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

FORM 10-Q

Commission file number: 0-20784

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

1090 East Arques Avenue, Sunnyvale, California 94085

(Address of principal executive offices) (Zip code)

(408) 991-8800

(Registrant’s telephone number, including area code)

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.

The number of shares of the registrant’s Common Stock, $0.001 par value, outstanding at September 30, 2002 was 13,603,855.

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TRIDENT MICROSYSTEMS, INC.

INDEX

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TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, unaudited)
ASSETS

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

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TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

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

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TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, unaudited)

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

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TRIDENT MICROSYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

Note 1. The Company

     Trident Microsystems, Inc. (the “Company”) designs, develops and markets integrated circuits for videographics, multimedia and digitally processed television products for the desktop and notebook PC market and consumer television market.

Note 2. Basis of Presentation

     The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all significant intercompany accounts and transactions. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts; actual results could differ from those estimates.

     In the opinion of the Company, the condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the financial position, operating results and cash flows for those periods presented. The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and are not audited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2002 included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission.

     The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for any other period or for the entire fiscal year which ends June 30, 2003.

Note 3. Revenue Recognition

     Revenue from product sales is generally recognized upon shipment when persuasive evidence of an arrangement exists, the price is fixed or determinable, shipment is made and collectibility is reasonably assured. Provision is made for expected future sales returns and allowances when revenue is recognized. The Company has no obligation to provide any modification or customization upgrades, enhancements or other post-sale customer support. The Company grants certain distributors limited rights of return and price protection on unsold products. Product revenue on shipments to distributors with such rights is deferred until the products are shipped to end customers by the distributors.

     The Company’s license revenues are recognized when: persuasive evidence of an arrangement exists, delivery has occurred, the vendor’s fee is fixed or determined, and the collectibility is reasonably assured. The Company’s license revenue does not require significant production, modification or

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customization of software. Royalty revenue is recognized when the Company is informed that the related products have been sold provided that collectibility is assured.

Note 4. Recent Accounting Pronouncements

     The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 141,“Business Combinations,” No. 142, “Goodwill and Other Intangible Assets” and No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” at the beginning of the 2003 fiscal year. The adoption of these standards did not have a material impact on the Company’s consolidated financial statements.

     In July 2002, the Financial Accounting Standards Board issued SFAS No.146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” The principal difference between SFAS No. 146 and EITF Issue No. 94-3 relates to SFAS No.146’s timing for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 94-3 a liability for an exit cost as generally defined in EITF Issue No. 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. SFAS No. 146 is applied prospectively upon adoption and, as a result, would not have a material impact on the Company’s current financial position or results of operations.

Note 5. Inventories

     Inventories consisted of the following (in thousands):

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Note 6. Loss Per Share

     Basic net loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is calculated using the weighted average number of outstanding shares of common stock plus potential common stock shares. The calculation of diluted net loss per share excludes potential common stock if the effect is antidilutive. Potential common stock shares consist of common stock options, computed using the treasury stock method based on the average stock price for the period.

     Reconciliations of the numerators and denominators of the basic and diluted net loss per share calculations are as follows:

Note 7. Investment in UMC

In August 1995, the Company made an investment of $49.3 million in United Integrated Circuits Corporation (“UICC”). On January 3, 2000, United Microelectronics Corporation (“UMC”) acquired UICC and, as a result of this merger, the Company received approximately 46.5 million shares of UMC. Subsequently, UMC announced a 20% stock dividend payable to shareholders of record on May 16, 2000, a 15% stock dividend payable to shareholders of record on July 21, 2001 and a 15% stock dividend payable to shareholders of record on August 22, 2002. The only change in the number of shares in UMC held by the Company from January 3, 2000 to September 30, 2002 was the increase resulting from the stock dividends. As of September 30, 2002, the Company owned approximately 73.8 million shares of UMC which represents about 0.5% of the outstanding stock of UMC.

On January 3, 2000, the Company recognized a pre-tax gain of $117.0 million upon the receipt of UMC shares in exchange for the UICC shares. In the quarter ended March 31, 2001, based on the decline of UMC’s stock price, the decline in stock prices of publicly traded semiconductor companies and the unfavorable outlook regarding the demand and operating environment of the semiconductor industry, the Company concluded that the decline in the investment value in UMC had become other-than-temporary. Accordingly, the difference of $76.4 million between the carrying value on January 3, 2000 and the quoted fair value on March 31, 2001 was written off and included in earnings as impairment loss on

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investments in accordance with SFAS No. 115 and APB No. 18 for the short-term and long-term portions of investments, respectively.

In the quarter ended September 30, 2001, the Company concluded that due to a substantial decline in the market value of UMC’s stock price from March 31, 2001 to September 30, 2001, the continued decline in stock prices of publicly traded semiconductor companies and the continuing unfavorable outlook for the semiconductor industry, the decline in the investment value in UMC had become other-than-temporary. Accordingly, the difference of $40.0 million between the carrying value on March 31, 2001 and the quoted fair value on September 30, 2001, was written off against earnings as an impairment loss on investments in accordance with SFAS No. 115 and APB No. 18, for the short-term and long-term portions of investments, respectively.

Due to an increase in the market value of UMC’s stock price from October 1, 2001 to September 30, 2002, an unrealized gain of $71,000 was recorded in equity as “accumulated other comprehensive gain” in accordance with SFAS No. 130, “Reporting Comprehensive Income.” The $71,000 is equal to a $119,000 increase in market value of our short-term investment in UMC from October 1, 2001 to September 30, 2002, less deferred income taxes of $48,000 relating to the unrealized gain.

In order to preserve the 12.5% wafer capacity guarantee of the UICC facility, which guarantees a maximum of approximately 3,000 wafers per month, there are certain limitations on the Company’s ability to sell the UMC shares. If the Company’s total shareholdings fall below one-half of the initial percentage of shares held in UMC, the Company’s production capacity will be reduced by at least 50%, and depending on the interpretation of the foundry capacity agreement between the parties, the Company’s 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 on January 3, 2000. After a two-year period, one-fifth of the shares will be available for sale from the lock-up portion every six months. During the quarter ended September 30, 2002, approximately 3.2 million shares with a carrying value of $2.5 million became available for sale upon the expiration of the lock up period and they were transferred from the long-term to the short-term accordingly. As of September 30, 2002, approximately 6.4 million shares with a carrying value of $4.4 million were included as short-term investments. As of September 30, 2002, approximately 9.7 million shares with a carrying value of $6.6 million are subject to this lock-up restriction. These shares are accounted for as long-term investments using the cost method in accordance with APB No. 18.

Shares of the Company’s UMC investment are listed on the Taiwan Stock Exchange. In accordance with SFAS No. 115, the 64.1 million unrestricted shares are treated as available-for-sale securities and are classified as short-term investments. These unrestricted shares had a market value of $43.7 million as of June 30, 2002. Unrestricted shares include shares that may need to be held by the Company to retain wafer capacity, as described in the prior paragraph.

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     Note 8. Investments in other companies

     No impairment losses were recognized in the quarter ended September 30, 2002. During the quarter ended September 30, 2001, the Company also recognized impairment losses of investments other than UMC totaling $2.1 million as follows:

     In September 1999, the Company invested $909,000 in an ADSL company for 227,250 shares of preferred stock which were then converted into the same number of common stock shares upon the company’s initial public offering in August 2000. On March 31, 2001 the fair value of these shares as quoted was $498,000. Because the company experienced declining earnings in relation to its competitors in the ADSL market and erosion of its market share, the decline in value was considered other-than-temporary. Accordingly, the difference between the carrying value and the quoted fair value on March 31, 2001 was written off against earnings in accordance with SFAS No. 115. On September 30, 2001 due to deteriorating industry outlook and decreasing value in the company’s shares, the difference between the carrying value and the quoted fair value on September 30, 2001 of $270,000 was considered an other-than-temporary impairment and was written off against earnings in accordance with SFAS No. 115.

     In June 2000, the Company invested $600,000 in a communications company which was subsequently acquired by a listed company. On March 31, 2001, the fair value of the shares owned by the Company was $221,000. Because of the significant losses incurred by this company, the Company concluded that the decline in value was other-than-temporary. Accordingly, the difference between the carrying value and the quoted fair value on March 31, 2001 was written off against earnings in accordance with SFAS No. 115. On September 30, 2001 due to the deteriorating industry outlook and decreasing value in the company’s shares, the difference between the carrying value and the quoted fair value on September 30, 2001 of $66,000 was considered an other-than-temporary impairment and was written off against earnings in accordance with SFAS No. 115.

     In April 2000, the Company invested $650,000 in a private company engaged in broadband communication technology. In June 2000, an additional $100,000 was invested in the company. In the quarter ended September 30, 2001, the Company determined that the prospects for recovery of the investment were unfavorable given the market position of the company and the company’s operating losses. Therefore, the Company concluded that the impairment was other-than-temporary. Accordingly, the full investment of $750,000 was written off against earnings in accordance with APB No. 18.

     In September 2000, the Company invested $1,500,000 in a private company engaged in “voice over DSL” communication technology. In the quarter ended September 30, 2001, the Company determined that this communications company was in a product reengineering process and would likely cease operations. The Company assessed the estimated cash recoverable from this investment and concluded that the estimated shortfall was an other-than-temporary impairment. Accordingly, $1,000,000 of the investment was written off against earnings in accordance with APB No. 18.

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Note 9. Comprehensive Income (Loss)

     Under SFAS No. 130, “Reporting Comprehensive Income” any unrealized gains or losses on the short-term investments which are classified as available-for-sale equity securities are to be reported as a separate adjustment to equity. The components of accumulated other comprehensive income (loss) as of September 30, 2002 and June 30, 2002 are as follows (in thousands):

     The total comprehensive loss for the three months ended September 30, 2002 and 2001 are as follows (in thousands):

Note 10. Other current assets

     Included in other current assets is a $500,000 loan to Mr. Frank Lin, the Company’s President and Chief Executive Officer. In accordance with an agreement dated April 27, 2000 and an amendment to this agreement approved by the Company’s Board of Directors on April 22, 2002, this loan was provided to Mr. Lin for his personal use. It is payable in full on the earlier of cessation of employment or April 27, 2003. The loan bears interest at variable market rates which are compounded annually, and the accrued interest is payable at maturity. Mr. Lin used shares of the Company’s stock he acquired several years ago as collateral for the loan. This loan was not provided in relation to any purchase of the Company’s stock or the exercise of the Company’s stock options.

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Note 11. Segment information

     The Company has two reportable segments: videographics and digital media. As of September 30, 2002 and June 30, 2002, the assets attributed to the digital media segment were negligible. The following is a summary of the Company’s segment information (in thousands):

The following is a summary of the Company’s geographic operations:

Revenues are attributed to countries based on delivery locations. Long-lived assets comprise property and equipment.

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Note 12. Contingencies

     On December 14, 1998, NeoMagic Corporation (“NeoMagic”) filed a patent infringement lawsuit in the U.S. District Court, District of Delaware, asserting infringement of two patents against the Company and requesting a reasonable royalty, lost profits and price erosion damages. On February 1, 2001, the Court granted summary judgment in favor of the Company that it did not infringe either patent. Other motions for summary judgment relating to damages issues remain unresolved. The Company expects the Court to enter judgment in its favor. NeoMagic has appealed the summary judgment on its infringement claims but the Company believes the appeal is premature. The Company expects to move to dismiss the appeal unless the Court permits NeoMagic to pursue the appeal before the Company’s antitrust counterclaim is resolved in the trial court. The Company asserted an antitrust counterclaim against NeoMagic, seeking compensatory damages, trebled damages, costs and attorney fees, which was stayed pending resolution of NeoMagic’s infringement claims at the District Court level. After the District Court granted summary judgment, the Company moved to lift the stay on its antitrust counterclaim. The briefing on this motion is completed and the parties are awaiting oral argument. On May 7, 2001, NeoMagic filed its opening appeal brief. On May 17, 2001, the Company filed a motion to dismiss NeoMagic’s appeal for lack of jurisdiction arguing that there is no final appealable order and that the Company’s antitrust counterclaim remains pending. On June 15, 2001, the Company filed its opposition appeal brief and renewed its request that the appeal be dismissed for lack of jurisdiction. On July 2, 2001, NeoMagic filed its reply brief. On July 31, 2001, the Federal Circuit dismissed NeoMagic’s appeal without prejudice as premature. NeoMagic subsequently moved the District Court to certify the Company’s summary judgment for immediate appeal pursuant to Federal Rules of Civil Procedure Rule 54(b). That motion was granted, as was the Company’s motion to lift the stay on its antitrust counterclaim so it could take limited discovery. On April 16, 2002, the Federal Circuit affirmed summary judgment on NeoMagic’s ‘955 patent in favor of the Company. The Federal Circuit affirmed portions of the district court’s claim construction on NeoMagic’s ‘806 patent, reversed others, and remanded the case to the district court for further proceedings on the ‘806 patent. However, the district court judge retired within days of the remand order, and the case has been reassigned to a yet-to-be-confirmed new judge. Magistrate Judge Thynge heard argument on claim construction, and both sides’ renewed motions for summary judgment on infringement issues, on November 5. A decision is not expected for some time.

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Item 2:

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:

•		our expectations and beliefs with respect to future revenues and financial results,
•		the timing of availability and functionality of products under development,
•		plans for development of future products,
•		the effect of future values of our investments on financial performance,
•		adequacy of financial reserves,
•		trends in average selling prices,
•		the percentage of export sales,
•		outcome of pending litigation,
•		demand for and trends in revenue for our products,
•		devotion of resources and control of expenses related to new products, markets and internal business strategies,

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

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

Overview of Business

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

Critical Accounting Policies, Judgments and Estimates

     Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to customer programs and incentives, product returns, bad debts, inventories, equity investments, income taxes, financing operations, warranty obligations, excess component order cancellation costs, restructuring, long-term service contracts, pensions and other post-

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retirement benefits, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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

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

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

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

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

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

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Results of Operations

     The following table sets forth the results of operations expressed as percentages of revenues for the three months ended September 30, 2002 and 2001:

Revenues

     Revenues for the three months ended September 30, 2002 were $13.2 million, a decrease of 49% from the $25.7 million reported in the three months ended September 30, 2001. Due to the effect of a missed OEM design-in cycle, relating to Intel’s continued CPU platform transition from Pentium® 3 to Pentium® 4, the demand for our integrated notebook products decreased substantially in the September 2002 quarter. In the three months ended September 30, 2002, notebook and desktop products accounted for 54% and 2% of revenues, respectively, compared to 87% and 3% of revenues, respectively, in the three months ended September 30, 2001. Revenues for digitally processed television (DPTV) chips in the three months ended September 30, 2002 totaled $5.3 million and accounted for 40% of total revenues, compared to $1.0 million or 4% of total revenues in the three months ended September 30, 2001. This increase was primarily due to the ramping up of production volumes by several of our early design wins during the past year in China.

     Sales to Asian customers, primarily in Japan, China and Taiwan accounted for 49%, 34% and 10% respectively of our revenues in the three months ended September 30, 2002. Sales to Asian customers, primarily in Taiwan and Japan, accounted for almost all of our revenues in the three months ended September 30, 2001. We expect Asian customers will continue to account for a significant portion of our sales. Sales to North American and European customers represented 0.1% of revenues in the three months ended September 30, 2002, a decrease from approximately 0.4% in the three months ended September 30, 2001. In the three months ended September 30, 2002, sales to two customers, Inno Micro (a supplier to Toshiba) and Skyworth (a television original equipment manufacturer located in China) accounted for 49% and 17% of revenues, respectively. In the three months ended September 30, 2001, sales to four customers, Inno Micro (a supplier to Toshiba), Quanta (a supplier to Compaq), Toshiba and Acer accounted for 43%, 16%, 11%, and 11% of revenues, respectively.

     We plan from time to time to introduce new and higher performance graphics controllers, multimedia products, and non-PC graphics products which we will seek to sell to our existing customers as well as new customers in Asia, North America and Europe. We are also expanding our product focus

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into markets outside the PC area, including digitally processed television applications. Our future success depends upon the regular and timely introduction of these and other new products and upon those products meeting customer requirements, and in significant part, upon the results of our expansion into new product markets. There can be no assurance that we will be able to successfully complete the development of these products or to commence shipments of these products in a timely manner, or that product specifications will not be changed during the development period. In addition, even if our products are developed and shipped on a timely basis, there can be no assurance that the products will be well accepted in the market place, or that we will experience success in the new product markets.

Gross Profit

     Gross profit decreased to $3.9 million for the three months ended September 30, 2002, from $5.9 million in the three months ended September 30, 2001. The decrease was primarily the result of lower sales of 3D notebook products. The gross margin as a percentage of revenues for the three months ended September 30, 2002 increased to 29.3% of revenues as compared to 23.1% for the three months ended September 30, 2001. The increase in gross margin as a percentage of revenues was primarily attributable to higher sales of DPTV products which have a higher sales margin.

     We believe that the prices of high-technology products will decline over time as competition increases and new and more advanced products are introduced. We expect average selling prices of existing products to continue to decline, although the average selling prices of our entire product line may remain constant or increase as a result of introductions of new higher-performance products which often have additional functionality and which are planned to have higher margins. Our strategy is to maintain and improve gross margins by (1) developing new products that have higher margins, and (2) reducing manufacturing costs by improving production yield and utilizing newer process technology. There is no assurance that we will be able to develop and introduce new products on a timely basis or that we can reduce manufacturing costs. Our revenues are substantially dependent on significant sales of our XP4™ product, which we expect to ship in volume later in the fiscal year, and increases in sales of PCs in general. Without those, we do not expect our revenues to increase. We currently do not expect revenues to increase over the next two quarters, and we expect to incur losses over those quarters.

Research and Development

     Research and development expenses for the three months ended September 30, 2002 increased to $5.8 million from $5.5 million from the three months ended September 30, 2001. As a percent of revenues, research and development expenses increased to 43.6% for the three months ended September 30, 2002, from 21.5% of revenues for the three months ended September 30, 2001. The increase in research and development expenses as a percentage of sales for the three months ended September 30, 2002 compared to the three months ended September 30, 2001 was primarily the result of lower sales. The increase in absolute dollars was primarily due to increased efforts in developing advanced graphic and digitally processed television products, such as our newest graphic chip the XP4™ and our digitally processed television chip DPTV™-3D.

     We are in the process of developing our next generation 3D graphics technology. The new technology, which we call XP4, will be used in both the discrete and integrated products. Our graphics product development strategy is to focus on a balanced design with consideration of not only high performance, but also low cost and low power consumption. We also plan to continue developing the next generation DPTV™ product as well as other advanced products for digitally processed television and digital Set Top Boxes (“STB”) for the digital television market in China, Japan, Korea and Taiwan.

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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 $2.9 million in the three months ended September 30, 2002 from $3.4 million in the three months ended September 30, 2001. The decrease in selling, general and administrative expenditures in actual dollars was attributed primarily to a decrease in selling expenses due to lower sales and a decrease in legal expenses. We will continue to monitor and control our selling, general and administrative expenses.

Interest Income, Net

     The amount of interest income earned by us varies directly with the amount of our cash and cash equivalents and the prevailing interest rates. Interest income decreased to $26,000 in the three months ended September 30, 2002, from $229,000 in the same prior year period. The decrease was primarily the result of lower interest rates and lower average cash levels invested during the three months ended September 30, 2002.

Provision (Benefit) for Income Taxes

     A provision for income taxes of $1.0 million was recorded for the three months ended September 30, 2002. This provision mainly represents an adjustment to the valuation allowance. This is related to the decrease in unrealized gain from our UMC investments during the quarter which decreased deferred tax liabilities, causing deferred tax assets to exceed deferred tax liabilities. The valuation allowance was increased so that the deferred tax assets would not exceed deferred tax liabilities.

     A benefit for income taxes of $16.6 million was recorded for the three months ended September 30, 2001. The benefit for income taxes was due to a decrease in deferred tax liabilities as a result of our loss on investments for the quarter ended September 30, 2001.

Investment in UMC and Other Investments

     As of September 30, 2002, the Company owned approximately 73.8 million shares of United Microelectronics Corporation (UMC) which represents about 0.5% of the outstanding stock of UMC. In the quarter ended September 30, 2001, we concluded that due to a substantial decline in the market value of UMC’s stock price from June 30, 2001 to September 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 and included in earnings as an impairment loss on investments in accordance with SFAS No. 115 and APB No. 18, for the short-term and long-term portions of investments, respectively. See Part I, Item 1, Notes 7 and 9 above (“Investment in UMC” and “Comprehensive Income (Loss),” respectively) for discussion of this investment and related losses.

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     No impairment losses were recognized in the quarter ended September 30, 2002. During the quarter ended September 30, 2001, we also recognized impairment losses of investments other than UMC totaling $2.1 million as follows:

See Part I, Item 1, Notes 8 and 9 above (“ Investments in other companies” and “Comprehensive Income (Loss),” respectively) for discussion of these investments and related losses. While we cannot predict the future values of our investments, we do anticipate that our future financial performance will be affected by future fluctuations of such values.

Liquidity and Capital Resources

     As of September 30, 2002, our principal sources of liquidity included cash and cash equivalents of $18.7 million, which decreased from $24.9 million at September 30, 2001. During the three months ended September 30, 2002, $2.4 million of cash was used by operations, compared to the three months ended September 30, 2001, during which $1.3 million of cash was used by operations. Cash used by operations in the three months ended September 30, 2002 was primarily due to operating loss, an increase in inventories and a decrease in income taxes payable, partially offset by a decrease in accounts receivable. Cash used by operations in the three months ended September 30, 2001 was primarily due to operating loss and a decrease in accounts payable and accrued liabilities offset by a decrease in inventories. Capital expenditures were $138,000 for the three months ended September 30, 2002, compared to $690,000 for the three months ended September 30, 2001.

     Inventories increased to $4.4 million at September 30, 2002 from $3.2 million at June 30, 2002. The primary reason for the increase is due to wafer purchases for DPTV products during the three months ended September 30, 2002, partially offset by the decrease in purchases for integrated notebook products.

     Accounts receivable decreased to $1.4 million at September 30, 2002 from $4.3 million at June 30, 2002 primarily due to a decline in sales.

     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 September 30, 2002 were as follows (in thousands):

     As of September 30, 2002, we had unconditional purchase order commitments of approximately $6.7 million for wafers and chipsets.

     As of September 30, 2002, our investment in UMC, classified as short-term investment, was valued at $43.7 million. In addition, we held $6.6 million in UMC stock which is not available for resale as it is

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subject to certain contractual and other restrictions, including restrictions relating to retention of our allocated foundry capacity at UMC. In order to preserve our wafer capacity guarantee with UMC, there are certain limitations on our ability to sell the shares. If our total shareholdings fall below one-half of their initial percentage of shares, our production capacity will be reduced by at least 50%, and depending on the interpretation of the foundry capacity agreement between the parties, our production capacity could be reduced by substantially more than 50%. In addition, one-third of the shares is subject to a two-year lock-up period in accordance with an investment agreement entered into with UMC. After a two-year period, one-fifth of the shares will be available for sale from the lock-up portion every six months. As of September 30, 2002, approximately 9.7 million shares are subject to this lock-up restriction. While we are an operating company not in the business of investing, reinvesting, owning, holding or trading in securities, we do intend to monitor the advisability of disposing of our UMC stock and intend to sell all or part of the stock when it is in the best interests of our shareholders to do so. We do not currently intend to sell any of the UMC stock in the immediate future.

     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.

Factors That May Affect Our Results

We incurred an operating loss in the quarter ended September 30, 2002.

     We incurred an operating loss of $4.8 million in the quarter ended September 30, 2002. Future performance will substantially depend upon numerous factors, such as:

•		whether there is improvement in PC sales, notebook and digital media sales in particular;
•		timely introduction of new products, particularly the XP4™ and product enhancements to the marketplace;
•		whether customers successfully incorporate our technologies into end products with high levels of customer acceptance;
•		fluctuating price levels for our products.

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

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

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

•		uncertain demand in new markets in which we have limited experience;
•		fluctuations in demand for our products, including seasonality;
•		unexpected product returns or the cancellation or rescheduling of significant orders;
•		our ability to develop, introduce, ship and support new products and product enhancements and to manage product transitions;
•		new product introductions by our competitors;

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•		our ability to achieve required cost reductions;
•		our ability to attain and maintain production volumes and quality levels for our products;
•		delayed new product introductions;
•		unfavorable responses to new products;
•		adverse economic conditions, particularly in Asia;
•		the mix of products sold and the mix of distribution channels through which they are sold;
•		availability of foundry and assembly capacities;
•		delay of joint development efforts due to unexpected market conditions; and
•		length of sales cycle.

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

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

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

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

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

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

     Our revenues have historically been generated primarily from Asian customers, particularly customers in Taiwan, and Japan. While we intend to continue our marketing efforts to North American OEMs, we expect to be primarily dependent on international sales and operations, particularly in Japan, Hong Kong, Taiwan, 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:

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

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•

unexpected changes in regulatory requirements.

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

Intense competition exists in the market for graphics controllers.

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

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

Intense competition exist is in the market for digital media products.

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

We are vulnerable to undetected product problems.

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

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

We rely upon independent foundries to manufacture our products.

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

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

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

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

     The market price of our common stock has been, and may continue to be volatile. Factors such as new product announcements by us or our competitors, quarterly fluctuations in our operating results and unfavorable conditions in the graphics controller market may have a significant impact on the market price of our common stock. 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

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person” life insurance policies covering any of our employees. In order to continue to expand our product offerings both in the U.S. and abroad, we must hire a number of research and development personnel. Hiring technical sales personnel in our industry is very competitive due to the limited number of people available with the necessary technical skills and understanding of our technologies. Our ability to continue to attract and retain highly skilled personnel will be a critical factor in determining whether we will be successful in the future. Competition for highly skilled personnel is intense, particularly in Northern California. We may also have difficulty hiring experienced and skilled engineers at our research and development facility in Taiwan and China. If we are not successful in attracting, assimilating or retaining qualified personnel to fulfill our current or future needs, our business may be harmed.

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

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

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

     Our industry is very competitive and is characterized by frequent litigation alleging infringement of intellectual property rights. Numerous patents in our industry have already been issued and as the market further develops and additional intellectual property protection is obtained by participants in our industry, litigation is likely to become more frequent. From time to time, third parties have asserted and are likely in the future to assert patent, copyright, trademark and other intellectual property rights to technologies or rights that are important to our business. We are currently involved in such disputes with NeoMagic. See Part II, Item 1 (“Legal Proceedings”). In addition, we may in the future enter into agreements to indemnify our customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. Our pending litigation and any future litigation arising from claims asserting that our products infringe or may infringe the proprietary rights of third parties, whether the litigation is with or without merit, has been and may in the future be, time-consuming, resulting in significant expenses and diverting the efforts of our technical and management personnel. We do not have insurance against our alleged or actual infringement of intellectual property of

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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 could affect our operations.

     On January 18, 2000, our Board of Directors approved a spin-off of our Trident Technologies Inc. subsidiary and our Trident Multimedia Technologies (Shanghai) Co. Ltd. subsidiary. It is our belief that these subsidiaries will operate more efficiently if their operations were managed as independent entities. The Trident Technologies, Inc. subsidiary is developing the Liquid Crystal Display (“LCD”) panel video controller chip product. The Trident Multimedia Technologies (Shanghai) Co. Ltd. subsidiary is involved in the joint development with us of graphic and digital media chips, and will sell digital media chips as our sales representative in the China market. The operations of either of these entities may change, or may be combined with other parts of our overseas operations. Trident Technologies Inc. and Trident Multimedia Technologies (Shanghai) Co. Ltd. had total assets equal to $2.4 million and $2.1 million respectively, as of September 30, 2002. We currently own a majority interest in Trident Technologies, Inc. and a 100% interest in Trident Multimedia Technologies (Shanghai) Co. Ltd. The structure and timing of these spin-offs, and the nature of the operations at the time of spin-off will depend on a number of organizational, operational and marketing factors. We have not made all of the decisions necessary to complete these spin-offs, and the spin-offs may not occur in 2003. While we intend to structure the transactions in a manner to enhance our overall operations, the spin-offs will dilute the interests of our shareholders in the operations of the spun off entities and, particularly if the spin-offs do not increase their revenue and profitability, could adversely affect our financial results.

The performance of our equity investments is currently uncertain.

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

Future changes in financial accounting standards may cause adverse unexpected revenue fluctuations and affect our reported results of operations.

     A change in accounting policies can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New pronouncements and varying interpretations of pronouncements have occurred with frequency and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

     Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq Stock Market rules, are creating uncertainty for companies such as ours. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

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Item 3: 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 September 30, 2002, $18.7 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.

Investment risk

     We are exposed to market risk as it relates to changes in the market value of our investments in public companies. We invest in equity instruments of public companies for business and strategic purposes and we have classified these securities as available-for-sale. These available-for-sale equity investments, primarily in technology companies, are subject to significant fluctuations in fair market value due to the volatility of the stock market and the industries in which these companies participate. We have realized significant gains and losses on our equity investments. For the fiscal year ended June 30, 2000, we recognized a pre-tax gain on investments of $115.0 million, primarily related to a $117.0 million gain on receiving shares in UMC in exchange for shares we held in UICC, a private company. For the fiscal year ended June 30, 2001, we recognized a pre-tax loss of $77.8 million of which $76.4 million related to a decline in the market value of shares in UMC that we concluded was other-than-temporary. For the fiscal year ended June 30, 2002, we recognized a pre-tax loss of $40.3 million of our investments in public companies of which $40.0 million related to a decline in the market value of shares in UMC that we concluded was other-than-temporary. As of September 30, 2002, we had available-for-sale equity investments with a fair market value of $44.5 million including $43.7 million related to shares of UMC. Our objective in managing our exposure to stock market fluctuations is to minimize the impact of stock market declines to our earnings and cash flows. There are, however, a number of factors beyond our control. Continued market volatility, as well as mergers and acquisitions, have the potential to have a material impact on our results of operations in future periods.

     We are also exposed to changes in the value of our investments in non-public companies, including start-up companies. These long-term equity investments in technology companies are subject to significant fluctuations in fair value due to the volatility of the industries in which these companies

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participate and other factors. As of September 30, 2002 the balance of our long-term equity investments in non-public companies was $8.6 million.

Item 4: Controls and Procedures

(a)  Under the supervision and with the participation of our management, including our chief executive officer and chief accounting officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), within 90 days of the filing date of this report. Based on their evaluation, our chief executive officer and chief accounting officer concluded that our disclosure controls and procedures are effective.

(b)  There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.

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Part II: Other Information

Item 1: Legal Proceedings

     On December 14, 1998, NeoMagic Corporation (“NeoMagic”) filed a patent infringement lawsuit in the U.S. District Court, District of Delaware, asserting infringement of two patents against the Company and requesting a reasonable royalty, lost profits and price erosion damages. On February 1, 2001, the Court granted summary judgment in favor of the Company that it did not infringe either patent. Other motions for summary judgment relating to damages issues remain unresolved. The Company expects the Court to enter judgment in its favor. NeoMagic has appealed the summary judgment on its infringement claims but the Company believes the appeal is premature. The Company expects to move to dismiss the appeal unless the Court permits NeoMagic to pursue the appeal before the Company’s antitrust counterclaim is resolved in the trial court. The Company asserted an antitrust counterclaim against NeoMagic, seeking compensatory damages, trebled damages, costs and attorney fees, which was stayed pending resolution of NeoMagic’s infringement claims at the District Court level. After the District Court granted summary judgment, the Company moved to lift the stay on its antitrust counterclaim. The briefing on this motion is completed and the parties are awaiting oral argument. On May 7, 2001, NeoMagic filed its opening appeal brief. On May 17, 2001, the Company filed a motion to dismiss NeoMagic’s appeal for lack of jurisdiction arguing that there is no final appealable order and that the Company’s antitrust counterclaim remains pending. On June 15, 2001, the Company filed its opposition appeal brief and renewed its request that the appeal be dismissed for lack of jurisdiction. On July 2, 2001, NeoMagic filed its reply brief. On July 31, 2001, the Federal Circuit dismissed NeoMagic’s appeal without prejudice as premature. NeoMagic subsequently moved the District Court to certify the Company’s summary judgment for immediate appeal pursuant to Federal Rules of Civil Procedure Rule 54(b). That motion was granted, as was the Company’s motion to lift the stay on its antitrust counterclaim so it could take limited discovery. On April 16, 2002, the Federal Circuit affirmed summary judgment on NeoMagic’s ‘955 patent in favor of the Company. The Federal Circuit affirmed portions of the district court’s claim construction on NeoMagic’s ‘806 patent, reversed others, and remanded the case to the district court for further proceedings on the ‘806 patent. However, the district court judge retired within days of the remand order, and the case has been reassigned to a yet-to-be-confirmed new judge. Magistrate Judge Thynge heard argument on claim construction, and both sides’ renewed motions for summary judgment on infringement issues, on November 5. A decision is not expected for some time.

Item 2: Changes in Securities

     Not applicable

Item 3: Defaults upon Senior Securities

     Not applicable

Item 4: Submissions of Matters to Vote by Security Holders

     Not applicable

Item 5: Other Information

     Not applicable

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Item 6: Exhibits and Reports on Form 8-K

Reports on Form 8-K

     Not Applicable

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on November 14, 2002, on its behalf by the undersigned thereunto duly authorized.

Trident Microsystems, Inc.
(Registrant)

/s/ Frank Lin Frank C. Lin President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer)

/s/ Peter Jen Peter Jen Senior Vice President, Asia Operations and Chief Accounting Officer (Principal Financial and Accounting Officer)

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CERTIFICATIONS

I, Frank C. Lin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Trident Microsystems, Inc. (the registrant);

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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I, Peter Jen, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Trident Microsystems, Inc. (the registrant);

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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Table of Contents

Reports on Form 8-K

     Not Applicable

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