 occurred in Asia. We anticipate that sales to customers in Asia will continue to account for a substantial percentage of sales. In addition, the foundries that manufacture our products are located in Asia. Due to this concentration of international sales and manufacturing capacity in Asia, we are subject to the risks of conducting business internationally, including unexpected changes in regulatory requirements, fluctuations in the U.S. dollar which could increase the sales price in local currencies of our products in foreign markets, tariffs and other barriers and restrictions, and the burdens of complying with a wide variety of foreign laws. In addition, we are subject to general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships, in connection with our sales, support and third-party fabrication efforts in Hong Kong, Taiwan and elsewhere. Also, political instability or significant changes in economic policy could disrupt our operations in foreign countries or result in the curtailment or termination of such operations. While we have not experienced any other material adverse effects on our operations as a result of other regulatory or geopolitical factors, there can be no assurance that such factors will not adversely impact our operations in the future or require us to modify our current business practices.

Intellectual Property

     We attempt to protect our trade secrets and other proprietary information primarily through agreements with customers and suppliers, proprietary information agreements with employees and consultants and other security measures. Although we intend to protect our rights vigorously, there can be no assurance that these measures will be successful. We have filed two U.S. patent applications in fiscal year 2002 relating to our technology. There can be no assurance that these applications will be approved, that any issued patents will protect our intellectual property or that they will not be challenged by third parties. Furthermore, there can be no assurance that others will not independently develop similar or competing technology or design around any patents that may be issued.

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     The semiconductor industry is characterized by frequent litigations regarding patent and other intellectual property rights. From time to time, we have received notices claiming that we have infringed third-party patents or other intellectual property rights. To date, licenses generally have been available to us where third-party technology was necessary or useful for the development or production of our products. However, NeoMagic Corporation has filed suit alleging that our embedded DRAM (dynamic random access memory) graphics accelerators infringe their patents. We have responded and filed a counterclaim, which is described in more detail under “Item 3. Legal Proceedings.” There can be no assurance that this litigation will be resolved in favor of us or 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. The NeoMagic litigation or similar 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 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 the People’s Republic of China, Taiwan and Korea, may not protect our products and intellectual property rights to the same extent as the laws of the United States of America.

     We may in the future initiate claims or litigations against third parties for infringement of our proprietary rights to determine the scope and validity of our proprietary rights. Any such claims, with or without merit, could be time-consuming, result in costly litigation and diversion of technical and management personnel or require us to develop non-infringing technology or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on acceptable terms, if at all. In the event of a successful claim of infringement and our failure or inability to develop non-infringing technology or license the proprietary rights on a timely basis, our business, operating results and financial condition could be materially adversely affected.

Backlog

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

Segments

     We operate in the videographics and digital media segments as described above. The majority of our revenues and operating loss was attributed to our videographics segment. For fiscal years ended June 30, 2002 and 2001, the digital media segment accounted for $6,222,000 and $2,788,000 in revenues, respectively. As a percentage of revenues for fiscal years ended June 30, 2002 and 2001, the digital media segment accounted for 6% and 2%, respectively. The digital media segment accounted for $3,924,000 in operating loss for the fiscal year ended June 30, 2002. At June 30, 2002 and 2001, the assets attributed to the digital media segment were negligible.

Employees

     As of June 30, 2002, we had 407 full time employees, including 291 in research and development, 36 in product testing, quality assurance and operations functions, 38 in marketing and sales and 42 in finance, human resources, and administration. As of June 30, 2002, we had 124 employees in the United States, 209 in Shanghai,

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China, 57 in Taiwan and 17 in Hong Kong. Competition for qualified personnel in the semiconductor, software and the PC industry in general is intense in Silicon Valley where we are located. 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.

Item 2. Properties

     We lease a building of approximately 34,000 square feet on 1090 East Arques Avenue in Sunnyvale, California, pursuant to a lease which expires in June 2006. This building is used as our headquarters and includes development, marketing and sales, and administrative offices. We lease office space for a sales office in Houston, Texas. This sales office totals approximately 500 square feet. Our other leases include a 6,000 square foot office in Kwun Tong, China, for the Hong Kong branch office of the Trident Far East subsidiary, a 9,000 square foot sales office in Taipei, Taiwan, a 14,000 square foot research and development facility in Hsinchu, Taiwan, a 4,000 square foot sales office in Shenzhen, China; a 36,000 square foot research and development facility in Shanghai, China, and a 1,000 square foot sales office in Beijing, China.

Item 3. Legal Proceedings

     On December 14, 1998, NeoMagic Corporation (“NeoMagic”) filed a patent infringement lawsuit in the U.S. District Court, District of Delaware, asserting infringement of two patents against us. On February 1, 2001, the Court granted summary judgment in favor of us that we did not infringe either patent. Other motions for summary judgment relating to damages issues remain unresolved. We expect the Court to enter judgment in our favor. NeoMagic has appealed the summary judgment on its infringement claims but we believe the appeal is premature. We expect to move to dismiss the appeal unless the Court permits NeoMagic to pursue the appeal before our antitrust counterclaim is resolved in the trial court. We asserted an antitrust counterclaim against NeoMagic, seeking compensatory damages, trebled damages, costs and attorney fees, which was stayed pending resolution of NeoMagic’s infringement claims at the District Court level. After the District Court granted summary judgment, we moved to lift the stay on our antitrust counterclaim. The briefing on this motion is completed and the parties are awaiting oral argument. On May 7, 2001, NeoMagic filed its opening appeal brief. On May 17, 2001, we filed a motion to dismiss NeoMagic’s appeal for lack of jurisdiction arguing that there is no final appealable order and that our antitrust counterclaim remains pending. On June 15, 2001, we filed our opposition appeal brief and renewed our request that the appeal be dismissed for lack of jurisdiction. On July 2, 2001, NeoMagic filed its reply brief. On July 31, 2001, the Federal Circuit dismissed NeoMagic’s appeal without prejudice as premature. NeoMagic subsequently moved the District Court to certify our summary judgment for immediate appeal pursuant to Federal Rules of Civil Procedure Rule 54(b). That motion was granted, as was our motion to lift the stay on our antitrust counterclaim so we could take limited discovery. On April 16, 2002, the Federal Circuit affirmed summary judgment on NeoMagic’s ‘955 patent in favor of us. The Federal Circuit affirmed portions of the district court’s claim construction on NeoMagic’s ‘806 patent, reversed others, and remanded the case to the district court for further proceedings on the ‘806 patent. However, the district court judge retired within days of the remand order, and the case has been reassigned to a yet-to-be-confirmed new judge. In the meantime, Magistrate Judge Thynge has agreed to hear new cross-motions for summary judgment, probably in November. We continue to take discovery in the district court on our antitrust counterclaim.

     On May 26, 2000, NeoMagic filed a second patent infringement lawsuit in the U.S. District Court, District of Delaware, asserting that we infringed a patent issued in March 2000 that is related to the two patents at issue in the first case. NeoMagic is seeking a permanent injunction, damages, including enhanced damages, pre-judgment and post-judgment interest, costs and attorney fees. This case was stayed pending resolution of the first case, and was dismissed without prejudice in August, 2002 by stipulation of the Parties.

     In January 2001, FIC Corporation’s motion to add us as a third-party defendant in a patent infringement case brought against FIC by Intel Corporation in the U.S. District Court, Northern District of California was denied. FIC had attempted to add us as a third-party defendant because we allegedly supplied to FIC the devices which Intel claims infringe its patents. FIC then demanded that we assume FIC’s defense in the Intel action, which demand we rejected. FIC settled its case with Intel and renewed its demand in March 2001, that we reimburse it for its costs of defense. We rejected this demand, and FIC has threatened to file suit against us seeking recovery of its costs of

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defense. Given the nature of litigation and inherent uncertainties associated with litigation, management cannot predict with certainty whether FIC will bring suit or the ultimate outcome of any such litigation.

     On April 26, 2001, we filed a lawsuit against VIA Technologies, Inc. We alleged that VIA and S3 Graphics, together with former Company engineering senior managers, conspired to misappropriate our trade secrets about products in development. We further alleged that the corporate and individual defendants used our confidential information to systematically recruit key engineers away from us as part of a scheme to gain a competitive advantage by undermining our product development and design win capabilities. We also alleged that VIA and S3 Graphics may be planning to use our trade secrets to unfairly compete against us. We requested both legal and equitable relief. The parties have settled their disputes. As part of that settlement, the action was dismissed.

     On May 4, 2001, VIA Technologies, Inc. sued us in the U.S. District Court, Northern District of California for breach of contract and related claims arising out of our agreements with respect to the manufacture and sale of Cbi-1 and Cbi-7 chipsets. The complaint seeks payment in an unspecified amount (but later asserted to be approximately $6.3 million) for 686,675 Cbi-7 chipsets we allegedly ordered but did not pay for. On May 29, 2001, we answered and counterclaimed, asserting claims for breach of the same agreements, interference with our relationships with our customers, and related claims. On July 9, 2001, we moved for a preliminary injunction to require VIA to satisfy its agreements with us. At the August 13, 2001 scheduled hearing on our motion for preliminary injunction, the Court continued the hearing to September 13 and ordered the parties to mediate their dispute in the interim. The mediation was not successful, but we nevertheless withdrew our motion for preliminary injunction. Extensive discovery was undertaken, following which the case was settled on May 24, 2002.

     Statements regarding the possible outcome of litigation and our actions are forward looking statements and actual outcomes could vary based upon future developments on the litigation.

Item 4. Submission of Matters to a Vote of Securities Holders.

None.

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Executive Officers of the Registrant

     As of June 30, 2002, the executive officers of the Company, who are elected by and serve at the discretion of the Board of Directors, were as follows:

Name		Age				Position		Employed Since
Frank C. Lin			57			President, Chief Executive Officer and Chairman of the Board			1987
Jung-Herng Chang, Ph.D.			46			Senior Vice President, Engineering			1992
Peter Jen			56			Senior Vice President, Asia Operations and Chief Accounting Officer			1988

     Mr. Lin founded Trident in July 1987 and has served in his present position since that time. His career spans 25 years in the computer and communications industries. Prior to Trident, he was Vice President of Engineering and co-founder of Genoa Systems, Inc., a graphics and storage product company. Before Genoa, Mr. Lin worked for GTE, ROLM, and was a senior manager at Olivetti Advanced Technical Center in Cupertino, CA. He holds a M.S.E.E. from the University of Iowa and an B.S.E.E. from National Chiao Tung University, Taiwan.

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

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

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PART II

Item 5. Market for the Registrant’s Common Stock and Related Stockholder Matters

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

     As of June 30, 2002, there were approximately 115 registered holders of record of the Company’s common stock.

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

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Item 6. Selected and Supplementary Financial Data

TRIDENT MICROSYSTEMS, INC.
SELECTED CONSOLIDATED FINANCIAL DATA

		Year ended June 30,
(in thousands, except per share data)		2002				2001				2000				1999				1998
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues		$	105,766			$	128,226			$	122,682			$	89,255			$	113,002
Income (loss) from operations			(13,006	)			2,394				(4,206	)			(14,251	)			(9,520	)
Net income (loss)			(35,651	)			(43,640	)			68,107				(12,195	)			(5,106	)
Basic income (loss) per share			(2.66	)			(3.33	)			5.07				(0.94	)			(0.39	)
Diluted income (loss) per share			(2.66	)			(3.33	)			4.43				(0.94	)			(0.39	)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents, and short-term investments		$	84,018			$	79,385			$	149,706			$	32,469			$	36,886
Working capital			73,802				79,191				115,211				37,498				47,881
Total assets			118,524				147,419				222,376				110,910				118,427
Long-term debt, less current portion			—				—				46				82				350
Total stockholders’ equity			90,656				105,366				155,961				93,381				104,891

SUPPLEMENTARY QUARTERLY CONSOLIDATED FINANCIAL DATA

		FISCAL 2002 QUARTER ENDED
(in thousands, except per share data)		JUNE 30				MARCH 31				DECEMBER 31				SEPTEMBER 30
Revenues		$	21,009			$	28,839			$	30,178			$	25,740
Gross profit			4,963				6,239				5,655				5,939
Loss from operations			(3,737	)			(2,622	)			(3,680	)			(2,967	)
Net loss			(2,032	)			(2,076	)			(3,334	)			(28,209	)
Net loss per share — basic and diluted			(0.15	)			(0.15	)			(0.25	)			(2.12	)

		FISCAL 2001 QUARTER ENDED
(in thousands, except per share data)		JUNE 30				MARCH 31				DECEMBER 31				SEPTEMBER 30
Revenues		$	32,393			$	24,724			$	35,052			$	36,057
Gross profit			9,369				5,010				15,111				9,390
Income (loss) from operations			463				(3,212	)			4,982				161
Net income (loss)			2,367				(50,646	)			4,105				534
Basic income (loss) per share			0.18				(3.87	)			0.32				0.04
Diluted income (loss) per share			0.17				(3.87	)			0.29				0.04

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward-Looking Statements

     When used in this report the words “expects,” “anticipates,” “estimates” and similar expressions are intended to identify forward-looking statements. Such statements, which include statements concerning:

•		the timing of availability and functionality of products under development,
•		trends in average selling prices,
•		the percentage of export sales,
•		outcome of pending litigation,
•		demand for and trends in revenue for our products,
•		devotion of resources and control of expenses related to new products, markets and internal business strategies,

are subject to risks and uncertainties, including those set forth below under “Factors That May Affect Our Results” and elsewhere in this report, that could cause actual results to differ materially from those projected. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.

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

Overview of Business

     We design, develop and market very large scale integrated circuits (“IC”) for videographics, multi-media and digitally processed television products for the desktop and notebook personal computer (“PC”) and consumer television market. Our graphics and video controllers typically are sold with software drivers, a BIOS (basic input/output system) and related system integration support. Our strategy is to apply our design expertise, which helped us succeed in the market for Super Video Graphics Array (“SVGA”) graphics controllers and Graphical User Interface (“GUI”) accelerators, to other high volume graphics, multimedia and digitally processed television markets for the general mass public, acceleration of Digital Versatile Disc (“DVD”) based live-video playback, and three-dimensional (“3D”) display for game and entertainment application markets.

Critical Accounting Policies, Judgments and Estimates

     Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to customer programs and incentives, product returns, bad debts, inventories, equity investments, income taxes, financing operations, warranty obligations, excess component order cancellation costs, restructuring, long-term service contracts, pensions and other post-retirement benefits, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

     We record estimated reductions to revenue for customer programs and incentive offerings including special pricing agreements, promotions, historical returns, inventory levels at distributors and other volume-based incentives. If market conditions were to decline, we may take actions to increase customer incentive offerings possibly resulting in an incremental reduction of revenue at the time the incentive is offered.

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     We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

     We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates and material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

     We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

     We hold minority interests in companies having operations or technology in areas within our strategic focus, four of which are publicly traded and have highly volatile share prices. We record an investment impairment charge when we believe an investment has experienced a decline in value that is other-than-temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

Results of Operations

     The following table sets forth the percentages that consolidated statement of operations items are to revenues for the years ended June 30, 2002, 2001 and 2000:

Revenues

     The sales of PCs have slowed in recent periods. Our revenues have declined in fiscal year 2002, and we cannot predict when or if this slowdown will be reversed. Any significant revenue growth in graphics revenue depends to a substantial extent on an improvement in the PC market. Net product sales decreased in fiscal 2002 to $105.8 million, or 11.1%, from $119.0 million reported in fiscal 2001. The decrease in net product sales was primarily due to the decrease in unit volume shipments of desktop and notebook products in fiscal 2002. Sales of notebook products of $89.4 million were approximately 85% of total revenues in fiscal 2002 as compared to $102.3 million or 80% of total revenues in fiscal 2001. Sales of GUI desktop products were approximately $2.6 million or 2% of total revenues in fiscal 2002 as compared to approximately $8.7 million or 7% in fiscal 2001. Sales of

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digitally processed television products represented approximately $6.2 million or 6% of total revenues in fiscal 2002 as compared to approximately $2.8 million or 2% in fiscal 2001.

     Total revenues in fiscal 2001 increased to $128.2 million, or 4%, from $122.7 million reported in fiscal 2000. Net product sales increased in fiscal 2001 to $119.0 million, or 1%, from $117.7 million reported in fiscal 2000. The increase in net product sales was primarily due to an increase in unit volume shipments of notebook products having higher average selling prices. Royalty and license revenue increased to $9.3 million in fiscal 2001 from $5.0 million in fiscal 2000 resulting primarily from a final payment from VIA in settlement of our litigation against VIA for products sold prior to March 31, 2000. We did not recognize the royalties in earnings until the quarter ended December 31, 2000 when the disputes were settled and the collectibility was assured. Sales of notebook products of $102.3 million were approximately 80% of total revenues in fiscal 2001 as compared to $91.9 million or 75% of total revenues in fiscal 2000. Sales of GUI desktop products were approximately $8.7 million or 7% of total revenues in fiscal 2001 as compared to approximately $21.9 million or 18% in fiscal 2000.

     We design products with the goal of filling the needs of leading PC systems manufacturers as well as the needs of adapter card manufacturers. Sales to Asian customers, primarily in Japan and Taiwan, accounted for 99% of net sales in fiscal 2002. Sales to Asian customers, primarily in Hong Kong, Taiwan, Japan, the Philippines, Thailand and Singapore, accounted for 99% of net sales in fiscal 2001. Sales to Asian customers, primarily in Hong Kong, Taiwan, Korea, Japan, and Singapore accounted for 99% of net sales in fiscal 2000. Sales to one customer, Inno Micro, which is a supplier of Toshiba, accounted for approximately 58% of net sales for fiscal 2002. Sales to three customers, Inno Micro, which is a supplier of Toshiba, and Quanta and Arima, which are suppliers of Compaq, accounted for approximately 23%, 16% and 15% of net sales for fiscal 2001, respectively. Sales to three customers, Compaq, Fujitsu, and Toshiba accounted for approximately 18%, 11%, and 10% of net sales for fiscal 2000, respectively. Substantially all of the sales transactions were denominated in U.S. dollars during all periods. In fiscal year 2002 our sales to distributors were negligible. Sales to distributors represented 30% and 6% of net sales during the fiscal years ended June 30, 2001 and 2000, respectively.

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

Gross Margin

     Gross margin as a percentage of total revenue decreased to 22% in fiscal 2002 from 30% in fiscal 2001. The 8% decrease was primarily due to an increase in the cost of production of notebook chips. Gross margin as a percentage of total revenue decreased to 30% in fiscal 2001 from 33% in fiscal 2000. Excluding the royalty and license revenue, our gross margin decreased to 25% in fiscal 2001 from 30% in fiscal 2000. The 5% decrease was primarily due to an increase in the cost of the production of notebook chips.

     We believe that the prices of high-technology products will 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 constant or increase as a result of introductions of new higher-performance products often with additional functionality which are planned to have higher margins. Our strategy is to maintain and improve gross margins by (1) developing new products that have higher margins, and (2) reducing manufacturing costs by improving production yield and utilizing newer process technology. 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. Our revenues are substantially dependent on significant sales of the XP4 and increases in sales of PCs in general. Without those, we do not expect our revenues to increase. We currently do not expect revenues to increase over the next two quarters, and we expect to incur losses over those quarters.

Research and Development

     Research and development expenses increased to $22.2 million in fiscal 2002 from $20.0 million in fiscal

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2001, and decreased from $27.6 million in fiscal 2000. Research and development expenses as a percentage of net sales were 21%, 15% and 22% in fiscal 2002, 2001 and 2000, respectively. The increase in the amount spent in fiscal 2002 was primarily the result of increased headcount relating to our efforts in developing advanced graphic and digitally processed television products such as our newest graphic chip the XP4™ and our digitally processed television chip DPTV™-3D.

     We are in the process of developing our next generation 3D graphics technology. The new technology, which we call XP4, will be used in both the discrete and integrated products. Our graphics product development strategy is to focus on a balanced design with consideration of not only high performance, but also low cost and low power consumption. We also plan to continue developing the next generation DPTV™ product as well as other advanced products for digital TV and digital Set Top Boxes (“STB”) for the digital television market in China, Japan, Korea and Taiwan. However, there can be no assurance that these products will be quickly or widely accepted by consumers in the market place, or that the new products will be developed and shipped in a timely manner.

Selling, General and Administrative

     Selling, general and administrative expenses decreased to $13.6 million in fiscal 2002 from $16.5 million in fiscal 2001 and decreased from $16.9 million in fiscal 2000. Selling, general and administrative expenses as a percentage of revenues were 13%, 13% and 14% in fiscal 2002, 2001 and 2000, respectively. Selling expenses were $8.5 million in fiscal 2002 as compared to $7.9 million and $9.7 million in fiscal 2001 and 2000, respectively. General and administrative expenses were $5.1 million in fiscal 2002 as compared to $8.6 million and $7.2 million in fiscal 2001 and 2000, respectively. Selling costs increased in fiscal 2002 due to higher sales representative commissions for our integrated notebook products. Selling costs declined in fiscal 2001 and fiscal 2000 due to a decline in headcount and sales representative commissions. General and administrative expenses decreased in fiscal 2002 compared to fiscal 2001 primarily due to a decrease in legal expenses. General and administrative expenses increased in fiscal 2001 compared to fiscal 2000 primarily due to an increase in headcount of administrative personnel.

Interest Income, Net

     The amount of interest income earned by us varies directly with the amount of our cash and cash equivalents balances and the prevailing interest rates. Net interest income decreased to $486,000 in fiscal 2002 from $1.7 million in fiscal 2001 due to lower cash balances and declining interest rates in money market accounts. Net interest income decreased to $1.7 million in fiscal 2001 from $2.0 million in fiscal 2000 due to lower cash balances in higher yielding money market accounts.

Provision/benefit for Income Taxes

     The benefit of income taxes amounted to $19.6 million and $30.1 million for the fiscal years ended June 30, 2002 and 2001, respectively. In both years, the income tax benefit was primarily due to the reversal of deferred tax liabilities as a result of the write-downs of our investment in United Microelectronics Corporation (“UMC”). The provision for income taxes amounted to $44.7 million for the fiscal year ended June 30, 2000, due primarily to the deferred tax provision for the unrealized capital gain in the investments in UMC.

Gain (loss) on investments, net

     On January 3, 2000, UMC acquired United Integrated Circuits Corporation (“UICC”), a company in which we had previously made an investment. We recorded a pre-tax gain of $117 million as a nonoperating gain in investment in our statement of operations during the year ended June 30, 2000. The gain represents the difference between the cost of our previous investment in UICC and the quoted market value of the UMC shares listed on the Taiwan Stock Exchange as of the date UMC acquired UICC. As of June 30, 2002, we owned approximately 64.2 million shares of UMC which represents about 0.5% of the outstanding stock of UMC. In the quarter ended September 30, 2001, we concluded that due to a substantial decline in the market value of UMC’s stock price from June 30, 2001, the continued decline in stock prices of publicly traded semiconductor companies and the continuing unfavorable outlook for the semiconductor industry, that the decline in the investment value in UMC had become other-than-temporary. Accordingly, $40.0 million, which represents the difference between the carrying value on March 31, 2001 and the quoted fair value on September 30, 2001, was written off against earnings as an impairment

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loss on investments in accordance with Statements of Financial Accounting (“SFAS”) No. 115 and Accounting Principles Board Opinion (“APB”) No. 18. See Part IV, Item 14, Note 4 to the Consolidated Financial Statements for discussion of this investment and the related losses.

     During the fiscal year ended June 30, 2002, we also recognized net impairment loss on investments other than UMC totaling $2.7 million as follows (in thousands):

     During the three months ended June 30, 2002, we recognized a gain on investment of $568,000 resulting from the acquisition by a public company of a software design company in which we had invested $250,000. See Part IV, Item 14, Note 5 to the Consolidated Financial Statements for discussion of these investments and the related losses.

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Liquidity and Capital Resources

     As of June 30, 2002, our principal sources of liquidity included cash and cash equivalents of $21.2 million, decreased from $26.7 million at June 30, 2001. In fiscal year 2002, $4.1 million of cash was used by operations, as opposed to fiscal year 2001, during which $607,000 of cash was provided by operations. The cash used by operations was primarily due to the operating loss and decrease in accounts payable, partially offset by a decrease in accounts receivable and inventories.

     Accounts receivable decreased to $4.3 million at June 30, 2002 from $9.2 million at June 30, 2001. The decrease in accounts receivable was primarily due to a decrease in revenues in the fourth quarter. Revenues decreased to $21.0 million in the three months ended June 30, 2002 from $28.8 million in the three months ended March 31, 2002.

     Inventories decreased to $3.2 million at June 30, 2002 from $10.7 million at June 30, 2001 primarily due to the reduction of our orders for product manufacturing during the fiscal year ended June 30, 2002. The decrease is also a result of changing our product mix to integrated notebook products, which are purchased on a just-in-time basis, further lowering our inventory level.

     Accounts payable decreased to $6.7 million at June 30, 2002 from $11.8 million at June 30, 2001. The decrease is mainly a reflection of our continued reduction in purchases during the fiscal year ended June 30, 2002.

     Capital expenditures in fiscal 2002, 2001, and 2000 were $2.7 million, $2.1 million and $1.2 million, respectively. Other significant cash outflows from investing and financing activities for the year ended June 30, 2001 represented the purchases of long-term investments of $6.1 million and treasury stock of $7.7 million.

     We occupy our facilities under several non-cancelable operating lease agreements expiring at various dates through 2006, and require payment of property taxes, insurance, maintenance and utilities. Future minimum lease payments under non-cancelable operating leases at June 30, 2002 were as follows (in thousands):

     As of June 30, 2002, we had unconditional purchase order commitments of approximately $ 5.0 million for wafers and chipsets.

     On April 13, 2000, our Board of Directors approved an extension to April 30, 2001 of the $20 million stock repurchase program, originally approved in April 1998. During fiscal years 2001, 2000, and 1999, 734,000, 680,000 and 161,500 shares of common stock were repurchased for $7.7 million, $6.2 million, and $0.9 million under this program, respectively.

     In October 1999, our Board of Directors authorized a one-year budget of $20.0 million allowing our President and executive officers to make equity investments in companies, with no more than $3.0 million in any one company or technology. As of June 30, 2002 cumulative purchases of investments totaled $14.7 million. Substantially all of these investments are in private companies developing technologies in areas in which we are focusing.

     On April 19, 2000, we and VIA Technologies, Inc. announced that we had agreed to resolve all pending litigation. We recognized $10.2 million in royalty revenue during the quarter ended December 31, 2000, offset by costs of $0.9 million, related to the litigation settlement with VIA Technologies Inc. The $10.2 million, which VIA agreed to pay us as part of the settlement of litigation, was related to products sold prior to March 31, 2000. We sued VIA because VIA did not pay royalties to us when the products were sold. We did not recognize the royalties in earnings until the disputes and litigation regarding our right to collect were settled in the quarter ended December 31, 2000.

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     As of June 30, 2002, the market value of our short-term investment in UMC was $61.7 million. In addition, we held $10.1 million in stock which was not available for resale as it is subject to certain contractual and other restrictions. We acquired the shares we hold in UMC as a result of a transaction we engaged in for the purpose of obtaining additional foundry capacity for our operations. In order to preserve our wafer capacity guarantee with UMC, there are certain limitations on our ability to sell the UMC shares. If our total shareholdings fall below one-half of their initial percentage of shares, our production capacity will be reduced by at least 50%, and depending on the interpretation of the foundry capacity agreement between the parties, our production capacity could be reduced by substantially more than 50%. In addition, one-third of the shares is subject to a two-year lock-up period in accordance with an investment agreement entered into with UMC. After a two-year period, one-fifth of the shares will be available for sale from the lock-up portion every six months. As of June 30, 2002, approximately 12.9 million shares are subject to this lock-up restriction. While we are an operating company and not in the business of investing, reinvesting, owning, holding or trading in securities, we do intend to monitor the advisability of disposing of our UMC stock and intend to sell all or part of the stock when it is in the best interests of our shareholders to do so.

     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.

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Factors That May Affect Our Results

We incurred an operating loss in fiscal 2002.

     We incurred an operating loss of $13.0 million in the fiscal year ended June 30, 2002. Future performance will substantially depend upon numerous factors, such as:

	•		whether there is improvement in PC sales, notebook and digital media sales in particular;
	•		timely introduction of new products and product enhancements to the marketplace;
	•		whether customers successfully incorporate our technologies into end products with high levels of customer acceptance;
	•		fluctuating price levels for our products.

     We are trying to expedite new product launchings and to control operating expenses. However, there is no guarantee that our efforts will be successful. Sales and marketing, product development and general and administrative expenses may increase as a result of shifts in the market place, our efforts in developing and marketing new products such as DPTV-3D™ and XP4™ and our need to respond to these shifts, which could result in the need to generate significantly higher revenue to achieve and sustain profitability.

We have had fluctuations in quarterly results in the past and will continue to do so in the future.

     We plan to control our operating expenses relating to any expansion of our sales and marketing activities, broadening of our customer support capabilities, development of new distribution channels, and any increase in our research and development capabilities. However, our quarterly revenue and operating results have varied in the past and may fluctuate in the future due to a number of factors including:

	•		uncertain demand in new markets in which we have limited experience;
	•		fluctuations in demand for our products, including seasonality;
	•		unexpected product returns or the cancellation or rescheduling of significant orders;
	•		our ability to develop, introduce, ship and support new products and product enhancements and to manage product transitions;
	•		new product introductions by our competitors;
	•		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;
	•		availability of foundry and assembly capacities;
	•		delay of joint development efforts due to unexpected market conditions; and
	•		length of sales cycle.

To be successful, we must continue to develop new products and to enhance our existing products.

     The graphics controller industry is characterized by rapidly changing technology, frequent new product introductions, changes in customer requirements and evolving industry standards. 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. Any return to profitability and long term success in the graphics business will depend on the introduction of successive generations of products in time to meet the design cycles as well as to specifications of PC 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

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introduce these new products, the new products may not achieve widespread market acceptance necessary to provide an adequate return on our investment.

We currently rely on a few key accounts for a significant portion of our revenue.

     To date, a limited number of customers have accounted for a significant portion of our revenue. Although our largest customers may vary from period-to-period, we anticipate that our operating results for any given period will continue to depend to a significant extent on large orders from a small number of customers. Our distributor and customer agreements generally are not exclusive, there is no obligation to renew agreements, and minimum purchases are generally not required. The significant terms of our agreements with distributors are as follows:

	•		The products are shipped by us to a distributor with terms of F.O.B. shipping point, with risk of loss transferring to the distributor upon delivery of the products by us to the common carrier.
	•		Payment terms are net 30-days.
	•		The distributors return privileges are in the form of stock rotation and warranty and return resulting from functionality and quality issues for one year.

We currently rely on certain international customers for a substantial portion of our revenue.

     Our revenues have historically been generated primarily from Asian customers, particularly customers in Taiwan, and Japan. While we intend to continue our marketing efforts to North American OEMs, we expect to be primarily dependent on international sales and operations, particularly in Taiwan, Japan and China, which are expected to constitute a significant portion of our sales in the future. 62% of our total sales for the year ending June 30, 2002 were indirectly and directly sold to Toshiba. There are a number of risks arising from our international business which could adversely affect future results, including:

	•		potentially longer accounts receivable collection cycles;
	•		import or export licensing requirements;
	•		potential adverse tax consequences; 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.

Intense competition exists in the market for graphics controllers.

     The graphics controller industry in the sub-$1,000 PC segment has experienced reduced margins due to a number of factors including: competitive pricing pressures, processing difficulties and rapid technological change. We anticipate that the discrete graphics controller demand from sub-$1,000 PC’s will continuously decrease in the future, while the demand for integrated graphics controllers will increase. Also, there is intense competition in the notebook graphics controller market. We compete in the notebook controller market with competitors such as ATI Technologies, NVIDIA Corporation, VIA/S3, and Intel. Therefore, to maintain our revenue and gross margin, we must develop and introduce on a timely basis new products and product enhancements and continually reduce our product cost. Our failure to do so would cause our revenue and gross margins to decline, which could have a materially adverse affect on our operating results.

     The market for graphics controllers is intensely competitive. Many of our current competitors in graphics have substantially greater financial, technical, sales, marketing and other resources, as well as greater name recognition and market share than we do. To remain competitive, we believe we must, among other things, invest significant resources in developing new products, including products for new markets, increasing the ability of our products to integrate various functions and enhancing quality product performance. If we fail to do so, our products may not compete favorably with those of our competitors, which could have a materially adverse affect on our revenue and future profitability. We are in the process of developing and introducing our next generation 3D graphics technology. The new technology, which we call XP4, will be used in both the discrete and integrated products. Our graphics product development strategy is to focus on a totally balanced design with consideration of not only high performance, but also low cost and low power consumption.

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Intense competition exist in the market for digital media products.

     We also plan to continue developing the next generation DPTV™ product as well as other advanced products for digital TV and digital STB for the digital television market in China, Japan, Korea and Taiwan. We believe the market for digital television will be competitive, and will require substantial research and development, sales and other expenditures to stay competitive in this market. In the digital television market our principal competitors are Toshiba, Philips Electronics, and Micronas AG. However, we believe that DPTV™ products will have a longer product life cycle than other current products. Therefore we expect to devote significant resources to the DPTV™ market even though competitors are substantially more experienced than we are in this market.

We are vulnerable to undetected product problems.

     Although we establish and implement test specifications, impose quality standards upon our suppliers and perform separate application-based compatibility and system testing, our products may contain undetected defects, which may or may not be material, and which may or may not have a feasible solution. We have experienced such errors in the past, and we cannot ensure that such errors will not be found from time to time in new or enhanced products after commencement of commercial shipments. These problems may materially adversely affect our business by causing us to incur significant warranty and repair costs, diverting the attention of our engineering personnel from our product development efforts and causing significant customer relations problems.

     In part due to pricing and other pressures in the PC graphics market and in the desktop market in particular, we are developing products for introduction in non-PC markets. However, there can be no assurance that we will be successful in eliminating undetected defects in these new products which may or may not be material.

We rely upon independent foundries to manufacture our products.

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

     We currently rely on a limited number of third-party foundries to manufacture our products either in finished form or wafer form. Generally, these foundries are not obligated to manufacture our products on a long term fixed price base; however, due to the company’s investment in one foundry, a certain level of guaranteed wafer capacity does exist. If we encounter shortages and delays in obtaining components, our ability to meet customer orders could be materially adversely affected.

     We have experienced delays in product shipments from a contract manufacturer in the past, which in turn delayed product shipments to our customers. Such delays often result in purchasing at a higher per unit product cost from other foundries or the payment of expediting charges so that we can obtain the required supply in a timely manner. We may in the future experience delays in shipments from foundries or other problems, such as inferior quality and insufficient quantity of product, any of which could materially adversely affect our business and operating results. There can be no assurance that these manufacturers will meet our future requirements for timely delivery of products of sufficient quality and quantity. The inability of our contract manufacturers to provide us with adequate supplies of high-quality products would cause a delay in our ability to fulfill orders while we obtain a replacement manufacturer and would have a material adverse effect on our business, operating results and financial condition.

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 graphics controller market may have a significant impact on the market price of our common stock.

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These conditions, as well as factors that generally affect the market for stocks in general and stocks in high-technology companies in particular, could cause the price of our stock to fluctuate from time to time.

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

     Our success depends to a significant degree upon the continued contributions of the principal members of our technical sales, marketing, engineering and management personnel, many of whom perform important management functions and would be difficult to replace. We particularly depend upon the continued services of our executive officers, particularly Frank Lin, our President and Chief Executive Officer, Dr. Jung-Herng Chang, Senior Vice President, Engineering, and Peter Jen, our Senior Vice President, Asia Operations and other key engineering, sales, marketing, finance, manufacturing and support personnel. 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 addition, we do not have “key person” life insurance policies covering any of our employees. In order to continue to expand our product offerings both in the U.S. and abroad, we must hire a number of research and development personnel. Hiring technical sales personnel in our industry is very competitive due to the limited number of people available with the necessary technical skills and understanding of our technologies. Our ability to continue to attract and retain highly skilled personnel will be a critical factor in determining whether we will be successful in the future. Competition for highly skilled personnel is intense, particularly in Northern California. We may also have difficulty hiring experienced and skilled engineers at our research and development facility in Taiwan and China. 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 graphics controller market is a highly competitive industry in which we, and most other participants, rely on a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures and licensing arrangements to establish and protect proprietary rights. The competitive nature of our industry, rapidly changing technology, frequent new product introductions, changes in customer requirements and evolving industry standards heighten the importance of protecting proprietary technology rights. Since the United States Patent and Trademark Office keeps patent applications confidential until a patent is issued, our pending patent applications may attempt to protect proprietary technology claimed in a third party patent application. Our existing and future patents may not be sufficiently broad to protect our proprietary technologies as policing unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly in foreign countries where the laws may not protect our proprietary rights as fully as U.S. law. Our competitors may independently develop similar technology, duplicate our products or design around any of our patents or other intellectual property. If we are unable to adequately protect our proprietary technology rights, others may be able to use our proprietary technology without having to compensate us, which could reduce our revenues and negatively impact our ability to compete effectively. We have filed a number of lawsuits to enforce our intellectual property rights or to determine the validity or scope of the proprietary rights of others. As a result of any such litigation, we could lose our proprietary rights and incur substantial unexpected operating costs. Any action we take to protect our intellectual property rights could be costly and could absorb significant management time and attention. In addition, failure to adequately protect our trademark rights could impair our brand identity and our ability to compete effectively.

We are currently 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.

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We are currently involved in such disputes with NeoMagic and others. See Part II, Item 1 (“Legal Proceedings”). In addition, we may in the future enter into agreements to indemnify our customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. Our pending litigation and any future litigation arising from claims asserting that our products infringe or may infringe the proprietary rights of third parties, whether the litigation is with or without merit, has been and may in the future be, time-consuming, resulting in significant expenses and diverting the efforts of our technical and management personnel. We do not have insurance against our alleged or actual infringement of intellectual property of others. These claims, if resolved adversely to us, could cause us to stop selling our products which incorporate the challenged intellectual property and could also result in product shipment delays or require us to redesign or modify our products or to enter into licensing agreements. These licensing agreements, if required, would increase our product costs and may not be available on terms acceptable to us, if at all. If there is a successful claim of infringement or we fail to develop non-infringing technology or license the proprietary rights on a timely basis, our business could be harmed.

The California energy crisis could lead to increasing operating expenses.

     We rely on the major Northern California public utility, Pacific Gas & Electric Company, or PG&E, to supply electric power to our headquarters facility in Sunnyvale, California. Due to problems associated with the deregulation of the power industry in California and shortages in wholesale electricity supplies, customers of PG&E may face increased electricity prices, power shortages and rolling blackouts. Increased energy prices will increase our operating expenses which will decrease our profits.

Natural disasters could limit our ability to supply products.

     Our primary suppliers are located in California and Taiwan, both active earthquake fault zones. These regions have experienced large earthquakes in the past and may experience them in the future. A large earthquake in any of these areas could disrupt our manufacturing operations for an extended period of time, which would limit our ability to supply our products to our customers in sufficient quantities on a timely basis, harming our customer relationships.

Future terrorist attacks may affect our business.

     We cannot guarantee that our business will be unaffected by terrorist attacks in the future. The impact and future effects of terrorism are currently uncertain, and we are unable to predict the future impact that terrorist attacks may have on our business and operations, the international markets in which we operate and the global economy in general.

Dilution of shareholders’ interest may occur.

     As part of our business strategy, we review acquisition and strategic investment prospects that would complement our current product offerings, augment our market coverage or enhance our technical capabilities, or that may otherwise offer growth opportunities. We are very aggressively seeking investment opportunities in new businesses, and we expect to make investments in and may acquire businesses, products or technologies in the future. In the event of any future acquisitions, we could issue equity securities which would dilute current stockholders’ percentage ownership.

     These actions could affect our operating results and/or the price of our common stock. Acquisitions and investment activities also entail numerous risks, including: difficulties in the assimilation of acquired operations, technologies or products; unanticipated costs associated with the acquisition or investment transaction; adverse effects on existing business relationships with suppliers and customers; risk associated with entering markets in which we have no or limited prior experience; and potential loss of key employees of acquired organizations.

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     We cannot assure that we will be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future, and our failure to do so could harm our business, operating results and financial condition.

Changes in our business organization could affect our operations.

     On January 18, 2000, our Board of Directors approved a spin-off of our Trident Technologies Inc. subsidiary and our Trident Multimedia Technologies (Shanghai) Co. Ltd. subsidiary. It is our belief that these subsidiaries will operate more efficiently if their operations were managed as independent entities. The Trident Technologies, Inc. subsidiary is developing the Liquid Crystal Display (“LCD”) panel video controller chip product. The Trident Multimedia Technologies (Shanghai) Co. Ltd. subsidiary is involved in the joint development with us of graphic and digital media chips, and will sell digital media chips as our sales representative in the China market. The operations of either of these entities may change, or may be combined with other parts of our overseas operations. Trident Technologies Inc. and Trident Multimedia Technologies (Shanghai) Co. Ltd. had total assets equal to $2.6 million and $2.1 million respectively, as of June 30, 2002. We currently own a majority interest in Trident Technologies, Inc. and a 100% interest in Trident Multimedia Technologies (Shanghai) Co. Ltd. The structure and timing of these spin-offs, and the nature of the operations at the time of spin-off will depend on a number of organizational, operational and marketing factors. We have not made all of the decisions necessary to complete these spin-offs, and the spin-offs may not occur in 2003. While we intend to structure the transactions in a manner to enhance our overall operations, the spin-offs will dilute the interests of our shareholders in the operations of the spun off entities and, particularly if the spin-offs do not increase their revenue and profitability, could adversely affect our financial results.

The performance of our equity investments is currently uncertain.

     We maintain an investment portfolio including minority equity investments in several publicly traded companies. Generally, these investments are made to more closely align our interests with those of potential strategic partners. The values of these investments are subject to market price volatility. We have also made investments in a number of privately held companies, many of which are in the early development stages. These investments are inherently risky as the market for the technologies or products they have under development are typically in the early stages and may never materialize. We have in the past incurred losses on our investments. In the future, we could further lose a portion of or our entire investment in these companies.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest rate risk

     We currently maintain our cash equivalents primarily in money market funds and highly liquid marketable securities. We do not have any derivative financial instruments. As of June 30, 2002, $21.2 million of our investments matured in less than three months. We will continue to invest a significant portion of our existing cash equivalents in interest bearing, investment grade securities, with maturities of less than twelve months. We do not believe that our investments, in the aggregate, have significant exposure to interest rate risk.

Exchange rate risk

     We currently have operations in the United States, Taiwan and China. The functional currency of all our operations is the U.S. dollar. Though some expenses are incurred in local currencies by our Taiwan and China operations, substantially all of our transactions are made in U.S. dollars, hence, we have minimal exposure to foreign currency rate fluctuations relating to our transactions.

     While we expect our international revenues to continue to be denominated predominately in U.S. dollars, an increasing portion of our international revenues may be denominated in foreign currencies in the future. In addition,

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we plan to continue to expand our overseas operations. As a result, our operating results may become subject to significant fluctuations based upon changes in exchange rates of certain currencies in relation to the U.S. dollar. We will analyze our exposure to currency fluctuations and may engage in financial hedging techniques in the future to attempt to minimize the effect of these potential fluctuations; however, exchange rate fluctuations may adversely affect our financial results in the future.

Investment risk

     We are exposed to market risk as it relates to changes in the market value of our investments in public companies. We invest in equity instruments of public companies for business and strategic purposes and we have classified these securities as available-for-sale. These available-for-sale equity investments, primarily in technology companies, are subject to significant fluctuations in fair market value due to the volatility of the stock market and the industries in which these companies participate. We have realized significant gains and losses on our equity investments. For the fiscal year ended June 30, 2000, we recognized a pre-tax gain on investments of $115.0 million, primarily related to a $117.0 million gain on receiving shares in UMC in exchange for shares we held in UICC, a private company. For the fiscal year ended June 30, 2001, we recognized a pre-tax loss of $77.8 million of which $76.4 million related to a decline in the market value of shares in UMC that we concluded was other-than-temporary. For the fiscal year ended June 30, 2002, we recognized a pre-tax loss of $40.3 million of our investments in public companies of which $40.0 million related to a decline in the market value of shares in UMC that we concluded was other-than-temporary. As of June 30, 2002, we had available-for-sale equity investments with a fair market value of $62.8 million including $61.7 million related to shares of UMC. Our objective in managing our exposure to stock market fluctuations is to minimize the impact of stock market declines to our earnings and cash flows. There are, however, a number of factors beyond our control. Continued market volatility, as well as mergers and acquisitions, have the potential to have a material impact on our results of operations in future periods.

     We are also exposed to changes in the value of our investments in non-public companies, including start-up companies. These long-term equity investments in technology companies are subject to significant fluctuations in fair value due to the volatility of the industries in which these companies participate and other factors. As of June 30, 2002 the balance of our long-term equity investments in non-public companies was $8.6 million.

Item 8. Financial Statements and Supplementary Data

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

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     None.

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PART III

Item 10. Directors and Executive Officers of the Registrant

     The information regarding directors required by this Item is incorporated by reference from the definitive proxy statement for the Company’s 2002 annual meeting of stockholders to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form (the “Proxy Statement”). Information relating to our executive officers is set forth in Part I of this report under the caption “Executive Officers of the Registrant.”

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

Item 11. Executive Compensation

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

Item 12. Security Ownership of Certain Beneficial Owners and Management

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

Item 13. Certain Relationships and Related Transactions

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

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PART IV

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

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

     (b)      Reports on Form 8-K:

None

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Report of Independent Accountants

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

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Trident Microsystems, Inc. and its subsidiaries at June 30, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
San Jose, California
July 23, 2002

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Trident Microsystems, Inc.
Consolidated Balance Sheet

				June 30,
(in thousands, except per share data)				2002				2001
ASSETS
Current assets:
	Cash and cash equivalents			$	21,193			$	26,677
	Short-term investment – UMC				61,672				52,708
	Short-term investments – other				1,153				791
	Accounts receivable, net				4,284				9,247
	Inventories				3,190				10,669
	Deferred income taxes				1,247				1,656
	Prepaid expenses and other current assets				1,953				3,481
		Total current assets			94,692				105,229
Property and equipment, net					4,710				3,559
Investment – UMC					10,063				26,005
Investments – other					8,642				11,996
Other assets					417				630
		Total assets		$	118,524			$	147,419
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	6,709			$	11,829
	Accrued expenses				10,201				13,169
	Income taxes payable				3,980				1,040
		Total current liabilities			20,890				26,038
Deferred income taxes – non-current					6,338				14,947
Minority interest in subsidiary					640				1,068
		Total liabilities			27,868				42,053
Commitments and contingencies (Notes 12 and 13)
Stockholders’ equity:
	Common stock, $0.001 par value; 30,000 shares authorized; 15,548 and 15,211 shares issued and outstanding				16				15
	Additional paid-in capital				56,303				55,091
	Treasury stock, at cost, 1,950 shares				(17,952	)			(17,952	)
	Retained earnings				39,345				74,996
	Accumulated other comprehensive income (loss)				12,944				(6,784	)
		Total stockholders’ equity			90,656				105,366
		Total liabilities and stockholders’ equity		$	118,524			$	147,419

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

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Trident Microsystems, Inc.
Consolidated Statement of Operations

			Year Ended June 30,
(in thousands, except per share data)			2002				2001				2000
Revenues
	Product sales		$	105,766			$	118,959			$	117,682
	Royalty and license revenue			—				9,267				5,000
				105,766				128,226				122,682
Cost of revenues				82,970				89,346				82,434
Gross profit				22,796				38,880				40,248
Research and development expenses				22,218				20,031				27,555
Selling, general and administrative expenses				13,584				16,455				16,899
Income (loss) from operations				(13,006	)			2,394				(4,206	)
Gain (loss) on investments				(42,715	)			(77,808	)			114,984
Interest income, net				486				1,712				2,046
Income (loss) before provision for income taxes				(55,235	)			(73,702	)			112,824
Provision (benefit) for income taxes				(19,584	)			(30,062	)			44,717
Net income (loss)			$	(35,651	)		$	(43,640	)		$	68,107
Basic income (loss) per share			$	(2.66	)		$	(3.33	)		$	5.07
Shares used in computing basic per share amounts				13,419				13,087				13,423
Diluted income (loss) per share			$	(2.66	)		$	(3.33	)		$	4.43
Shares used in computing diluted per share amounts				13,419				13,087				15,360

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

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Trident Microsystems, Inc.
Consolidated Statement of Stockholders’ Equity