UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark one)

or

Commission file number: 0-20784

TRIDENT MICROSYSTEMS, INC.

1090 East Arques Avenue, Sunnyvale, California 94085

(408) 991-8800

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]          No [X]

The number of shares of the registrant’s Common Stock, $0.001 par value, outstanding at March 31, 2004 was 22,821,421.

TRIDENT MICROSYSTEMS, INC.

INDEX

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TRIDENT MICROSYSTEMS, INC.

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

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TRIDENT MICROSYSTEMS, INC.

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

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TRIDENT MICROSYSTEMS, INC.

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

Note 1. The Company

     Trident Microsystems, Inc. (“TMI”) and its subsidiaries (collectively the “Company”) designs, develops and markets integrated circuits for multimedia and digitally processed television products for the consumer television market, as well as for the desktop and notebook PC market. Our digital media operations are primarily conducted by our majority-owned subsidiary Trident Technologies, Inc. (“TTI”). Prior to the transfer of the graphics division to XGI Technology, Inc. (“XGI”) in the quarter ended September 30, 2003 (see Note 8), the Company also designed, developed and marketed integrated circuits for videographics products.

Note 2. Basis of Presentation

     The unaudited condensed 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 unaudited 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 unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2003 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, 2004.

     On November 5, 2003, the Company announced that its Board of Directors had approved a three-for-two stock split of the Company’s outstanding shares of common stock to be effected in the form of a 50 percent stock dividend. The stock split entitled each stockholder of record at the close of business on November 26, 2003 to receive one additional share for every two outstanding shares of common stock held on the record date. The additional shares resulting from the stock split were distributed on December 12, 2003. On March 17, 2004, a Special Meeting of Stockholders was held and approval was given to increase the number of authorized shares of common stock from 30,000,000 to 60,000,000. All share numbers in this document reflect the capital structure as of the end of the fiscal quarter and are therefore on a post-split basis.

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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.

Note 4. Inventories

     Inventories consisted of the following (in thousands):

Note 5. Net income (loss) Per Share

     Basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders 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 income (loss) per share calculations are as follows:

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Note 6. Stock-based compensation

     Stock-based compensation expense for the three and nine months ended March 31, 2004 represents the intrinsic value of stock options issued by TTI to employees of TTI and certain employees of TMI. The Company accounts for employee stock-based compensation in accordance with the intrinsic value method of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations. Stock-based compensation related to individuals who are not employees of the Company is based on the fair value of the related stock or options in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123. Expense associated with stock-based compensation is amortized on a straight-line basis over the vesting period of each individual award.

     Had the Company recorded compensation based on the estimated grant date fair value, as defined by SFAS No. 123, for awards granted under its stock option plans and stock purchase plan, the net income (loss) and net income (loss) per share would have been changed to the pro forma amounts below for the three and nine months ended March 31, 2004 and 2003:

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%, 15%, 15% and 4.01% stock dividend payable to shareholders of record as of May 2000, July 2001, August 2002 and July 2003. During the quarter ended March 31, 2004 the Company sold 5.3 million shares of its investment in UMC for net proceeds of $5.4 million resulting in a gain of $1.9 million. As of March 31, 2004, the Company owned approximately 71.5 million shares of UMC, which represents about 0.5% of the outstanding stock of UMC.

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     During the quarter ended March 31, 2004, approximately 3.2 million shares with a carrying value of $2.1 million were released from a lock-up restriction in accordance with an investment agreement entered into with UMC on January 3, 2000. The carrying value of these shares was reclassified as short-term investments. Shares of the Company’s UMC investment are listed on the Taiwan Stock Exchange. In accordance with SFAS No. 115, the 71.5 million shares are treated as available-for-sale securities and are classified as short-term investments.

     Due to an increase in the market value of UMC’s stock price from October 1, 2001 to March 31, 2004, an unrealized gain of $10.6 million was recorded in equity as “accumulated other comprehensive income” in accordance with SFAS No. 130, “Reporting Comprehensive Income.” The $10.6 million is equal to a $17.6 million increase in market value of the Company’s short-term investment in UMC from October 1, 2001 to March 31, 2004, less deferred income taxes of $7.0 million relating to the unrealized gain.

Note 8. Gain on investments, net

     During the nine months ended March 31, 2004, the Company recognized a net gain on investments totaling $9.1 million as follows (in thousands):

     On June 12, 2003, the Company announced that it would transfer its Graphics Division in Sunnyvale, California to XGI Technology, Inc. (“XGI”), a newly formed company incorporated in Taiwan, in exchange for stock in XGI. Silicon Integrated Systems Corporation (SIS), a company incorporated in Taiwan and unrelated to the Company, also transferred its graphics business to XGI. The transactions were structured to simultaneously close, with the Company receiving cash for the assets of the Graphics Division in one transaction, and simultaneously using the cash to acquire a 30% equity interest in XGI.

     The above transactions closed on July 25, 2003. In addition, on September 30, 2003, the Company sold one third of its investment in XGI to a third party for cash of $7.5 million. The above transactions resulted in a gain of approximately $6.6 million being recognized in the third quarter of 2003. Because XGI is a new company that is merging two businesses with an uncertain future and its equity securities are not traded on a quoted exchange, the Company recognized a gain on the above transactions based on the actual cash received and retained by the Company and no value was attributed to the Company’s remaining 20% equity interest in XGI.

     During the quarter ended September 30, 2003, the Company sold approximately 6.8% of its holding in TTI to a venture fund and its affiliates for cash of approximately $2.8 million which resulted in a gain of approximately $1.0 million. The venture fund is the largest minority investor in TTI and is an affiliate of UMC, a key business partner of the Company.

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     In March 2000, the Company invested $287,000 in a private company engaged in software development. In the quarter ended March 31, 2003, the Company determined that revenue growth had not been achieved and the investee company’s financial position had deteriorated significantly. Therefore, the Company assessed the fair value of its investment based on the investee company’s latest financial position and concluded that the impairment was other-than-temporary. Accordingly, $110,000 of the investment was written off against earnings in accordance with APB No. 18. In the quarter ended September 30, 2003, due to further deterioration in the financial position of the investee company, the Company concluded that the remaining investment of $177,000 was impaired and was written off against earnings in accordance with APB No. 18.

     In May 2000, the Company invested $750,000 in a private company engaged in development of an optical applications technology. In June 2001, an additional $509,000 was invested in the company. In the quarter ended December 31, 2002, the Company determined that the fair value of the shares had decreased significantly. Therefore, the Company assessed the fair value of its investment based on the latest financing transaction and concluded that the impairment was other-than-temporary. Accordingly, an amount of the investment of $987,000 was written off against earnings in accordance with APB No. 18. In the quarter ended September 30, 2003, due to further deterioration in the financial position of the investee company, the Company concluded that the remaining investment of $272,000 was impaired and was written off against earnings in accordance with APB No. 18.

     In May 2000, the Company invested $250,000 in a private system design software company. This company was acquired by a publicly traded design software company during May 2002. The acquisition resulted in the Company receiving shares of the acquiring company, which had fair value in excess of the original investment. Therefore, a gain of $568,000 was recorded in the year ended June 30, 2002. During the year ended June 30, 2003, the Company received additional shares in the acquiring company upon the achievement of certain milestones, and accordingly, an additional realized gain of $167,000 was recognized. In the quarter ended December 31, 2003, the Company determined to sell its remaining investment for cash and as a result, a loss of $104,000 was recognized.

     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 of the listed company 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. Due to an increase in the market value of the communications company’s stock price from October 1, 2001 to December 31, 2001, an unrealized gain of $94,000 was recorded in equity as “accumulated other comprehensive gain” in accordance with SFAS No. 130, “Reporting Comprehensive Income.” The $94,000 is equal to a $157,000 increase in market value of the short-term investment for the three months ended December 31, 2001, less deferred taxes relating to the unrealized gain of $63,000. In quarter ended December 31, 2003, the Company determined that it was in the best interest of its shareholders to sell a majority of its investment and recognized a gain of $109,000.

     From December 1999 to November 2001, the Company invested a total of $3.4 million in several venture capital funds. In the quarter ended December 31, 2003, substantial losses were recorded by the funds. Accordingly, the company recorded an other-than-temporary impairment of $90,000 based on the latest financial statements.

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     During the nine months ended March 31, 2003, the Company recognized impairment losses on investments totaling $4,787,000 as follows (in thousands):

     In May 2000, the Company invested $750,000 in a private company engaged in optical applications technology. In June 2001, an additional $509,000 was invested in the company. In the quarter ended December 31, 2002, the Company determined that the fair value of the shares had decreased significantly. Therefore, the Company assessed the fair value of its investment based on the latest financing transaction and concluded that the impairment was other-than-temporary. Accordingly, an amount of the investment of $987,000 was written off against earnings in accordance with APB No. 18.

     In June 2000, the Company invested $500,000 in a private company engaged in fiber optic technology. In the quarter ended June 30, 2002, the Company recorded an other-than-temporary impairment of $349,000. In the quarter ended December 31, 2002, the Company further 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 remaining investment of $151,000 was written off against earnings in accordance with APB No. 18. The company ceased its operations during the quarter ended March 31, 2003.

     In February 2000, the Company invested $500,000 in a private company engaged in integrated circuit design. In the quarter ended December 31, 2002, the Company determined that the prospects for recovery of the investment were unfavorable given the poor cash position of the company and the company’s operating losses. Accordingly, $250,000 of the investment was written off against earnings in accordance with APB No. 18. In the quarter ended March 31, 2003, the Company determined that the prospects for recovery of the investment had further deteriorated based on its latest financial position and accordingly, the remaining investment of $250,000 was written off. Thus for the nine months ended March 31, 2003, the entire investment of $500,000 was written off against earnings in accordance with APB No. 18.

     In May 2000 to May 2002, the Company invested $753,000 in a private company engaged in analog integrated circuit design. In the quarter ended December 31, 2002, the Company determined that the cash position of the company was poor and there was reasonable doubt the company may not be able to raise additional funds. Therefore, the Company concluded that the impairment was other-than-temporary. Accordingly, $378,000 of the investment was written off against earnings in accordance with APB No. 18.

     In December 1999 and January 2003, the Company invested a total of $1.1 million in a private company engaged in optical networking. In the quarter ended March 31, 2003, the Company determined that the fair value of the shares had decreased significantly based on the purchase price agreed by an acquiring company. Therefore, the Company assessed the fair value of its investment and concluded that

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the impairment was other-than-temporary. Accordingly, $831,000 of the investment was written off against earnings in accordance with APB No. 18.

     In July 2000, the Company invested $1.6 million in a private company engaged in broadband networking. In the quarter ended March 31, 2003, the Company determined that the fair value of the shares had decreased significantly. Therefore, the Company assessed the fair value of its investment based on the latest financing transaction and concluded that the impairment was other-than-temporary. Accordingly, $1,370,000 of the investment was written off against earnings in accordance with APB No. 18.

     In March 2000, the Company invested $287,000 in a private company engaged in software development. In the quarter ended March 31, 2003, the Company determined that revenue growth had not been achieved and the investment’s financial position had deteriorated significantly. Therefore, the Company assessed the fair value of its investment based on the investment’s latest financial position and concluded that the impairment was other-than-temporary. Accordingly, $110,000 of the investment was written off against earnings in accordance with APB No. 18.

     From December 1999 to November 2001, the Company invested $3.4 million in several venture capital funds. In the quarter ended December 31, 2002, substantial losses were recorded by one of the funds and $200,000 was recorded as an other-than-temporary impairment and written off against earnings. In the quarter ended March 31, 2003, the Company received the funds’ most current financial statements and noted further depreciation in value had occurred and accordingly, the company recorded an other-than-temporary impairment of $260,000. During the nine months ended March 31, 2003, a total of $460,000 was written off against earnings in accordance with APB No. 18 due to other-than-temporary losses from venture capital funds.

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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 March 31, 2004 and June 30, 2003 are as follows (in thousands):

The total comprehensive income (loss) for the nine months ended March 31, 2004 and 2003 are as follows (in thousands):

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Note 10. Segment information and concentration of credit risk.

     Subsequent to the transfer of its graphics division to XGI in July 2003, the Company operates in only one reportable segment: digital media. Accordingly, certain comparative amounts were reclassified to conform with current period presentation.

The following is a summary of the Company’s segment information (in thousands):

In August 2003, the Digital Media operations were transferred to TTI, a subsidiary of the Company. The Company held an 83% equity interest in TTI as of March 31, 2004, December 31, 2003 and September 30, 2003. The Company held a 63% equity interest in TTI as of June 30, 2003. Dilution of interest would result upon exercise of stock options by the employees in the future or if the Company determines to sell further interests in TTI. As of March 31, 2004, 65.0 million shares and options to purchase 12.6 million shares were outstanding for TTI. The options are vested over a period of four years from the grant date.

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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Two customers accounted for 55% and 14% of accounts receivables as of March 31, 2004. In the quarter ended March 31, 2004, four customers accounted for 19%, 19%, 16% and 11% of total revenues.

Note 11. Contingencies

     On December 14, 1998, NeoMagic Corporation (“NeoMagic”) filed a patent infringement action against the Company in the United States District Court for the District of Delaware, Case No. 98-CV-699. On January 25, 1999, the Company 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 the Company’s 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, the Company filed a motion to lift the stay on its antitrust counterclaim. On September 7, 2001, the District Court granted the Company’s motion to lift the stay on its antitrust counterclaim and discovery on the counterclaim is proceeding.

     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 because there is no final appealable order and the Company’s antitrust counterclaim remains pending. On August 1, 2001, the Federal Circuit granted the Company’s 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 the Company filed its 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 the Company, 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 Trident’s motion for summary judgment of non-infringement and denying NeoMagic’s motion for summary judgment of infringement. On May 21, 2003, Trident 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 23, 2003, the Court issued an Order denying NeoMagic’s motion for reconsideration of the Court’s May 23, 2003 summary judgment decision and granting Trident’s motion for clarification of the Court’s May 23, 2003 summary judgment decision. The Company stipulated to the order pursuant to Federal Rules of Civil Procedure Rule 54(b), the Court entered the order, and on October 22, 2003 NeoMagic filed its Notice of Appeal to the Federal Circuit. NeoMagic filed its opening brief on appeal on December 24, 2003. Trident filed its response brief on February 4, 2004. NeoMagic filed its reply brief on Appeal in early March. Oral argument has been set for June 9, 2004, with a decision likely approximately 45 days later.

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     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 respect to patents or other intellectual property rights relevant to the Company’s products, the Company 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. The Company cannot make any assurance that these matters will not materially and adversely affect the Company’s business, financial condition, operating results, or cash flows.

Note 12. Recent Accounting Pronouncements

     In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, which codifies, revises and rescinds certain sections of SAB No. 101, Revenue Recognition in Financial Statements, in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB No. 104 did not have a material impact on the Company’s consolidated results of operations, consolidated financial position or consolidated cash flows.

     In April 2004, the Emerging Issues Task Force issued Statement No. 03-06, Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share, (“EITF 03-06”). EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after March 31, 2004. The Company does not expect the adoption of EITF 03-06 to have any material impact on its consolidated financial statements.

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Item 2:

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 include our expectations and beliefs concerning:

•		the effects of our 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,
•		projected digital media revenue for the quarter ending June 30, 2004,
•		future prospects for the digital television industry in general,
•		devotion of resources and control of expenses related to the digital television market, new products and internal business strategies,
•		our future product development in the digital television market,
•		future gross margin levels and our strategy to maintain and improve gross margins,
•		demand for and trends in revenue for our products,
•		trends in average selling prices,
•		the percentage of export sales,
•		maintenance of majority ownership in our subsidiaries,
•		the outcome of pending litigation,
•		future investments and/or acquisitions.

We 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 Consolidated Financial Statements and Notes thereto.

Overview of Business

     We have been investing 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 a restructuring earlier in the fiscal year to allow us to build upon our prior success in this market by focusing our resources primarily on digital media products. We believe that our recent results demonstrate the success of our restructuring and we are optimistic that this will position the Company for long term success.

     As a result of the restructuring, we have increased the resources devoted to the digital television market, while reducing 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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     We undertook the following steps to accomplish the restructuring. In July 2003, the assets of our Graphics Division were acquired by XGI Technology, Inc. (XGI), the graphics business previously spun off from Silicon Integrated System Corp, and we simultaneously made a 30% equity investment in XGI. We later sold a portion of our investment in XGI and we now hold an approximately 20% 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 August 2003. In September 2003, we sold a portion of our equity interest in TTI and now hold an approximately 83% equity interest in TTI. However, our current equity interest in TTI may decline in the future, as discussed more fully in this report, due to dilution of interest resulting from employee exercises of stock options in TTI or further sales of equity interests in TTI.

     References to “we,” “Trident,” or the “Company” in this report refer to Trident Microsystems, Inc. and its subsidiaries, including TTI which was 83% owned by TMI as of March 31, 2004, December 31, 2003 and September 30, 2003, and was 63% owned by TMI as of June 30, 2003.

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Results of Operations

     The following table sets forth the results of operations expressed as percentages of revenues for the three and nine months ended March 31, 2004 and 2003:

The following table provides statement of operations data and the percentage change from the prior year (in thousands):

Revenues

     Revenues for the three months ended March 31, 2004 increased 19% to $13.8 million from the $11.6 million reported in the three months ended March 31, 2003. Revenues for the nine months ended March 31, 2004 increased 5% to $39.9 million from the $38.1 million reported in the nine months ended March 31, 2003. Revenues from our digital media products for the three months ended March 31, 2004 increased 68% to $12.7 million from $7.6 million for the three months ended March 31, 2003. Revenues from our digital media division for the nine months ended March 31, 2004 increased 87% to $37.8 million from $20.2 million for the nine months ended March 31, 2003. The increase in both the three months and nine months ended March 31, 2004 was primarily attributed to additional demand for our DPTV products from China’s TV makers and LCDTV sales to Samsung. For the June quarter, which is typically a slow quarter for the consumer electronics market, we expect digital media revenue to be relatively flat or slightly up as compared with the March quarter. Revenues from our graphics division were $3.9 million and $17.6 million for the three months and nine months ended March 31, 2003, respectively. No revenue was recorded for graphics products in the three months and nine months ended March 31, 2004 as a result of the transfer of the graphics division to XGI in July 2003.

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     Revenues from Asian customers, primarily in China and Taiwan accounted for 73%, and 13%, respectively, of our total revenues in the three months ended March 31, 2004. Revenues from Asian customers, primarily in Japan, Taiwan and China accounted for almost all of our total revenues in the three months and nine months ended March 31, 2003. Revenues from Asian customers, primarily in China and Taiwan accounted for 77% and 15%, respectively, of our total revenues in the nine months ended March 31, 2004. Revenues from North American and European customers were insignificant during all reported periods. We expect Asian customers will continue to account for a significant portion of our revenues.

     In the three months ended March 31, 2004, revenues from four customers, Skyworth, Samsung, Konka and Chang Hong, accounted for 19%, 19%, 16%, and 11% of total revenues, respectively. Skyworth, Konka and Chang Hong are television original equipment manufacturers located in China. In the three months ended March 31, 2003, sales to three customers, Inno Micro (a supplier to Toshiba), Chang Hong and Sampo (a television original equipment manufacturer located in Taiwan), accounted for 32%, 11% and 10% of total revenues, respectively. In the nine months ended March 31, 2004, sales to three customers, Skyworth, Samsung, and Sampo, accounted for 22%, 19%, and 17% of total revenues, respectively. In the nine months ended March 31, 2003 sales to two customers, Inno Micro and Skyworth, accounted for 39% and 13% of total revenues, respectively.

Gross Profit

     Gross profit increased to $7.8 million for the three months ended March 31, 2004 from $4.2 million for the three months ended March 31, 2003. Gross profit increased to $21.7 million for the nine months ended March 31, 2004 from $12.1 million for the nine months ended March 31, 2003. The gross margin as a percentage of revenues for the three months ended March 31, 2004 increased to 57% of revenues from 36% for the three months ended March 31, 2003. The gross margin as a percentage of revenues for the nine months ended March 31, 2004 increased to 54% of revenues from 32% for the nine months ended March 31, 2003. The increase in gross profit and gross margin was primarily attributable to higher revenues for digital media products, which have higher sales margins than graphics products.

     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 may have additional functionality and which are planned to have higher margins. We believe margins will be under modest pressure in the near term due to declining average selling prices, and our strategy is to maintain and improve gross margins over the long term by (1) developing new and more advanced products that have higher margins, (2) reducing manufacturing costs by improving production yield and (3) aggressively developing more cost effective products. 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 for the three months ended March 31, 2004 decreased to $3.1 million from $5.5 million for the three months ended March 31, 2003. As a percentage of total revenues, research and development expenses decreased to 23% for the three months ended March 31, 2004, from 47% for the three months ended March 31, 2003. Research and development expenses for the nine months ended March 31, 2004 decreased to $7.9 million from $17.0 million for the nine months ended March 31, 2003. As a percentage of total revenues, research and development expenses decreased to 20% for the nine months ended March 31, 2004, from 45% for the nine months ended March 31, 2003. The decrease in research and development expenses, both in actual dollars and as a percentage of total revenues, was primarily the result of a reduction in research and development activities due to the transfer of the Graphics Division to XGI.

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     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 the U.S., China, Japan, Korea, Taiwan and Europe. However, there can be no assurance that these products will be quickly or widely accepted by consumers in the marketplace, or that the new products will be developed and shipped in a timely manner.

Selling, General and Administrative

     Selling, general and administrative expenses increased to $3.5 million in the three months ended March 31, 2004 from $3.0 million in the three months ended March 31, 2003. Selling, general and administrative expenses decreased as a percentage of total revenues to 25% in the three months ended March 31, 2004 from 26% in the three months ended March 31, 2003. Selling, general and administrative expenses increased to $10.2 million in the nine months ended March 31, 2004 from $9.1 million in the nine months ended March 31, 2003. Selling, general and administrative expenses increased as a percentage of total revenues to 25% in the nine months ended March 31, 2004 from 24% in the nine months ended March 31, 2003. The increase in selling, general and administrative expenditures in actual dollars in both the three and nine months ended March 31, 2004, was attributed primarily to an increase in professional fees and administrative expenses relating to our restructuring activities. We will continue to monitor and control our selling, general and administrative expenses.

Interest and Other Income and Expense, Net

     Net interest and other income of $137,000 for the three months ended March 31, 2004 represents interest income of $41,000 and other income of $142,000 partially offset by other expenses of $46,000. Net interest and other expense of $255,000 for the nine months ended March 31, 2004 primarily represents interest income of $87,000 and net other expense of $344,000, which mainly related to currency translation losses and investment expenses. Interest income increased to $41,000 in the three months ended March 31, 2004, from $31,000 in the same prior year period. Interest income decreased to $87,000 in the nine months ended March 31, 2004, from $110,000 in the same prior year period. The decrease in interest income was primarily the result of lower interest rates during the nine months ended March 31, 2004. The amount of interest income earned by us varies directly with the amount of our cash and cash equivalents and the prevailing interest rates. Net Interest and other expense was $458,000 in the three months ended March 31, 2003 representing an expense of $489,000, partially offset by interest income of $31,000. In the nine months ended March 31, 2003, interest and other expense was $350,000, representing an expense of $489,000 partially offset by interest income $111,000.

Minority Interests in subsidiaries

     The $539,000 recorded in minority interests in subsidiaries for the three months ended March 31, 2004 and $1,324,000 recorded in the nine months ended March 31, 2004 represents the share of income relating to minority shareholders of our consolidated subsidiaries. The amount of such charges is dependent upon the minority ownership in our subsidiaries, TTI in particular. The percentage held by minority shareholders will increase in the future if employees of TTI exercise options to acquire TTI stock, or if we determine to sell further interests in TTI to outside investors. We are reviewing the possibility of a public offering of TTI stock in Taiwan, or possibly, in the United States. No decision has been made to proceed with such an offering, but we have taken steps to ensure that an offering could occur in Taiwan if we decided to proceed. We would intend to retain a majority interest in TTI in all cases, but any such offering would increase the minority ownership in TTI.

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Provision for Income Taxes

     A provision for income taxes of $231,000 was recorded for the three months ended March 31, 2004 and $2,506,000 was recorded in the nine months ended March 31, 2004 primarily relating to our Taiwan operations.

     A provision for income taxes of $1.0 million was recorded for the nine months ended March 31, 2003. This provision mainly represents an adjustment to the valuation allowance. This is related to the decrease in unrealized gain from our UMC investments 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.

Investment in UMC and Other Investments

     As of March 31, 2004, the Company owned approximately 71.5 million shares of United Microelectronics Corporation (UMC), which represents about 0.5% of the outstanding stock of UMC. See Part I, Item 1, Notes 7 and 9 above (“Investment in UMC” and “Comprehensive Income (Loss),” respectively) for discussion of this investment. In March 2004 the Company sold 5.3 million shares of its investment in UMC for cash of $5.4 million. This resulted in a gain of $1.9 million. We may sell additional UMC shares in the near future if it is in the best interests of our stockholders to do so.

During the nine months ended March 31, 2004, we recognized net gain on investments totaling $9.1 million as follows (in thousands):

     During the nine months ended March 31, 2003, we recognized impairment losses on investments other than UMC totaling $4.8 million as follows (in thousands):

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See Part I, Item 1, Notes 7 and 8 to the condensed consolidated financial statements above for discussion of these investments and related losses.

     Under the Investment Company Act of 1940 (the “1940 Act”), a company meeting the definition of an “investment company” is subject to various stringent legal requirements on its operations. A company may become subject to the 1940 Act if, among other reasons, it owns investment securities with a value exceeding 40 percent of the value of its total assets (excluding government securities and cash items) on an unconsolidated basis, unless a particular exemption or safe harbor applies. “Investment securities” do not include interests in majority owned subsidiaries, and we intend to maintain a majority interest in our subsidiaries, including TTI, for the foreseeable future. We do hold other securities, including shares in UMC, and the value of those securities fluctuates significantly. At times, the total value of the investment securities we hold may, and recently has, exceeded 40% of total assets. However, we are, and intend to remain, an operating company. Our efforts are focused almost exclusively on our digital media business and we intend to continue to conduct business as an operating company, and to take such actions as are necessary to ensure we are not, and are not regulated as, an investment company.

Liquidity and Capital Resources

     As of March 31, 2004, our principal sources of liquidity included cash and cash equivalents of $29.2 million, which increased from $5.1 million at June 30, 2003. During the nine months ended March 31, 2004, $1.3 million of cash was provided by operations, compared to the nine months ended March 31, 2003, during which $12.2 million of cash was used by operations. Cash provided by operations in the nine months ended March 31, 2004 was primarily due to operating income, a decrease in accounts receivable and an increase in income taxes payable, partially offset by an increase in inventories and a decrease in accounts payable. Cash used in operations in the nine months ended March 31, 2003 was primarily due to net loss, an increase in inventories and a decrease in taxes payable, offset by a decrease in accounts receivable. Capital expenditures were $315,000 for the nine months ended March 31, 2004, compared to $358,000 for the nine months ended March 31, 2003. During the nine months ended March 31, 2004, $18.0 million of net cash was provided by investing activities which was comprised of the net proceeds of $8.4 million from the transfer of our Graphics Division to XGI and the sale of one-third of our interest in XGI, the sale of approximately 6.8% equity interest in our TTI subsidiary for $2.8 million, the sale of 5.3 million shares of our investment in UMC for $5.4 million and $1.5 million from the disposal of short-term investments, partially offset by the purchase of investments of $90,000.

     Accounts receivable decreased to $3.1 million at March 31, 2004 from $4.3 million at June 30, 2003 primarily as a result of our restructuring due to decreased revenues after the transfer of our Graphics Division to XGI, and due to more sales made on cash on delivery terms for digital media products. Accounts payable decreased to $4.5 million at March 31, 2004 from $8.0 million at June 30, 2003 primarily due to our decreased research and development expenditures, which is due to the transfer of the Graphics Division to XGI. Our income taxes payable increased due to income from our Taiwan operations.

     During the nine months ended March 31, 2004, $5.2 million of cash was provided by financing activities, which was the result of the exercising of employee stock options.

     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 March 31, 2004 were as follows (in thousands):

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     As of March 31, 2004, we had unconditional purchase order commitments of approximately $2.4 million for wafers and chipsets.

     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 may sell additional UMC shares in the near term if it is in the best interests of our stockholders to do so.

     We believe our current resources are sufficient to meet our needs for at least the next twelve months. We regularly consider transactions to finance our activities, including debt and equity offerings and new credit facilities or other financing transactions. We believe our current reserves are adequate.

Factors That May Affect Our Results

While we recognized operating income in the quarter ended March 31, 2004, we have incurred operating losses in recent history.

     We recognized income from operations of $1,181,000 in the quarter ended March 31, 2004. However, we did incur losses for several quarters prior to our reorganization.

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

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

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

	•		uncertain demand in 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;
	•		seasonality, particularly in the third quarter of each fiscal year, due to the extended holidays surrounding the Chinese New Year;
	•		our ability to achieve required cost reductions;
	•		our ability to attain and maintain production volumes and quality levels for our products;
	•		delayed new product introductions;
	•		unfavorable responses to new products;
	•		adverse economic conditions, particularly in Asia; and
	•		the mix of products sold and the mix of distribution channels through which they are sold.

     The quarterly results of TMI also depend in part on the charges we incur as a result of the minority ownership of TTI. The minority ownership may increase in the future as a result of the exercise of TTI options by employees or if we determine to sell further interests in TTI.

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

     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:

	•		exchange rate variations
	•		potential adverse tax consequences; and
	•		unexpected changes in regulatory requirements.

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

Intense competition exists in the market for digital media products.

     We plan to continue developing the next generation DPTV™, HiDTV™ as well as other advanced products for digital TV and digital STB for the digital television market in the U.S., China, Japan, Korea, Taiwan and Europe. 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. Therefore, we expect to devote significant resources to the DPTV™ and HiDTV™ market even though competitors are substantially more experienced than we are in this market.

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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 and long-term strategic partner relationships, 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.

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

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

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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 consider from time to time 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.

     We are reviewing the possibility of a public offering of TTI stock in Taiwan, or possibly, in the United States. No decision has been made to proceed with such an offering, but we have taken steps to ensure that an offering could occur in Taiwan if we decided to proceed. Any such offering would increase the minority ownership in TTI, and result in larger charges, as a percentage of operating income, for minority interest in subsidiaries. Any such decision would be made based upon the overall results and benefits to TMI shareholders at the time.

     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.

Changes in our business organization will affect our operations.

     As a result of our 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. Through our TTI subsidiary, we plan to continue developing the next generation DPTV^™and HDTV, as well as other advanced products for digital TV and digital STB for the digital television market in the U.S., China, Japan, Korea, Taiwan and

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Europe. While we anticipate this market to generate an increasing percentage of our revenues, we have limited experience with digital video television. There can be no guarantee that our digital media products will be accepted by the market or increase our revenues or profitability.

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 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 March 31, 2004, approximately $29.2 million of our investments matured in less than three months. We will continue to invest a significant portion of our existing cash equivalents in interest bearing, investment grade securities, with maturities of less than twelve months. We do not believe that our investments, in the aggregate, have significant exposure to interest rate risk.

Exchange rate risk

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

     While we expect our international revenues to continue to be denominated predominately in U.S. dollars, an increasing portion of our international revenues may be denominated in foreign currencies in the future. In addition, 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. As of March 31, 2004, we had available-for-sale equity investments with a fair market value of $64.3 million mostly relating to shares of UMC. Our objective in managing our exposure to stock market fluctuations

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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 nine months ended March 31, 2004, we recognized an impairment loss of approximately $539,000 on our investments in private companies that we concluded was other-than-temporary. As of March 31, 2004, the balance of our long-term equity investments in non-public companies was approximately $3.0 million.

Item 4: Controls and Procedures

     Under the supervision and with the participation of our management, including our chief executive officer and chief accounting officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our chief executive officer and chief accounting officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

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Part II: Other Information

Item 1: Legal Proceedings

     On December 14, 1998, NeoMagic Corporation (“NeoMagic”) filed a patent infringement action against the Company in the United States District Court for the District of Delaware, Case No. 98-CV-699. On January 25, 1999, the Company 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 the Company’s 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, the Company filed a motion to lift the stay on its antitrust counterclaim. On September 7, 2001, the District Court granted the Company’s motion to lift the stay on its antitrust counterclaim and discovery on the counterclaim is proceeding.

     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 because there is no final appealable order and the Company’s antitrust counterclaim remains pending. On August 1, 2001, the Federal Circuit granted the Company’s 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 the Company filed its 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 the Company, 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 Trident’s motion for summary judgment of non-infringement and denying NeoMagic’s motion for summary judgment of infringement. On May 21, 2003, Trident 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 23, 2003, the Court issued an Order denying NeoMagic’s motion for reconsideration of the Court’s May 23, 2003 summary judgment decision and granting Trident’s motion for clarification of the Court’s May 23, 2003 summary judgment decision. The Company stipulated to the order pursuant to Federal Rules of Civil Procedure Rule 54(b), the Court entered the order, and on October 22, 2003 NeoMagic filed its Notice of Appeal to the Federal Circuit. NeoMagic filed its opening brief on appeal on December 24, 2003. Trident filed its response brief on February 4, 2004. NeoMagic filed its reply brief on Appeal in early March. Oral argument has been set for June 9, 2004, with a decision likely approximately 45 days later.

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     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 respect to patents or other intellectual property rights relevant to our products, the Company 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. The Company 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 2: Changes in Securities and Use of Proceeds

            Not applicable

Item 3: Defaults upon Senior Securities

            Not applicable

Item 4: Submission of Matters to Vote by Security Holders

A Special Meeting of Stockholders was held on March 17, 2004 to approve an amendment to the Company’s Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 30,000,000 to 60,000,000. The proposal was approved by the following margins:

Item 5: Other Information

            Not applicable

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Item 6: Exhibits and Reports on Form 8-K

(a)

Exhibits

(b)

Reports on Form 8-K

			We filed a Current Report on Form 8-K, dated January 5, 2004, pursuant to Item 7 and Item 12.
			We filed a Current Report on Form 8-K, dated January 22, 2004, pursuant to Item 7 and Item 12.

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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 May 14, 2004, on its behalf by the undersigned thereunto duly authorized.

Trident Microsystems, Inc.

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Index to Exhibits

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