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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

TRIDENT MICROSYSTEMS, INC.

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

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

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

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

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

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

          Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act. Yes [  ] No [ X ]

          The aggregate market value of the Common Stock held by non-affiliates of the Registrant, based upon the closing price of the Common Stock on December 31, 2002 ($3.70 per share), as reported on the NASDAQ National Market was approximately $32,168,214. 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, 2003, was 14,427,850.

          Part III incorporates by reference from the definitive proxy statement for the registrant’s 2003 annual meeting of stockholders to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form.

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TABLE OF CONTENTS

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PART I

Item 1. Business

          Since 1987 we have designed, developed and marketed very large-scale integrated circuits (“IC”) for videographics and multi-media products for the desktop personal computer (“PC”) market. In 1995 we began design and development of videographic IC’s for the notebook PC market which became our largest selling product area through 2002. In 2000, we restructured our organization into two business units, the Graphics Division, which concentrated primarily on videographics for the desktop and notebook PC market, and the Digital Media Division (DM), which designed and developed integrated circuits for digitally processed television (DPTV) for the consumer television market.

          On June 12, 2003 we announced that the assets of our Graphics Division will be acquired by XGI Technology, Inc. (XGI), the graphics unit previously spun off from Silicon Integrated System Corp (SiS). XGI will be capitalized through a cash infusion from outside investors. This transaction closed on July 25, 2003 and we received a 30% equity interest in XGI. In a separate transaction, the assets of our Digital Media Division were merged with our subsidiary, Trident Technologies, Inc. (TTI) in Taiwan, on August 25, 2003 to strengthen and extend our digitally processed television business. As a result of these transactions, we will be able to focus our resources on our restructured DM business as well as focus on other challenges and opportunities in the rapidly growing digital media market. After the close of this transaction we held a 90% equity interest in TTI.

          We have been investing in and experiencing success in the digital television market for several years. During that time, the digital television industry has grown rapidly and we believe that this industry is on the verge of a further, significant growth phase. We undertook our restructuring to allow us to build upon our prior success in this market by focusing our resources primarily on digital media products. We are optimistic that this will position Trident for a return to profitability.

          As a result of the restructuring, we expect to increase the resources devoted to the digital television market, but still reduce our overall expense level. We expect to experience additional benefits from focusing on digital media products. These include a broader customer base and, consequently, less dependence on a limited group of customers, as well as a longer product life and longer design cycle for our products. We believe these and other factors will position Trident for success in the market and for a more effective business model than the one we operated in the graphics industry.

          References to “we,” “Trident,” or the “Company” in this report refer to Trident Microsystems, Inc. and its subsidiaries, including Trident Technologies, Inc. (TTI) which was 63% owned as of June 30, 2003.

Markets and Products

          As we go forward into fiscal year 2004, our principle design, development and marketing effort will focus primarily on our Digital Media products. Our Digital Media Division accounted for 48% and 6% of total revenues for fiscal years ended June 30, 2003 and 2002, respectively. We plan to continue developing the next generation DPTV™ product as well as other advanced products for digital TV and digital STB for the world wide digital television market including specifically China, Japan, Korea and Taiwan. Designed for system design flexibility, and high integration level, our goal is for users of our single chip DPTV™ Video Processors(s) to benefit from feature rich devices at competitive prices. The DPTV video processor converts analog TV into an advanced progressive digital quality television. While we have developed valuable experience with digital video television, following the acquisition of our Graphics Division assets, we anticipate this market to generate substantially all of our revenues. However, there can be no guarantee that our digital television products will be accepted by the market or increase our revenues or profitability.

Current Digital Media Products:

          We have been developing products for other digital media applications, such as set top boxes and progressive television sets since 1999. The DPTV market in particular has begun to emerge as a high volume market for these products. Our DPTV products are designed to optimize and enhance video quality for various display

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devices, such as Cathode Ray Television (“CRTTV”), Liquid Crystal Display Television (“LCDTV”), Plasma Display Panel (“PDP”), Projection TV, Liquid Crystal Display projection.

          DPTV™3D. DPTV™3D integrates an advanced 3-D digital comb video decoder for NTSC, PAL, and SECAM formats. Based on Trident’s patented proprietary Unified Memory Architecture (UMA), DPTV™-3D digital comb video decoder does not require extra frame buffers for performing 3D comb filtering. With film-mode recovery, DPTV™-3D can accurately detect the frame rates of incoming video sources, and then correctly restore the video source to the original film mode sequences in play back. The motion adaptive de-interlacing and edge-smoothing feature of the DPTV™-3D further refines the video display quality. The DPTV™ chip enables a SDTV signal to display in Picture-In-Picture mode, Picture-Out-Picture mode, and 16:9 or 4:3 aspect ratio modes. DPTV™-3D supports non-linear scaling in panorama mode to ensure the most natural picture aspect ratio for the viewers. DPTV™-3D’s integrated 3-D digital comb video decoder has a built-in VBI circuit for closed captioning and V-chip for parental control that is EIA 608 compliant. Furthermore, DPTV™-3D’s graphic-based On-Screen Display provides the most user-friendly and graphic-oriented TV menu control interface.

          DPTV™MV. DPTV^TMMV is a derivative of DPTV3DP. It has all the features of DPTV-3D, except that DPTV^TMMV’s integrative video decoder is 2D comb filter video decoder. The DPTV™MV is the main component in the premier TV chipset solution on the market. Designed for maximum system design flexibility, users of Trident’s single chip DPTV^TM Video Processor(s) will benefit from one of the most feature rich devices available while maintaining a price competitive advantage over the existing solution(s). The DPTV^TM-MV converts today’s analog TV into an advanced progressive TV quality. Decoded HDTV digital video streams can be formatted to different output display modes by DPTV. Trident’s DPTV^TM product family propels the corporate mission of Digital Media For The Masses by delivering tomorrow’s digital media technology to today’s consumer.

          DPTV™3DPRO. The DPTV™3DPRO is Trident’s third generation DPTV single-chip mixed-signal video processor product. It integrates a high performance, multi-region 3D digital comb video decoder, a motion and edge adaptive de-interlacer with film mode recovery, scan rate and frequency conversion circuitries, and a graphical-based OSD for full support of today’s premier digital TV applications. DPTV™3DPRO uses Trident’s patented Unified Memory Architecture (UMA), which allows both 3D comb filter video decoding and video enhancement processing to share the same frame buffer memory made up of high-speed and cost-effective PC graphic memory. Designed for maximum system design flexibility, DPTV™3DPRO integrates all video interfaces to support hybrid digital and analog TV chassis applications. DPTV™3DPRO is ideal for applications in Digital TVs, Plasma TVs, LCD TVs, and Set-top boxes, where high precision video processing and scan rate frequency conversion are required. The users of Trident’s single chip DPTV™ video processor(s) will benefit from many features available while maintaining a price competitive advantage over the existing solution(s).

          PANELTV™3DPRO. The PANELTV™3DPRO is Trident’s third generation DPTV single-chip mixed-signal video processor product. It integrates a high performance, multi-region 3D digital comb video decoder, a motion and edge adaptive de-interlacer with film mode recovery, scan rate and frequency conversion circuitries, and a graphical-based OSD for full support of today’s premier digital TV applications. PANELTV™3DPRO uses Trident’s patented Unified Memory Architecture (UMA), which allows both 3D comb filter video decoding and video enhancement processing to share the same frame buffer memory made up of high-speed and cost-effective PC graphic memory. Designed for maximum system design flexibility, PANELTV™3DPRO integrates all video interfaces to support hybrid digital and analog TV chassis applications. The PANELTV™3DPRO uses a 320-pin BGA package allowing multiple video data input and output configurations. PANELTV™3DPRO is ideal for applications in Digital TVs, Plasma TVs, LCD TVs, and Set-top boxes, where high precision video processing and scan rate frequency conversion are required. The users of Trident’s single chip DPTV™ video processor(s) will benefit from many features available while maintaining a price competitive advantage over the existing solution(s).

          PANELPRO™-MM. The PanelPro™-MM is an advanced high-quality controller chip that designed with an external CPU for maximum system design flexibility, users of Trident’s single chip PanelPro™-MM Video Processor will benefit from one of the most feature rich devices available while maintaining a price competitive advantage over the existing solution(s). The PanelPro™-MM integrates - Clamping, pre-amp, ADC, sync separator, scaling engine, and external SDRAM/SGRAM interface - to deliver a high quality, high integration controller for the mainstream LCD monitors with dual (VGA analog and digital) interfaces plus video inputs up to D4. The chip handles dual 24-bit digital RGB port, SYNC input, and separated 8-bit /16-bit digital port for video decoder connection. The SYNC input interfaces directly with any VGA/SVGA/XGA/UXGA graphics board or any other compatible source. The PanelPro™-MM accepts video signals from both 8/16-bit YUV CCIR601 or 8-bit CCIR656 formats from a video decoder and receives digital signals from an external DVI transmitter. It delivers 48-bit digital

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data and all essential control signals for driving an 8-bit or 6-bit TFT LCD panel. Frame rate conversion is also supported with external SDRAM / SGRAM.

          TVX2. Trident’s TVX2 is a versatile NTSC/PAL TV encoder chip equipped with an advanced, programmable multi-tap TV de-flicker and UV chroma filter that provides sharp text, superb graphics, and vivid video quality while substantially reducing dot crawl and color bleeding for computer images displaying on TV. TVX2 enables Entertainment PC applications such as 3D gaming, web TV, video conferencing, etc. to be displayed on television.

Products in Development:

          Trident’s product market strategy is to continually provide the most integrated video processor solution to the market. Trident is the world’s first and in many cases, the only company to integrate high precision ADC, advanced 3D comb filter video decoder, de-interlacer, and scaler into a single chip. We intend to lead the industry in innovations and we are planning introductions of the next generation of DPTV chips in the current fiscal year.

          Trident and TrueVideo are registered trademarks DPTV™3D, DPTV™MV, DPTV™3DPRO, PANELTV™3DPRO, PANELPRO-MM™, and are trademarks of the Company as of June 30, 2003. Other trademarks used in this report are the property of their respective owners.

Graphics Products:

          As a result of the sale of the assets of our Graphics Division, we will no longer produce graphics chips for the PC market. Graphics chips accounted for the majority of our revenue in fiscal 2003 and all prior periods.

Sales, Marketing and Distribution

          We sell our products primarily through direct sales efforts. Our digitally processed television products are marketed primarily from our sales offices in Taipei, Taiwan; Shanghai, China; and Sunnyvale, California. Our graphics products were marketed from our 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.

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

          Our digitally processed television manufacturers include leading manufacturers of TVs in China, Taiwan, Japan 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 2003 our desktop customers were 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 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 were primarily worldwide brandname notebook PC manufacturers and Taiwanese OEM/ODM (original equipment manufacturers/original design manufacturers) notebook PC manufacturers. Whether

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manufactured by the PC company or an OEM/ODM, the notebook product was distributed primarily through brandname sales channels. With the merging of the assets of our Graphics Division into XGI, technical support required by these customers will be supplied by XGI.

          During fiscal year 2003, we generated 98% 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. A small number of customers frequently account for a majority of our sales in any quarter. However, sales to any particular customer may fluctuate significantly from quarter to quarter. Fluctuations in sales to key customers may adversely affect our operating results in the future. For additional information on foreign and domestic operations, see Note 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 Technology, Inc. will provide manufacturing operations for our Digital Media Business Unit after the closing of our restructuring in August 2003.

          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 73.8 million shares as of June 30, 2003 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 are 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, 2003, approximately 6.4 million shares with a carrying value of $4.4 million 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 2003, 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 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

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reduced control over delivery schedules, manufacturing yields, quality assurance and costs. We often conduct business with foundries by delivering written purchase orders specifying the particular product ordered, quantity, price, delivery date and shipping terms and, therefore, except as set forth in the above-mentioned contracts or agreements, such foundries are not obligated to supply products to us for any specific period, in any specific quantity or at any specified price, except as may be provided in a particular purchase order.

          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 $21.6 million, $22.2 million and $20.0 million on Company sponsored research and development activities during fiscal 2003, 2002 and 2001, respectively. We have conducted substantially all of our product development in-house and as of June 30, 2003 our staff of research and development personnel equaled 259, which included 109 employees under the graphics division.

Competition

          The markets in which we compete are highly competitive and we expect that competition will increase. The principal factors of competition in our markets include, but are not limited to price, performance, the timing of new product introductions by us and our competitors, product features, level of integration of various functions, quality and customer support. In the digital television market our principal competitors are Toshiba, Philips Electronics, Micronas AG, Pixelworks, Inc. and Genesis Microchip, Inc. Other smaller competitors supplying LCDTV chip sets may arise in the future. Certain of our current competitors and many potential competitors have significantly greater technical, manufacturing, financial and marketing resources than we have.

          We plan to continue developing the next generation DPTV™ product as well as other advanced products for digitally processed television and digital set top boxes for the digitally processed television market in China, Japan, Korea and Taiwan. We believe the market for digital television will be competitive, and will require substantial research and development, sales and other expenditures to stay competitive in this market. 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. However, these efforts may not be successful.

International Operations

          Our wholly-owned subsidiary, Trident Far East, maintains offices in Hong Kong, 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 August 25, 2003, the assets of our Digital Media Division, which were previously operated under the U.S. head office, were merged with our subsidiary, Trident Technologies, Inc. (TTI) in Taiwan, to strengthen and extend our digitally processed television business.

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          During fiscal years 2003 and 2002, all of our DPTV sales occurred in Asia. During fiscal year 2003, 2002 and 2001, sales to OEM, ODM and adapter card customers in Asia accounted for approximately 97% of our net sales of graphic chips. We anticipate that sales to customers in Asia will continue to account for a substantial percentage of revenues. In addition, the foundries that manufacture our products are located in Asia. Due to this concentration of international sales and manufacturing capacity in Asia, we are subject to the risks of conducting business internationally, including unexpected changes in regulatory requirements, fluctuations in the U.S. dollar which could increase the sales price in local currencies of our products in foreign markets, tariffs and other barriers and restrictions, and the burdens of complying with a wide variety of foreign laws. In addition, we are subject to general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships, in connection with our sales, support and third-party fabrication efforts in Hong Kong, Taiwan and elsewhere. Also, political instability or significant changes in economic policy could disrupt our operations in foreign countries or result in the curtailment or termination of such operations. While we have not experienced any material adverse effects on our operations as a result of other regulatory or geopolitical factors, there can be no assurance that such factors will not adversely impact our operations in the future or require us to modify our current business practices.

Intellectual Property

          We attempt to protect our trade secrets and other proprietary information primarily through agreements with customers and suppliers, proprietary information agreements with employees and consultants and other security measures. Although we intend to protect our rights vigorously, there can be no assurance that these measures will be successful. We have obtained various digital video processing technology patents with other patents pending. Furthermore, there can be no assurance that others will not independently develop similar or competing technology or design around any patents that may be issued. While we will maintain certain rights and obligations with respect to our graphics technology, substantially all such rights for the PC graphics field were transferred as part of the XGI transaction.

          The semiconductor industry is characterized by frequent litigations regarding patent and other intellectual property rights. From time to time, we have received notices claiming that we have infringed third-party patents or other intellectual property rights. To date, licenses generally have been available to us where third-party technology was necessary or useful for the development or production of our products. However, we have been in litigation with NeoMagic Corporation which 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.

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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

          For fiscal years ended June 30, 2003, 2002 and 2001, the digital media segment accounted for $25.6 million, $6.2 million and $2.8 million in revenues, respectively. As a percentage of revenues for fiscal years ended June 30, 2003, 2002 and 2001, the digital media segment accounted for 48%, 6% and 2%, respectively. The digital media segment had an operating income of $1.9 million for the fiscal year ended June 30, 2003, and an operating loss of $3.9 million for the fiscal year ended June 30, 2002.

Employees

          As of June 30, 2003, we had 257 full time employees in our Digital Media division, including 150 in research and development, 31 in product testing, quality assurance and operations functions, 41 in marketing and sales and 35 in finance, human resources, and administration. As of June 30, 2003, our Digital Media division had 45 employees in the United States, 149 in Shanghai, China, 46 in Taiwan and 17 in Hong Kong. Our future success will depend in great part on our ability to continue to attract, retain and motivate highly qualified technical, marketing, engineering and management personnel. Our employees are not represented by any collective bargaining agreements, and we have never experienced a work stoppage. We believe that our employee relations are good.

Available Information

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

          You may obtain a free copy of our annual reports on Form 10-K and quarterly reports on Form 10-Q and any amendments to these reports on the day of filing with the SEC or on our website on the World Wide Web at http://www.tridentmicro.com. We do not make available on our website current reports on Form 8-K because we state on our website the location where such filings can be found on the SEC website and on http://www.FreeEdgar.com. You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports by contacting the Investor Relations Department at our corporate offices by calling 408 991-8090 or by sending an e-mail message to [email protected] .

Item 2. Properties

          We lease a building of approximately 34,000 square feet on 1090 East Arques Avenue in Sunnyvale, California, pursuant to a lease which expires in June 2006. This building is used as our headquarters and includes development, marketing and sales, and administrative offices. Our other leases include a 6,000 square-foot office in Hong Kong, China, for the Hong Kong branch office of our Trident Far East subsidiary, 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-

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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. Also, in fiscal year 2003, we leased a 500 square-foot sales office in Houston, Texas for marketing our graphics products.

Item 3. Legal Proceedings

          On December 14, 1998, NeoMagic Corporation (“NeoMagic”) filed a patent infringement action against us in the United States District Court for the District of Delaware, Case No. 98-CV-699. On January 25, 1999, we answered the complaint and filed a counterclaim alleging violation of Section 2 of the Sherman Act. The antitrust counterclaim was stayed by the Court pending the outcome of NeoMagic’s patent infringement claim. The parties filed motions for summary judgment concerning infringement on December 23, 1999 and January 11, 2000. The Court issued its order regarding patent claim construction on May 8, 2000. Following additional briefing on the issue of infringement, on February 1, 2001, the Court issued its second order regarding patent claim construction and granted our motion for summary judgment of non-infringement. On February 28, 2001, NeoMagic filed its notice of appeal of the Court’s February 1, 2001 order to the United States Court of Appeal for the Federal Circuit. On April 5, 2001, we filed a motion to lift the stay on its antitrust counterclaim. On September 7, 2001, the District Court granted our motion to lift the stay on our antitrust counterclaim and discovery on the counterclaim is proceeding.

          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 because there is no final appealable order and our antitrust counterclaim remained pending. On August 1, 2001, the Federal Circuit granted our motion and dismissed NeoMagic’s appeal.

          On August 3, 2001, NeoMagic requested that the United States District Court of Delaware enter an order under the Federal Rules of Civil Procedure Rule 54(b) certifying the February 1, 2001 summary judgment order as a final judgment. On August 27, 2001, the Court certified the February 1, 2001 order as a final judgment, and on August 29, 2001, NeoMagic again filed its Notice of Appeal with the United States Court of Appeals for the Federal Circuit. NeoMagic filed its brief with the Federal Circuit on October 15, 2001 and we filed our reply brief on November 23, 2001. Argument was heard before the Federal Circuit on March 6, 2002.

          On April 17, 2002, the Federal Circuit issued an Order affirming-in-part and vacating-in-part the District Court’s summary judgment of non-infringement. The Federal Circuit upheld the District Court’s summary judgment determination as to non-infringement of U.S. Patent No. 5,650,955 in favor of us, but vacated-in-part the District Court’s summary judgment determination as to non-infringement of U.S. Patent No. 5,703,806, remanding the case back to the District Court for additional briefing on the issue.

          The case was assigned to Magistrate Judge Thynge. The parties filed opening briefs in connection with claim construction and cross motions for summary judgment. Oral argument on these motions occurred on November 5, 2002. The Court issued its Order on May 9, 2003, granting our motion for summary judgment of non-infringement and denying NeoMagic’s motion for summary judgment of infringement. On May 21, 2003, we filed a motion for clarification requesting that the Court clarify its Memorandum Opinion by restating the final paragraph on page 31 of the Opinion. On May 23, 2003, NeoMagic filed a motion for reconsideration of the Court’s May 9, 2003 Order. On July 30, 2003, the Court issued an Order denying NeoMagic’s motion for reconsideration of the Court’s May 9, 2003 summary judgment decision and granting our motion for clarification of the Court’s May 23, 2003 summary judgment decision. NeoMagic has asked us to stipulate to an order pursuant to Federal Rule of Civil Procedure Rule 54(b) certifying the July 30, 2003 Order as a final judgment and allowing immediate appeal of this decision to the Federal Circuit. We anticipate that NeoMagic will make a motion under Rule 54(b) if we decline to stipulate, and that such motion most likely would be granted, allowing immediate appeal of the July 30 Order granting us summary judgment of non-infringement.

          On April 10, 2003, Trident Microsystems (Far East) Ltd. filed suit against iGlobe Partners Fund, L.P. (“iGlobe Fund”), and certain related persons and entities, in the Superior Court of the State of California, County of Santa Clara. Trident Microsystems (Far East) Ltd. is a wholly-owned subsidiary of Trident Microsystems, Inc. In the lawsuit, Trident and other limited partners of the iGlobe Fund seek to rescind their multi-million dollar investment in the iGlobe Fund, or alternatively, to be excused from satisfying past and future capital calls of the iGlobe Fund. A tentative settlement of the suit has been reached by the parties.

          The results of any litigation matters are inherently uncertain. In the event of an adverse decision in the described legal actions or disputes, or any other related litigation with third parties that could arise in the future with

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respect to patents or other intellectual property rights relevant to our products, we could be required to pay damages and other expenses, to cease the manufacture, use and sale of infringing products, to expend significant resources to develop non-infringing technology or to obtain licenses to the infringing technology. We cannot make any assurance that these matters will not materially and adversely affect the Company’s business, financial condition, operating results, or cash flows.

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

          None.

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Executive Officers of the Registrant

          As of June 30, 2003, the executive officers of the Company, who are elected by and serve at the discretion of the Board of Directors, were as follows:

          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, 2003, there were approximately 113 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

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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 effects of our recent restructuring on our business and future financial results,
•		our prospects for success in the digital television market and its effect on our future financial results,
•		demand for and trends in revenue for our products,
•		the timing of availability and functionality of products under development,
•		future prospects for the digital television market,
•		trends in average selling prices,
•		the percentage of export sales,
•		outcome of pending litigation,
•		future investments and/or acquisitions,
•		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

          The PC marketplace is characterized by intense price competition and rapid technological changes as leading PC systems manufacturers compete among themselves and other PC clone makers for market share. It is in this difficult environment that we determined that it was in the best interest of our stockholders to merge our Graphics Division with another high tech company to improve the Graphics Division’s competitive situation and provide it with additional resources. On June 12, 2003 we announced that the assets of our Graphics Division will be acquired by XGI Technology, Inc. (XGI), the graphics unit previously spun off from Silicon Integrated System Corp (SiS). XGI will be capitalized through cash infusion from outside investors. This transaction closed on July 25, 2003 and we received a 30% equity interest in XGI. In a separate transaction, the assets of our Digital Media Division were merged with our subsidiary, Trident Technologies, Inc. (TTI) in Taiwan, on August 25, 2003 to strengthen and extend the company’s digitally processed television business. As a result of these transactions, we will be able to focus our resources on our restructured DM business as well as focus on other challenges and opportunities in the rapidly growing digital media market. After the close of this transaction we held a 90% equity interest in TTI.

          We have been investing in and experiencing success in the digital television market for several years. During that time, the digital television industry has grown rapidly and we believe that this industry is on the verge of a further, significant growth phase. We undertook our restructuring to allow us to build upon our prior success in this market by focusing our resources primarily on digital media products. We are optimistic that this will position Trident for a return to profitability.

          As a result of the restructuring, we expect to increase the resources devoted to the digital television market, but still reduce our overall expense level. We expect to experience additional benefits from focusing on digital media products. These include a broader customer base and, consequently, less dependence on a limited group of customers, as well as a longer product life and longer design cycle for our products. We believe these and other factors will position Trident for success in the market and for a more effective business model than the one we operated in the graphics industry.

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Recent Developments

          In September 2003, we entered into an agreement with an independent venture capital fund to sell approximately one-third of our equity investment in XGI for cash of approximately $7.4 million. Upon consummation of the transaction, we will hold approximately 20% equity interests in XGI.

          In September 2003, we entered into an agreement with UMC and its designees to sell approximately 7% equity interests in our subsidiary, TTI, for cash of approximately $2.7 million. Upon consummation of the transaction, we will hold approximately 83% equity interests in TTI.

Critical Accounting Policies, Judgments and Estimates

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

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

          We recognize product sales as revenue, generally upon shipment, when persuasive evidence of an arrangement exists, title and risk of loss pass to the customer, the price is fixed or determinable, and collection of the receivable is reasonably assured. A reserve for sales returns is established based on historical trends in product returns. Sales to resellers are generally recognized upon shipment to end user customers.

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

          We 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 currently evaluate our long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.

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Factors considered important that could result in an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of acquired assets or the strategy for the our business, significant negative industry or economic trends, and/or a significant decline in the our stock price for a sustained period of time.

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

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, 2003, 2002 and 2001:

Revenues

          Total revenues decreased in fiscal 2003 to $52.8 million, or 50%, from $105.8 million reported in fiscal 2002. The decrease in net product sales was primarily due to the decrease in unit volume shipments of desktop and notebook PC products in fiscal 2003. Sales of digitally processed television products represented approximately $25.6 million or 48% of total revenues in fiscal 2003 as compared to approximately $6.2 million or 6% in fiscal 2002. Sales of notebook products of $25.2 million were approximately 47% of total revenues in fiscal 2003 as compared to $96.2 million or 91% of total revenues in fiscal 2002. Sales of GUI desktop products were approximately $1 million or 2% of total revenues in fiscal 2003 as compared to approximately $2.6 million or 2% in fiscal 2002.

          Net product sales decreased in fiscal 2002 to $105.8 million, or 11%, 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 $96.2 million were approximately 91% 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 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. Royalty and license revenue of $9.3 million was recorded in fiscal 2001 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.

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          Sales to Asian customers, primarily in Japan, Hong Kong, Taiwan and China accounted for 98% of net sales in fiscal 2003. Sales to Asian customers, primarily in Japan and Taiwan, accounted for 99% of net sales in fiscal 2002. Sales to two customers, Inno Micro, which is a supplier of Toshiba, and Skyworth, a television original equipment manufacturer located in China, accounted for approximately 43% and 11% of net sales, respectively, for fiscal 2003. 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. Substantially all of the sales transactions were denominated in U.S. dollars during all periods. In fiscal years 2003 and 2002 our sales to distributors were negligible. Sales to distributors represented 30% of net sales during the fiscal year ended June 30, 2001.

          On June 12, 2003, we announced a significant restructuring of our operations involving both our Graphics and Digital Media businesses. The assets of our Graphics Division were acquired by XGI Technology, Inc. (XGI), the graphics unit previously spun off from Silicon Integrated System Corp (SiS). XGI was capitalized through a cash infusion from outside investors. This transaction closed on July 25, 2003 and we received a 30% equity interest in XGI. In a separate transaction, the assets of our Digital Media Division were merged with our subsidiary, Trident Technologies, Inc. (TTI) in Taiwan, on August 25, 2003 to strengthen and extend our digital TV business. As a result of these transactions, we will be able to focus our resources on our restructured DM business as well as focus on other challenges and opportunities in the rapidly growing digital media market. We believe that this restructuring will position us as one of the leading contenders in the emerging digital media space and put us on track to return to profitability.

Gross Margin

          Gross margin as a percentage of total revenues increased to 28% in fiscal 2003 from 22% in fiscal 2002. The 6% increase was primarily due to an increase in the sales of DPTV chips which have higher margins than PC graphics products. Gross margin as a percentage of total revenues 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. 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.

Research and Development

          Research and development expenses decreased to $21.6 million in fiscal 2003 from $22.2 million in fiscal 2002, and increased from $20.0 million in fiscal 2001. Research and development expenses as a percentage of total revenues were 41%, 21% and 15% in fiscal 2003, 2002 and 2001, respectively. The decrease in absolute dollars spent in fiscal 2003 was primarily the result of decreased spending on research and development relating to graphics products. 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 the XP4™ graphics chip and our digitally processed television chip DPTV™-3D.

          We are currently planning 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 $11.9 million in fiscal 2003 from $13.6 million in fiscal 2002 and $16.5 million in fiscal 2001. Selling, general and administrative expenses as a percentage of revenues were 23%, 13% and 13% in fiscal 2003, 2002 and 2001, respectively. Selling expenses were $6.5 million in fiscal 2003 as compared to $8.5 million and $7.9 million in fiscal 2002 and 2001, respectively. General and administrative

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expenses were $5.4 million in fiscal 2003 as compared to $5.1 million and $8.6 million in fiscal 2002 and 2001, respectively. Selling cost decreased in fiscal 2003 due to declining sales in graphics products. Selling costs increased in fiscal 2002 from 2001 due to higher sales representative commissions for our integrated notebook products. General and administrative expenses increased in fiscal 2003 compared to fiscal 2002 primarily due to an increase in consulting and legal expenses primarily relating to our restructuring activities. General and administrative expenses decreased in fiscal 2002 compared to fiscal 2001 primarily due to a decrease in legal expenses.

Interest and Other Income(Expense) , Net

          Interest and other expense, net was $269,000 in fiscal 2003 representing an expense of $503,000 partially offset by interest income of $234,000. Interest income declined in fiscal 2003 due to lower cash balances and lower applicable interest rates as compared to the corresponding period in fiscal 2002. 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. The amount of interest income earned by us varies directly with the amount of our cash and cash equivalents balances and prevailing interest rates.

Provision/benefit for Income Taxes

          For fiscal 2003 we recorded a provision for income taxes of $1.0 million to increase our valuation allowance and reduce the carrying amount of our net deferred tax asset to zero. Based on our assessment of all available evidence, including consideration of historical and future estimated taxable losses, we concluded that it was more likely than not our net deferred tax asset was would not be realized. The net deferred tax asset arose during fiscal 2003 due to decreases in our deferred tax liabilities associated with cumulative unrealized holding gains on our UMC investment.

          We recorded a benefit for income taxes of $19.6 million 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 UMC investment.

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 represented 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, 2003, we owned approximately 73.8 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 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.

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          During the fiscal year ended June 30, 2003, we also recognized net impairment loss on investments other than UMC totaling $5.0 million as follows (in thousands):

During the year ended June 30, 2003, we recognized a gain on investment of $167,000 resulting from the additional shares received upon the achievement of certain milestones during the year ended June 30, 2003.

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

          See Part II, Item 8, 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, 2003, our principal sources of liquidity included cash and cash equivalents of $5.1 million, decreased from $21.2 million at June 30, 2002. In fiscal year 2003, $16.8 million of cash was used by operations, as compared to $4.1 million in fiscal year 2002. The cash used by operations was primarily due to the operating loss and a decrease in income taxes payable, partially offset by a decrease in accounts receivable, prepaid expenses and an increase in accounts payable.

          Gross Accounts receivable decreased to $4.9 million at June 30, 2003 from $6.4 million at June 30, 2002. The decrease in accounts receivable was primarily due to a decrease in revenues in fiscal year 2003.

          Prepaid expenses declined to $734,000 at June 30, 2003 from $2.0 million at June 30, 2002. The decline was primarily due to a decrease in prepaid royalties, prepaid software maintenance and the repayment of an other receivable.

          The increase of $1.8 million in assets held for sale represents inventory of $1.7 million and fixed assets of $100,000 that represents assets to be transferred to XGI at the close of the merging transaction of the assets of our Graphics Division with XGI.

          Accounts payable increased to $8.0 million at June 30, 2003 from $6.7 million at June 30, 2002. The increase is mainly the consequence of materials purchases during fiscal year ended June 30, 2003.

          Capital expenditures in fiscal 2003, 2002, and 2001 were $457,000, $2.7 million and $2.1 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, 2003 were as follows (in thousands):

          As of June 30, 2003, we had unconditional purchase order commitments of approximately $ 2.0 million for wafers and chipsets.

          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, 2003 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.

          As of June 30, 2003, the market value of our short-term investment in UMC was $43.5 million. In addition, we held $4.4 million in stock in other entities 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. One-third of the shares are 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, 2003, approximately 6.4 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.

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          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.

          As a result of our reorganization and the disposal of our graphics business, we believe that our liquidity will be positively affected as a result of the termination of a line of business which was using cash. In addition, we believe that we may be able to enhance our cash position through sales of equity interests in XGI and TTI.

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Factors That May Affect Our Results

We incurred an operating loss in fiscal 2003.

We incurred an operating loss of $18.5 million in the fiscal year ended June 30, 2003 primarily due to unprofitable graphics operations.

          Our recent reorganization is intended to reduce our operating expenses and position the Company in a market in which we may be profitable in the future. In addition, we are trying to expedite new digital media 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, DPTV™MV, DPTV™3DPRO, PANELTV™3DPRO, PANELPRO-MM™, DPTV™SVP and our need to respond to these shifts, which could result in the need to generate significantly higher revenue to achieve and sustain profitability.

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

          The digitally processed television industry is characterized by rapidly changing technology, frequent new product introductions, 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 digitally process television business will depend on the introduction of successive generations of products in time to meet the design cycles as well as to specifications of television original equipment manufacturers. Our failure to predict market needs accurately or to develop new products or product enhancements in a timely manner will harm market acceptance and sales of our products. If the development or enhancement of these products or any other future products takes longer than we anticipate, or if we are unable to introduce these products to market, our sales will not increase. Even if we are able to develop and commercially introduce these new products, the new products may not achieve widespread market acceptance necessary to provide an adequate return on our investment.

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

          While we expect to experience improved financial performance as result of our restructuring, 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;

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

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	•		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 exist in the market for digital media products.

          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. We believe the market for digital television will be competitive, and will require substantial research and development, technical support, sales and other expenditures to stay competitive in this market. In the digital television market our principal competitors are Toshiba, Philips Electronics, Micronas AG, Pixelworks, Inc. and Genesis Microchip, Inc. 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.

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 one third-party foundry to manufacture our products either in finished form or wafer form. Generally, foundries are not obligated to manufacture our products on a long-term fixed price base; however, due to the Company’s investment in one third-party 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 and production problems, 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.

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

          The market price of our common stock has been, and may continue to be volatile. Factors such as new product announcements by us or our competitors, quarterly fluctuations in our operating results and unfavorable conditions in the digital television market may have a significant impact on the market price of our common stock. These conditions, as well as factors that generally affect the market for stocks 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. If we are not successful in attracting, assimilating or retaining qualified personnel to fulfill our current or future needs, our business may be harmed.

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

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

We 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

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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. We are currently involved in such disputes. See Part I, Item 3 (“Legal Proceedings”). In addition, we may in the future enter into agreements to indemnify our customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. Our pending litigation and any future litigation arising from claims asserting that our products infringe or may infringe the proprietary rights of third parties, whether the litigation is with or without merit, has been and may in the future be, time-consuming, resulting in significant expenses and diverting the efforts of our technical and management personnel. We do not have insurance against our alleged or actual infringement of intellectual property of others. These claims, if resolved adversely to us, could cause us to stop selling our products which incorporate the challenged intellectual property and could also result in product shipment delays or require us to redesign or modify our products or to enter into licensing agreements. These licensing agreements, if required, would increase our product costs and may not be available on terms acceptable to us, if at all. If there is a successful claim of infringement or we fail to develop non-infringing technology or license the proprietary rights on a timely basis, our business could be harmed.

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.

          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.

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Changes in our business organization will affect our operations.

          On June 12, 2003 we announced that the assets of our Graphics Division will be acquired by XGI Technology, Inc. (XGI), the graphics unit previously spun off from Silicon Integrated System Corp (SiS). XGI will be capitalized through cash infusion from outside investors. This transaction closed on July 25, 2003 and we received a 30% equity interest in XGI. In a separate transaction, the assets of our Digital Media Division were merged with our subsidiary, Trident Technologies, Inc. (TTI) in Taiwan, on August 25, 2003 to strengthen and extend the company’s digitally processed television business. As a result of these transactions, we will be able to focus our resources on our restructured DM business as well as focus on other challenges and opportunities in the rapidly growing digital media market. After the close of this transaction we held a 90% equity interest in TTI.

          As a result of our recently concluded reorganization and as we go forward into fiscal year 2004, our principle design, development and marketing effort will focus primarily on our Digital Media products. These products are now our only product line and our success in the near term depends upon the growth of the market for these products and our success in this market. Our success in the longer term will also depend on our ability to develop and introduce other digital media products. Our Digital Media Division accounted for 48% and 6% of revenues for fiscal years ended June 30, 2003 and 2002, respectively. Through our TTI subsidiary, 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. While we anticipate this market to generate an increasing percentage of our revenues, we have limited experience with digital video television. There can be no guarantee that our digital television products will be accepted by the market or increase our revenues or profitability.

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, 2003, approximately $5.1 million of our investments matured in less than three months. We will continue to invest a significant portion of our existing cash equivalents in interest bearing, investment grade securities, with maturities of less than twelve months. We do not believe that our investments, in the aggregate, have significant exposure to interest rate risk.

Exchange rate risk

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

          While we expect our international revenues to continue to be denominated predominately in U.S. dollars, an increasing portion of our international revenues may be denominated in foreign currencies in the future. In addition, we plan to continue to expand our overseas operations. As a result, our operating results may become subject to significant fluctuations based upon changes in exchange rates of certain currencies in relation to the U.S. dollar. We will analyze our exposure to currency fluctuations and may engage in financial hedging techniques in the future to attempt to minimize the effect of these potential fluctuations; however, exchange rate fluctuations may adversely affect our financial results in the future.

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Investment risk

          We are exposed to market risk as it relates to changes in the market value of our investments in public companies. We invest in equity instruments of public companies for business and strategic purposes and we have classified these securities as available-for-sale. These available-for-sale equity investments, primarily in technology companies, are subject to significant fluctuations in fair market value due to the volatility of the stock market and the industries in which these companies participate. We have realized significant gains and losses on our equity investments. 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, 2003, we had available-for-sale equity investments with a fair market value of $44.8 million including $43.5 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. For the fiscal year ended June 30, 2003, we recognized a net loss of approximately $5.2 million of our investments in private companies that we concluded was other-than-temporary. As of June 30, 2003, the balance of our long-term equity investments in non-public companies was $3.6 million.

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Item 8. Financial Statements and Supplementary Data

          The following documents are filed as a part of this Report:

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Report of Independent Auditors

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, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2003, 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 22, 2003

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Trident Microsystems, Inc.
Consolidated Balance Sheet

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

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Trident Microsystems, Inc.
Consolidated Statement of Operations

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

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Trident Microsystems, Inc.
Consolidated Statement of Stockholders’ Equity

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

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Trident Microsystems, Inc.
Consolidated Statement of Cash Flows