UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-20784

TRIDENT MICROSYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		77-0156584 (I.R.S. Employer Identification Number)
1170 Kifer Road Sunnyvale, California (Address of principal executive offices)		94086-5303 (Zip Code)

(408)-962-5000
(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. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

At July 31, 2011, the number of shares of the Registrant’s common stock outstanding was 180,697,321.

 

 

TRIDENT MICROSYSTEMS, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2011

INDEX

Part I. Financial Information			3
Item 1. Financial Statements			3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010 (Unaudited)			3
Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010 (Unaudited)			4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 (Unaudited)			5
Notes to Condensed Consolidated Financial Statements (Unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 3. Quantitative and Qualitative Disclosures About Market Risk			41
Item 4. Controls and Procedures			43
Part II. Other Information
Item 1. Legal Proceedings			44
Item 1A. Risk Factors			44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. (Reserved)
Item 5. Other Information
Item 6. Exhibits			59
Signatures			61
Index to Exhibits			62
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Three months Ended June 30,								Six Months Ended June 30,
(In thousands, except per share data)		2011				2010				2011				2010
Net revenues		$	69,569			$	171,648			$	157,902			$	262,051
Cost of revenues			51,567				138,722				120,023				215,340
Gross profit			18,002				32,926				37,879				46,711
Operating expenses:
Research and development			35,491				49,653				71,350				86,717
Selling, general and administrative			16,519				22,311				36,383				42,447
Goodwill impairment			—				7,851				—				7,851
Restructuring charges			(73	)			4,470				4,652				12,865
Total operating expenses			51,937				84,285				112,385				149,880
Loss from operations			(33,935	)			(51,359	)			(74,506	)			(103,169	)
Gain  on investments			2,098								2,098				(209	)
Interest income			173				228				348				498
Gain on acquisition			—				—				—				43,402
Other income			4,851				59				5,529				352
Loss before provision for income taxes			(26,813	)			(51,072	)			(66,531	)			(59,126	)
Provision (benefit from) for income taxes			(554	)			(2,255	)			501				(1,530	)
Net loss		$	(26,259	)		$	(48,817	)		$	(67,032	)		$	(57,596	)
Net loss per share — basic and diluted		$	(0.15	)		$	(0.28	)		$	(0.38	)		$	(0.38	)
Shares used in computing net loss per share — basic and diluted			176,056				174,018				175,862				152,059

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

TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

		June 30,				December 31,
(In thousands, except par values)		2011				2010
Assets
Current assets:
Cash and cash equivalents		$	51,619			$	93,224
Accounts receivable, net			32,699				62,328
Accounts receivable from related parties			6,402				7,337
Inventories			13,406				23,025
Notes receivable from related party			20,884				20,884
Prepaid expenses and other current assets			15,418				18,330
Total current assets			140,428				225,128
Property and equipment, net			31,076				31,566
Intangible assets, net			60,861				82,921
Long-term note receivable from related party			500				1,500
Other assets			32,978				29,826
Total assets		$	265,843			$	370,941
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	8,145			$	7,828
Accounts payable to related parties			16,142				26,818
Accrued expenses and other current liabilities			44,462				70,401
Deferred margin			6,712				8,904
Income taxes payable			3,683				2,077
Total current liabilities			79,144				116,028
Long-term income taxes payable			23,681				25,476
Deferred income tax liabilities			200				200
Other long-term liabilities			2,376				4,933
Total liabilities			105,401				146,637
Commitments and contingencies (Note 16)
Stockholders’ equity:
Preferred stock, $0.001 par value: 500 shares authorized; .004 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively (Note 11)			—				—
Common stock, $0.001 par value; 250,000 shares authorized; 180,437 and 177,046 shares issued and outstanding at June 30, 2011, and December 31, 2010, respectively			180				177
Additional paid-in capital			437,992				434,825
Accumulated deficit			(277,730	)			(210,698	)
Total stockholders’ equity			160,442				224,304
Total liabilities and stockholders’ equity		$	265,843			$	370,941

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

TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Six Months Ended
		June 30,				June 30,
(In thousands)		2011				2010
Cash flows from operating activities:
Net loss		$	(67,032	)		$	(57,596	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense			3,396				2,898
Depreciation and amortization			12,787				12,894
Amortization of acquisition-related intangible assets			21,362				30,589
Loss on disposal of property and equipment			(68	)			4
Impairment of goodwill			—				7,851
Impairment of technology licenses and prepaid royalties			698				2,078
Severance paid by NXP			—				3,588
Gain on acquisition			—				(43,402	)
Loss on sales of investments			(2,098	)			209
Deferred income taxes			33				(2,259	)
Changes in current assets and liabilities net of effect from acquisition:
Accounts receivable			29,629				(93,231	)
Accounts receivable from related parties			1,935				(8,488	)
Inventories			9,619				(6,397	)
Prepaid expenses and other current assets			3,628				(1,389	)
Accounts payable			(1,532	)			1,359
Accounts payable to related parties			(10,676	)			35,961
Accrued expenses and other liabilities			(27,167	)			28,500
Income taxes payable			(190	)			839
Net cash used in operating activities			(25,676	)			(85,992	)
Cash flows from investing activities:
Purchases of property and equipment			(3,035	)			(3,222	)
Acquisition of businesses, net of cash acquired			—				46,380
Proceeds from sale of property, plant and equipment			67				134
Purchases of technology licenses			(13,025	)			(8,436	)
Net cash provided by (used in) investing activities			(15,993	)			34,856
Cash flows from financing activities:
Proceeds from issuance of common stock to employees			64				56
Net cash provided by financing activities			64				56
Net decrease in cash and cash equivalents			(41,605	)			(51,080	)
Cash and cash equivalents at beginning of the period			93,224				147,995
Cash and cash equivalents at end of the period		$	51,619			$	96,915
Supplemental schedule of non-cash investing and financing activities:
Common stock and preferred shares issued in connection with acquisition of business		$	—			$	188,610

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

TRIDENT MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. NATURE OF OPERATIONS

     Trident Microsystems, Inc. (including our subsidiaries, referred to collectively in this Report as “the Company”) is a provider of high-performance multimedia semiconductor solutions for the digital home entertainment market. Our goal is to become a leading provider for the “connected home,” with innovative semiconductor solutions that make it possible for consumers to access their entertainment and content (music, pictures, internet, data) anywhere and at anytime throughout the home.

2. BASIS OF PRESENTATION

Basis of Presentation

     The condensed consolidated financial statements include the accounts of Trident Microsystems, Inc., or Trident and its subsidiaries (collectively the “Company”) after elimination of all significant intercompany accounts and transactions. In the opinion of the Company, the condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments necessary for a fair statement 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, or SEC, and are not audited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been 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 December 31, 2010 included in the Company’s Annual Report on Form 10-K, for the period ended December 31, 2010, filed with the SEC. 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 ending December 31, 2011.

Revenue Recognition

     The Company recognizes revenues upon shipment directly to end customers provided that persuasive evidence of an arrangement exists, delivery has occurred, title has transferred, the price is fixed or determinable, there are no customer acceptance requirements, there are no remaining significant obligations and collectability of the resulting receivable is reasonably assured.

     The Company records estimated reductions to revenue for customer incentive offerings, including rebates and sales returns allowance in the same period that the related revenue is recognized. The Company’s customer incentive offerings primarily involve

volume rebates for its products in various target markets. The Company accrues for 100% of the potential rebates when it is likely that the relevant criteria will be met. A sales returns allowance, based primarily on historical sales returns, credit memo data and other factors known at that time, is presented as a reduction in accounts receivable on the Company’s Condensed Consolidated Balance Sheet.

     A significant amount of the Company’s revenue is generated through distributors that may benefit from pricing protection and/or rights of return. The Company defers recognition of product revenue and costs from sales to such distributors until the products are resold by the distributor to the end user customers and records deferred revenue less cost of deferred revenues as a net liability on the Company’s Condensed Consolidated Balance Sheet. At the time of shipment to such distributors, the Company records a trade receivable at the selling price since there is a legally enforceable obligation from the distributor to pay the Company currently for product delivered and relieve inventory for the carrying value of goods shipped since legal title has passed to the distributor. During the three and six months ended June 30, 2011, the Company recognized $21.9 million and $47.0 million, respectively, and $42.5 million and $53.4 million during the three and six months ended June 30, 2010, respectively, of product revenue from products that were sold by distributors to the end user customers.

     The Company presents any taxes assessed by a governmental authority that are both imposed on and concurrent with our sales on a net basis, excluded from revenues.

Recent Accounting Pronouncements

     In December 2010, the Financial Accounting Standards Board (“FASB”) issued an update to modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The updated guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The Company’s adoption did not have a material impact on its consolidated results of operations or financial condition.

     In December 2010, the FASB updated its guidance related to disclosure of supplementary pro forma information for business combinations. The updated guidance requires that if comparative financial statements are presented, the pro forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period only. The updated guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, with early adoption permitted. The Company’s adoption did not have an impact on its consolidated results of operations or financial condition as the updated guidance only affects disclosures related to future business combinations.

      In May, 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04 “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” The ASU is the result of joint efforts by the FASB and the International Accounting Standards Board (“IASB”) to develop a single, converged fair value framework. While the ASU is largely consistent with existing fair value measurement principles in U.S. GAAP, it expands existing disclosure requirements for fair value measurements and makes other amendments. Key additional disclosures include quantitative disclosures about unobservable inputs in Level 3 measures, qualitative information about sensitivity of Level 3 measures and valuation process, and classification within the fair value hierarchy for instruments where fair value is only disclosed in the footnotes but carrying amount is on some other basis. For public companies, the ASU is effective for interim and annual periods beginning after December 15, 2011. We do not expect adoption of this ASU to have a material impact on our results of operations, financial position or cash flow.

      In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income: Presentation of Comprehensive Income,” which amends current comprehensive income guidance. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, it requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. Under the two-statement approach, the first statement would include components of net income, which is consistent with the income statement format used today, and the second statement would include components of other comprehensive income (“OCI”). The ASU does not change the items that must be reported in OCI. ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after December 15, 2011 with early adoption permitted. We do not expect adoption of this ASU to have a material impact on our results of operations, financial position or cash flow.

3. BALANCE SHEET COMPONENTS

The following table provides details of selected balance sheet components:

(Dollars in thousands)		June 30, 2011				December 31, 2010
Cash and cash equivalents:
Cash		$	51,619			$	62,226
Money market funds invested in U.S. Treasuries			—				30,998
Total cash and cash equivalents		$	51,619			$	93,224
Accounts receivable:
Accounts receivable, gross		$	33,820			$	62,962
Allowance for sales returns and doubtful accounts			(1,121	)			(634	)
Total accounts receivable		$	32,699			$	62,328
Inventories:
Work in process		$	4,351			$	4,751
Finished goods			9,055				18,274
Total inventories		$	13,406			$	23,025
Prepaid expenses and other current assets:
Prepaid licenses			531				—
VAT receivable			10,239				9,488
Prepaid and deferred taxes			914				658
Prepaid insurance			878				524
Other			2,856				7,660
Total prepaid expenses and other current assets:		$	15,418			$	18,330
Property and equipment, net:
Building and leasehold improvements		$	21,598			$	21,068
Machinery and equipment			27,891				29,889
Software			7,470				4,816
Furniture and fixtures			3,612				3,411
			60,571				59,184
Accumulated depreciation and amortization			(29,495	)			(27,618	)
Total property and equipment, net		$	31,076			$	31,566
Accrued expenses and other current liabilities:
Compensation and benefits		$	10,908			$	22,098
Price rebate			5,013				6,414
Wafer and substrate fees			1,498				4,203
VAT payable			4,725				4,203
Royalties			1,703				2,579
Contingent liabilities			—				2,758
Professional fees			1,402				2,133
Restructuring accrual			1,215				4,518
Warranty accrual			770				1,596
Software licenses			4,935				5,989
Other			12,293				13,910
Accrued expenses and other current liabilities		$	44,462			$	70,401
Deferred margin:
Deferred revenue on shipments to distributors			14,480				18,841
Deferred cost of sales on shipments to distributors			(7,768	)			(9,937	)
Total deferred margin		$	6,712			$	8,904

4. FAIR VALUE MEASUREMENTS

     The Company follows applicable accounting guidance for its fair value measurements. The guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The guidance establishes three levels of inputs that may be used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

Determination of fair value

     Cash equivalents are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.

Assets Measured at Fair Value on a Recurring Basis

     The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis which were comprised of the following types of instruments as of December 31, 2010:

		Fair Value Measurement at Reporting Date
						Quoted Prices
						In Active				Significant				Significant
						Markets for				Observable				Unobservable
						Identical Assets				Inputs				Inputs
		Fair Value				(Level 1)				(Level 2)				(Level 3)
						(In thousands)
Money market funds invested in U.S. Treasuries(1)		$	30,998			$	30,998			$	—			$	—
Total		$	30,998			$	30,998			$	—			$	—

     The Company did not have cash equivalents as of June 30, 2011.

5. BUSINESS COMBINATIONS

Acquisition of the television systems and set-top box business lines from NXP B.V.

     On February 8, 2010, the Company and its wholly-owned subsidiary Trident Microsystems, (Far East), Ltd., or TMFE, a corporation organized under the laws of the Cayman Islands, completed the acquisition of the television systems and set-top box business lines from NXP B.V., a Dutch besloten vennootschap, or NXP. As a result of the acquisition, the Company issued 104,204,348 shares of Trident common stock to NXP, equal to 60% of the Company’s total outstanding shares of Common Stock, after giving effect to the share issuance to NXP, in exchange for the contribution of selected assets and liabilities of the television systems and set-top box business lines from NXP and cash proceeds in the amount of $44 million. In accordance with U.S. generally accepted accounting principles, the closing price on February 8, 2010, of $1.81 per share, was used to value the Company’s common stock because it is traded in an active market and considered a Level 1 input. In addition, the Company issued to NXP four shares of a newly created Series B Preferred Stock or the Preferred Shares.

     The acquisition was accounted for using the purchase method of accounting, and the Company was deemed to be the acquirer in accordance with applicable accounting guidance. The determination that Trident was the accounting acquirer was based on a review of all pertinent facts and circumstances. The following key factors of the acquisition transaction were considered by the Company to conclude that Trident was the acquirer:

     The composition of the governing body of the combined entity — Major decisions require the approval of at least two-thirds of the members of Trident’s Board of Directors. Five of the nine members of the Board of Directors following the closing of the acquisition in February 2010 were legacy Company directors.

     The composition of senior management of the combined entity — The senior management of the Company following the acquisition was primarily composed of members of the Company’s pre-acquisition senior management.

     The relative voting rights in the combined entity after the business combination — NXP’s voting rights are limited, such that if all outstanding shares of Common Stock of Trident not held by NXP (i.e., 40% of the Common Stock) vote all 40% in favor of a stockholder proposal, then NXP is limited to voting 30% of the outstanding shares against the proposal, and the remaining 30% of the Common Stock of Trident held by NXP must be voted either (a) in accordance with the non-NXP stockholders, in this case for such proposal, or (b) in accordance with the recommendation of the Board of Directors as approved by a majority of the non-NXP members of the Trident Board of Directors.

     The existence of a large minority voting interest in the combined entity if no other owner or organized group of owners has a significant voting interest — NXP may vote 30% of the outstanding shares freely, with the remaining 30% of shares owned by NXP restricted to voting either (a) in accordance with the recommendation of the Board of Directors as approved by a majority of the non-NXP directors, or (b) in the same proportion as the votes cast by all other stockholders.

     The terms of the exchange of equity interests — The acquisition represented the purchase of a relatively small portion of the total NXP business.

     Based upon the analysis of all relevant facts and circumstances, most notably the factors described above, the Company determined that the preponderance of such factors indicated that Trident was the acquiring entity.

The following is the consideration transferred by the Company representing the total purchase price:

		Shares				Amount
		(In thousands)
Issuance of Trident common shares to NXP			104,204,348			$	188,610
Issuance of Trident preferred shares to NXP			4				—
Purchase of Trident common shares by NXP							(30,000	)
Net cash payment by NXP							(14,235	)
Contingent returnable consideration(a)							(3,588	)
Acquisition date fair value of total consideration transferred						$	140,787

     The final purchase price of $140.8 million was allocated to the net tangible and intangible assets acquired and liabilities assumed as follows:

		Amount
		(In thousands)
Assets acquired:
Cash		$	2,145
Prepaid expenses and other current assets			14,375
Inventory notes receivable(b)			39,900
Fixed assets(c)			10,487
Non-current assets			4,500
Service agreements(d)			16,000
Acquired intangible assets(e)			117,000
Deferred tax asset(f)			796
Liabilities assumed:
Accrued liabilities			(16,199	)
Non-current liabilities			(4,815	)
Fair market value of the net assets acquired			184,189
Gain on acquisition(g)			(43,402	)
Total purchase price		$	140,787

     Under the purchase method of accounting, the total purchase price is allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed in connection with the acquisition based on their fair value as of the closing date of the acquisition. Total acquisition related expenses incurred through March 31, 2010, recorded as operating expenses, were approximately $11.7 million. Assets acquired in the acquisition as of February 8, 2010 were reviewed and adjusted, if required, to their fair value.

     The Company utilized a methodology referred to as the income approach, which discounts expected future cash flows to present value. The discount rate used in the present value calculations was derived from a weighted-average cost of capital analysis, adjusted to reflect additional risks.

Other NXP related items:

(a)		Prior to the close of the acquisition, NXP initiated a restructuring plan pursuant to which the employment of some NXP employees was terminated upon the close of the acquisition. The Company has determined that the restructuring plan was a separate plan from the business combination because the plan to terminate the employment of certain employees was made in contemplation of the acquisition. Therefore, the full severance cost of $3.6 million was recognized by the Company as an expense on the acquisition close date. The entire severance cost was paid by NXP after the close of the acquisition, was reflected under applicable accounting guidance as contingent returnable consideration, effectively reducing the purchase consideration transferred.
(b)		As of the effective date of the acquisition, the Company acquired two inventory notes receivable (the “Note” or “Notes”). The first Note was for $19.1 million and allowed the Company to purchase finished goods inventory on March 22, 2010.
		The second Note was for $20.8 million and allows the Company to purchase work-in-process inventory on the readiness of the Company’s enterprise resource planning system which is projected to be implemented in the first half of fiscal 2012, but no later than August 31, 2012. For additional details related to notes receivable, see Note 14, “Related Party Transactions,” of Notes to Condensed Consolidated Financial Statements.
(c)		Fixed assets (property and equipment) were measured at fair value and could include assets that are not intended to be used in their highest and best use. The Company’s fixed assets were reduced by $1.4 million, resulting from new information received by the Company subsequent to filing the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2010.
(d)		Service agreements acquired from NXP were measured at fair value and are amortized over the remaining life of the agreement, up to 33 months from the closing date of the transaction. These service agreements include manufacturing and distributor agreements as well as payroll processing, benefits administration, accounting, information technology and real estate administration.

(e)

Identifiable intangible assets were measured at fair value and could include assets that are not intended to be used in their highest and best use. Developed technology consisted of products which have reached technological feasibility. The value of the developed technology was determined by using the discounted income approach.

     Customer relationships relate to the Company’s ability to sell existing and future versions of products to existing NXP customers. The fair value of the customer relationships was determined by using the discounted income approach.

     Patents represent various patents previously owned by NXP. The fair value of patents was determined by using the royalty relief method and estimating a benefit from owning the asset rather than paying a royalty to a third party for the use of the asset.

     The backlog fair value represents the value of the standing orders for the products acquired in the acquisition as of the close of the acquisition.

     The acquired intangible assets, their fair values and weighted average amortized lives, are as follows (dollars in thousands):

						Weighted
						Average
		Fair Value				Amortized Life
Backlog		$	15,000			0.5 years
Customer relationships			23,000			2.24 years
Developed technology			48,000			3.0 years
Patents			13,000			4.5 years
In-process research and development			18,000
		$	117,000

In-process research and development, or IPR&D, consisted of the in-process set-top box projects awaiting completion development at the time of the acquisition. The value assigned to IPR&D was determined by considering the importance of products under development to the overall development plan, estimating costs to develop the purchased IPR&D into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. Acquired IPR&D assets were initially recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. Efforts necessary to complete the in-process research and development include additional design, testing and feasibility analyses.

The values assigned to IPR&D were based upon discounted cash flows related to the future products’ projected income stream. The discount rate of 33.9% used in the present value calculations were derived from a weighted average cost of capital, adjusted upward to reflect the additional risks inherent in the development life cycle, including the useful life of the technology, profitability levels of the technology, and the uncertainty of technology advances that are known at the date of acquisition.

The following table summarizes the significant assumptions at the acquisition date underlying the valuations of IPR&D for the NXP acquisition completed on February 8, 2010:

						February 8, 2010
										Expected
						Estimated				Commencement
						Cost to				Date of Significant
Set-Top Box Development Projects		Fair Value				Complete				Cash Flows
	(In thousands)
Apollo/Shiner		$	8,856			$	1,400			Completed
Kronos			7,731				1,800			February 2012
Other			1,413				2,700			February 2013
Total		$	18,000			$	5,900

The Company received and sampled first silicon on the Apollo/Shiner product and in November 2010 determined that the project was complete. Minor validation and testing work will continue prior to achieving high volume production which is anticipated to occur in 2011. The asset was re-designated a finite-lived intangible asset within the core technology category and

amortization of the asset commenced in November 2010 over an expected useful live of 3 years. The Company continues to develop the Kronos and other product lines with the expectation the products will be fully developed in 2012 and 2013, respectively.

NXP Related Tax Items:

(f)		The Company’s deferred tax assets were reduced by $3.7 million, resulting from new information received by the Company subsequent to filing the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2010.
(g)		The preliminary purchase price allocation, associated with the acquisition of the television systems and set-top box business lines from NXP, assigned $48.5 million to gain on acquisition. Subsequently, in accordance with applicable accounting guidance, the gain on acquisition was reduced by $5.1 million and the Company’s deferred tax assets and fixed assets were reduced by $3.7 million and $1.4 million, respectively, resulting from new information received by the Company subsequent to filing the Company’s Form 10-Q for the three months ended March 31, 2010.

     The Company utilized the income approach to determine fair value of the assets. The key factor that led to the recognition of a gain on acquisition was a decline of $54.2 million in the fair value of the Company’s common stock purchase consideration between the date that the definitive agreement was signed on October 4, 2009 (based on a closing price of $2.33 per share) and the acquisition date of February 8, 2010 (based on a closing price of $1.81 per share), as determined in accordance with applicable accounting guidance.

Unaudited Pro Forma Financial Information

     The following unaudited pro forma information presents a summary of the results of operations of the Company assuming the acquisition of the television systems and set-top box business lines of NXP had occurred on January 1, 2010. This pro forma financial information is for informational purposes only and does not reflect any operating efficiencies or inefficiencies which may result from the business combination and therefore is not necessarily indicative of results that would have been achieved had the businesses been combined during the periods presented (amounts in thousands, except per share data):

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2010				2010
Pro forma net revenues		$	171,648			$	309,470
Pro forma net loss			(49,030	)			(55,520	)
Pro forma net loss per share — Basic			(0.28	)			(0.37	)
Shares used in computing pro forma net loss per share — Basic			174,018				152,059

     The Company recorded net revenues of approximately $124 million and $172 million and net operating losses of approximately $10 million and $31 million from the acquisition for the three and six months ended June 30, 2010 respectively.

6. GOODWILL AND INTANGIBLE ASSETS

Goodwill and impairment

     The following table presents goodwill balances and movements for the six months ended June 30, 2011 and 2010:

		June 30,
(In thousands)		2011				2010
Balance at beginning of quarter		$	—			$	7,851
Impairment charge			—				(7,851	)
Balance at end of quarter		$	—			$	—

     Management evaluates the recoverability of its identifiable intangible assets and long-lived assets in accordance with applicable accounting guidance, which requires the assessment of these assets for recoverability when events or circumstances indicate a potential impairment exists. In determining whether impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment loss is measured and recorded as the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company performed an annual goodwill impairment analysis in the quarter ended June 30, 2010 and recorded an impairment charge of $7.9 million, due to the excess of the carrying value over the estimated market value for the television systems operating segment. The market approach method and the Company’s stock price at June 30, 2010, were used to determine the estimated market value of the television systems operating segment.

Intangible assets and impairment

     The following table summarizes the components of intangible assets and related accumulated amortization, including impairment, for the periods presented:

		As of June 30, 2011												As of December 31, 2010
		Gross				Accumulated								Gross				Accumulated				Net
		Carrying				Amortization				Net Carrying				Carrying				Amortization				Carrying
		Amount				and Impairment				Amount				Amount				and Impairment				Amount
										(In thousands)
Intangible assets:
Core & developed		$	84,607			$	(50,869	)		$	33,738			$	84,607			$	(40,716	)		$	43,891
Customer relationships			25,120				(17,195	)			7,925				25,120				(11,795	)			13,325
Patents			13,000				(4,032	)			8,968				13,000				(2,588	)			10,412
In-process R&D			9,144				(698	)			8,446				9,144				—				9,144
Service agreements			16,000				(14,216	)			1,784				16,000				(9,851	)			6,149
Total		$	147,871			$	(87,010	)		$	60,861			$	147,871			$	(64,950	)		$	82,921

     As of June 30, 2011, the status of in-process research and development is consistent with the Company’s expectation at the time the in-process research and development was acquired. Future period intangible assets amortization expense will include the amortization of in-process research and development, if and when the technology reaches technical feasibility. As of June 30, 2011, approximately $0.7 million was impaired and written off and approximately $8.9 million of the in-process research and development has reached technological feasibility and was reclassified to core and developed technology, and the unamortized portion is included in the estimated future amortization expense of intangible assets. See Note 5, “Business Combinations,” of Notes to Condensed Consolidated Financial Statements for a further description of the Company’s in-process research and development.

     The following table presents details of the amortization of intangible assets included in net revenues, cost of revenues, research and development and selling, general and administrative expense categories for the periods presented:

		Three months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Cost of revenues		$	8,760			$	16,972			$	17,878			$	27,187
Operating expenses:
Research and development			664				823				2,058				1,308
Selling, general and administrative			926				1,339				2,124				2,094
		$	10,350			$	19,134			$	22,060			$	30,589

     As of June 30, 2011, the estimated future amortization expense of intangible assets in the table above is as follows, excluding an in-process research and development intangible asset that has not reached technological feasibility:

		Estimated
Year Ending		Amortization
		(In thousands)
2011(remaining 6 months)		$	16,948
2012			26,706
2013			7,015
2014			1,745
2015 and thereafter			0
Total		$	52,414

7. RESTRUCTURING

     Subsequent to the Company’s second quarter earnings release included in its Current Report on Form 8-K dated July 28, 2011, the Company performed further analysis in the course of finalizing the consolidated financial statements included in the Form 10-Q for the three and six months ended June 30, 2011, and concluded that it was appropriate to adjust restructuring expense by $674,000. The adjustment reduced restructuring expenses by $674,000 for the three and six months ended June 30, 2011. This adjustment does not indicate a significant change in the Company’s previously reported operating performance. As a result, the Company incurred a restructuring charge of ($0.1) million and $4.7 million for the three and six months ended June 30, 2011. During the three months ended March 31, 2011, the Company approved plans to restructure some of our research and development operations. These plans included the closure of a facility in Israel and significant downsizing of a facility in San Diego, California during the quarter ended June 30, 2011.

     Prior to the close of the Company’s acquisition from NXP of selected assets and liabilities of NXP’s television systems and set-top box business lines, NXP initiated a restructuring plan pursuant to which the employment of some NXP employees was terminated upon the close of the merger. The Company determined that the restructuring plan was a separate plan from the business combination because the plan to terminate the employment of certain employees was made in contemplation of the acquisition. Therefore, a severance cost of $3.6 million was recognized by the Company as an expense on the acquisition date and is included in the total restructuring charge of approximately $8.4 million for the three months ended March 31, 2010. The $3.6 million of severance cost was paid by NXP after the close of the acquisition, effectively reducing the purchase consideration transferred. See Note 5, “Business Combinations,” of Notes to Condensed Consolidated Financial Statements. Also during the three months ended March 31, 2010, the Company shut down one of its European locations in an effort to streamline its operations and recorded $4.5 million of restructuring expenses related to severance and related employee benefits to employees who will be terminated. Restructuring charges are recorded under “Restructuring charges” in the Company’s Condensed Consolidated Statement of Operations.

     The following table presents the changes in the Company’s restructuring accrual for the three and six months ended June 30, 2011 and 2010:

		Three months Ended June 30,								Six Months Ended June 30,
(In thousands)		2011				2010				2011				2010
Restructuring liabilities, beginning of period		$	2,355			$	153			$	2,983			$	—
Severance and related charges, net			1,129				4,470				5,854				12,875
Net cash payments			(2,305	)			(3,518	)			(7,658	)			(11,770	)
Foreign exchange gain (loss)			36				—				36				—
Restructuring liabilities, end of period		$	1,215			$	1,105			$	1,215			$	1,105

     The Company expects to pay the remaining liability over the next twelve to twenty-four months.

8. WARRANTY PROVISION

     The Company replaces defective products that are expected to be returned by its customers under its warranty program and includes such estimated product returns in its cost of goods sold. The following table reflects the changes in the Company’s accrued product warranty for expected customer claims related to known product warranty issues for the three and six months ended June 30, 2011 and June 30, 2010:

		Three months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Accrued product warranty, beginning of period		$	943			$	210			$	1,596			$	—
Charged to (reversal of) cost of revenues			(122	)			271				82				481
Actual product warranty expenses			(51	)			—				(908	)			—
Accrued product warranty, end of period		$	770			$	481			$	770			$	481

9. BANK LINE OF CREDIT

     On February 9, 2011, the Company, TMFE and Trident Microsystems (HK) Ltd., or TMHK, entered into a $40 million revolving line of credit agreement with Bank of America, N.A., to finance working capital. Borrowings under the agreement will bear interest at the base rate, as defined in the agreement, plus a margin ranging from 1.50% to 3.00% per annum, or at the option of the Company, rates based on LIBOR plus a margin ranging from 2.25% to 3.75% per annum. Under the credit agreement, the Company may access credit based upon a certain percentage of its eligible accounts receivable outstanding, subject to eligibility requirements, limitations and covenants. The credit agreement contains both affirmative and negative covenants, including covenants that limit or restrict the Company’s ability to, among other things, incur indebtedness, grant liens, make capital expenditures, merge or consolidate, dispose of

assets, pay dividends or make distributions, change the method of accounting, make investments and enter into certain transactions with affiliates, in each case subject to materiality and other qualifications, baskets and exceptions customary for a credit agreement of this size and type. The credit agreement also contains a financial covenant that requires the Company to maintain a specified fixed charge coverage ratio if either the Company’s liquidity or availability under the credit agreement drops below certain thresholds. The Company incurred loan origination costs and related expenses of $1.0 million, which will be amortized as interest expense over the life of the agreement. As of June 30, 2011, the remaining unamortized portion of said fees was $0.8 million. As of June 30, 2011, the Company had not borrowed funds from the revolving line of credit.

     On August 8, 2011, the Company amended the credit agreement. From the effective date of the amendment through December 31, 2011, the liquidity threshold for triggering of financial covenants has been reduced from $35 million, with a minimum of $5 million of liquidity required to be from availability under the line, to $15 million, with a minimum of $10 million of liquidity required to be from deposits in certain of the Company’s investment accounts. After December 31, 2011, the liquidity threshold would return to $35 million, with a minimum of $10 million required to be from availability under the credit line. During the period that the reduced liquidity threshold is in effect (through December 31, 2011) the line will be unavailable for borrowing. The Company is currently in compliance with all covenants and requirements under the credit agreement and has no borrowings outstanding thereunder. The Company believes this amendment substantially enhances its liquidity and operating flexibility, however, if the Company is not in compliance in the future with covenants under the agreement and is unable to borrow under the credit facility or to refinance future indebtedness, the Company may be prevented from using the agreement to fund its working capital needs.

10. EMPLOYEE STOCK PLANS

Voluntary stock option exchange program

     On February 10, 2010, the Company commenced a voluntary stock option exchange program (the “Exchange Program”), previously approved by stockholders at the Company’s annual stockholder meeting on January 25, 2010. The Exchange Program offer period commenced on February 10, 2010 and concluded at 9:00 p.m., Pacific Standard Time, on March 10, 2010.

     Under the Exchange Program, eligible employees were able to exchange certain outstanding options to purchase shares of the Company’s common stock having a per share exercise price equal to or greater than $4.69 for a lesser number of shares of restricted stock or restricted stock units. Eligible employees participating in the offer who were subject to U.S. income taxation receive shares of restricted stock, while all other eligible employees participating in the offer received restricted stock units. Members of the Company’s Board of Directors and the Company’s executive officers and “named executive officers,” as identified in the Company’s definitive proxy statement filed on December 18, 2009, were not eligible to participate in the Exchange Program.

     Pursuant to the terms and conditions of the Exchange Program, the Company accepted for exchange eligible options to purchase 1,637,750 shares of the Company’s common stock, representing 88.83% of the total number of options originally eligible for exchange. These surrendered options were cancelled on March 11, 2010 and in exchange therefore the Company granted a total of 120,001 new shares of restricted stock and a total of 198,577 new restricted stock units under the Trident Microsystems, Inc. 2010 Equity Incentive Plan, in accordance with the applicable Exchange Program conversion ratios. Under applicable accounting guidance, the exchange was accounted for as a modification and the stock-based compensation expense recognized by the Company as a result of the Exchange Program was immaterial.

Employee Stock Incentive Plans

     The Company grants nonstatutory and incentive stock options, restricted stock awards, restricted stock units and performance share awards to attract and retain officers, directors, employees and consultants. For the quarter ended March 31, 2010, the Company made awards under the 2010 Equity Incentive Plan (the “2010 Plan”), which was approved by the Company’s stockholders on January 25, 2010. Previously, the Company had also adopted the 2001 Employee Stock Purchase Plan, however, purchases under this plan have been suspended for several years. Options to purchase Trident’s common stock remain outstanding under the following incentive plans which have expired or been terminated: the 1992 Stock Option Plan, the 1994 Outside Directors Stock Option Plan, the 1996 Nonstatutory Stock Option Plan (the “1996 Plan”), the 2002 Stock Option Plan (the “2002 Plan”) and the 2006 Equity Incentive Plan (the “2006 Plan”). In addition, options to purchase Trident’s common stock are outstanding as a result of the assumption by the Company of options granted to “TTI”‘s officers, employees and consultants under the “TTI” 2003 Employee Option Plan (“TTI Plan”). The options granted under the “TTI” option Plan were assumed in connection with the acquisition of the minority interest in “TTI” on March 31, 2005 and converted into options to purchase Trident’s common stock. Except for the 1996 Plan, all of the Company’s equity incentive plans, as well as the assumption and conversion of options granted under the “TTI” Plan, have been approved by the Company’s stockholders.

     At the Company’s Annual Stockholder Meeting held on June 16, 2011, the Company’s stockholders approved an increase of 35,000,000 shares to be available for issuance under the 2010 Plan. The 2010 Plan provides for the grant of equity incentive awards, including stock options, stock appreciation rights, restricted stock purchase rights, restricted stock bonuses, restricted stock units, performance shares, performance units and cash-based and other stock-based awards of up to 67,200,000 shares, subject to increase for unissued

predecessor plan shares as set forth in the 2010 Plan. For purposes of the total number of shares available for grant under the 2010 Plan, any shares that are subject to awards of stock options, stock appreciation rights or other awards that require the option holder to purchase shares for monetary consideration equal to their fair market value determined at the time of grant are counted against the available-for-grant limit as one share for every one share issued, and any shares issued in connection with any other awards, or “full value” awards, are counted against the available-for-grant limit as 1.2 shares for every one share issued. Stock options granted under the 2010 Plan generally must have an exercise price equal to the closing market price of the underlying stock on the grant date and generally expire no later than ten years from the grant date. Options generally become exercisable beginning one year after the date of grant and vest as to a percentage of shares annually over a period of three to four years following the date of grant. The 2010 Plan supersedes the 2006 Plan and the 2002 Plan. The 2006 Plan and 2002 Plan were terminated on January 26, 2010 following approval of the 2010 Plan by the Company’s stockholders.

Valuation of Employee Stock Options

     The Company values its stock-based incentive awards granted using the Black-Scholes model, except for performance-based restricted stock awards with a market condition granted during the fiscal year ended June 30, 2008 and during the quarter ended March 31, 2010, for which the Company used a Monte Carlo simulation model to value the awards.

     The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Black-Scholes model requires the input of certain assumptions. The Company’s stock options have characteristics significantly different from those of traded options, and changes in the assumptions can materially affect the fair value estimates.

     For the three and six months ended June 30, 2011 and 2010, the fair value of options granted were estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions:

		Three months Ended June 30,								Six Months Ended June 30,
Employee Incentive Plans		2011				2010				2011				2010
Expected term (in years)		5.03					5.03			5.03					4.78
Expected volatility		71.98		%			69.88	%		71.93		%			68.95	%
Risk-free interest rate		2.23		%			2.43	%		2.23		%			2.28	%
Expected dividend rate			—				—				—				—
Weighted average fair value at grant date		$	0.56			$	1.08			$	0.57			$	1.03

     The expected term of stock options represents the weighted average period the stock options are expected to remain outstanding. The expected term is based on the observed and expected time to exercise and post-vesting cancellations of options by employees. The Company uses historical volatility in deriving its expected volatility assumption because it believes that future volatility over the expected term of the stock options is not likely to differ from the past. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of options to purchase Trident common stock. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts.

     As stock-based compensation expense recognized in the Condensed Consolidated Statements of Operations for the quarters ended June 30, 2011 and 2010 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.

Stock-Based Compensation Expense

     The following table summarizes Trident’s stock-based award activities for the quarters ended June 30, 2011 and 2010. The Company has not capitalized any stock-based compensation expense in inventory for the quarters ended June 30, 2011 and 2010 as such amounts were immaterial.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In thousands)		2011				2010				2011				2010
Cost of revenues		$	62			$	86			$	150			$	190
Research and development			885				902				1,611				1,782
Selling, general and administrative			734				1,246				1,635				2,505
Total stock-based compensation expense		$	1,681			$	2,234			$	3,396			$	4,477

     During the three months ended June 30, 2011, total stock-based compensation expense recognized in income before taxes was $1.7 million, and there was no related recognized tax benefit. During the three months ended June 30, 2010, total stock-based compensation expense recognized in income before taxes was $2.2 million, with no related recognized tax benefit, that was reduced by a reduction in a contingent liability of $1.6 million associated with the “modification of certain options” that was recorded in Selling, general administrative expenses on the Company’s Condensed Consolidated Statement of Operations for the quarter ended March 31, 2010. See Note 16, “Commitments and Contingencies – “Special Litigation Committee,” in the Notes to Condensed Consolidated Financial Statements for further discussion regarding the modification of certain options.

Stock Option Awards

     The following table summarizes the Company’s stock option and restricted stock activities for the six months ended June 30, 2011:

						Options Outstanding
														Weighted
														Average
														Remaining
														Contractual				Aggregate
		Shares Available				Number of				weighted Average				Term (in				Intrinsic
(In thousands, except per share data and contractual term)		for Grant				Shares				Exercise Price				Years)				Value
Balance at December 31, 2010			36,039				5,027			$	4.28
Plan shares expired			(1,069	)			—				—
Options increase under 2010 plan			1,111				—				—
Granted			(4,400	)			4,400			$	0.95
Exercised			—				(59	)		$	1.08
Cancelled, forfeited or expired			1,585				(1,585	)		$	3.30
Restricted stock granted (1)			(7,335	)			—				—
Restricted stock cancelled, forfeited or expired (1)			1,502				—				—
Balance at June 30, 2011			27,433				7,783			$	2.62				6.5			$	0
Vested and expected to vest at June 30, 2011							6,658			$	2.89				6.4			$	0
Exercisable at June, 2011							2,437			$	5.72				4.9			$	0

     The aggregate intrinsic value represents the total pre-tax intrinsic value, which is computed based on the difference between the exercise price and Trident’s closing common stock price of $0.69 as of June 30, 2011, which would have been received by the option holders had all option holders exercised their options as of that date. Total unrecognized compensation cost of options granted but not yet vested as of June 30, 2011 was $3.1 million, which is expected to be recognized over the weighted average service period of 3.4 years.

Restricted Stock Awards and Restricted Stock Units

     The following table summarizes the activity for Trident’s restricted stock awards (“RSA”) and restricted stock units (“RSU”) for the six months ended June 30, 2011.

		Restricted Stock Awards
		and Restricted Stock Units
						Weighted Average
						Grant-Date Fair
(In thousands, except per share data)		Number of Shares				Value
Nonvested balance at December 31 2010			4,452			$	2.93
Granted			6,113			$	0.99
Vested			(1,375	)		$	1.23
Forfeited			(1,227	)		$	1.23
Nonvested balance at June 30, 2011			7,963			$	2.00

     Both RSAs and RSUs typically vest over a three or four year period. The fair value of the RSAs and RSUs was based on the closing market price of the Company’s common stock on the date of award. The table above includes an RSA of 110,000 performance-based shares issued to the Company’s former Chief Executive Officer on October 23, 2007 as part of her initial new hire award. As part of the Resignation Agreement and Release of Claims between the Company and the former Chief Executive Officer, the 110,000 performance-based shares were accelerated and an insignificant amount of expense was recognized in January 2011.

     The table above includes performance-based RSU awards of 67,000 shares under the 2006 Plan, granted on October 4, 2009, to the Company’s former Chief Executive Officer. The RSU award granted to the former Chief Executive Officer were cancelled during January 2011 and no expense was recognized in January 2011.

     The table above includes awards of 650,000 performance-based shares with market conditions and service conditions that were granted to certain Company executives during the year ended December 31, 2010. These awards vest subject to achievement of a minimum price for the Company’s stock for fiscal years 2011 through 2013. The fair value of these performance share awards with market and service conditions was estimated at the grant date using a Monte Carlo simulation with the following weighted-average assumptions: volatility of Trident’s common stock of 72%; and a risk-free interest rate of 1.83%. The weighted-average grant-date fair value of the performance share awards was $1.11.

     The table above includes awards of 624,000 performance-based shares with market conditions that were granted to certain Company executives during the quarter ended June 30, 2011. The vesting percentages of these awards are calculated based on the Total Shareholder Return (TSR) of Trident’s common stock as compared to the TSR of the 30 peers included in the Philadelphia Semiconductor Sector index. The fair value of these performance share awards with market conditions was estimated at the grant date using a Monte Carlo simulation with the following weighted-average assumptions: volatility of Trident’s common stock of 75.65%; and a risk-free interest rate of 0.93%. The weighted-average grant-date fair value of the performance share awards was $0.87.

     For the three months ended June 30, 2011, the Company recognized expense for RSAs and RSUs, excluding performance share awards with market and service conditions granted under the 2010 Plan, of $1.5 million. A total of $7.8 million of unrecognized compensation cost is expected to be recognized over a weighted average period of 2.9 years.

     For the three months ended June 30, 2011, the Company recognized expense performance share awards with market and service conditions granted under the 2010 Plan, of $0.1 million. A total of $0.7 million of unrecognized compensation cost is expected to be recognized over a weighted average period of 2.0 years.

     The Company recognized an insignificant amount of expense for RSAs and RSUs granted under the Employee Stock Plans for the quarter ended June 30, 2011. Unrecognized compensation cost is expected to be recognized over a weighted average period of 2.6 years.

11. STOCKHOLDERS’ EQUITY

Common Stock Warrants

     In connection with the acquisition of selected assets from Micronas in 2009, the Company issued warrants to acquire up to 3.0 million additional shares of its common stock. The warrants were valued using the Black-Scholes option pricing model with the following inputs: volatility factor 68%, contractual terms of 5 years, risk-free interest rate of 1.98%, and a market value for the Company’s stock of $1.43 per share at the acquisition date, May 14, 2009. Warrants to purchase one million shares will vest on each of the second, third and fourth anniversaries of the closing of the transaction, with exercise prices of $4.00 per share, $4.25 per share and $4.50 per share, respectively. The warrants provide for customary anti-dilution adjustments, including for stock splits, dividends, distributions, rights issuances and certain tender offers or exchange offers. If not yet exercised, the warrants will expire on May 14, 2014.

Preferred Stock

     In connection with the NXP acquisition, the Company issued to NXP four shares of a newly created Series B Preferred Stock, having the rights, privileges and preferences set forth in the Certificate of Designation of the Series B Preferred Stock filed on February 5, 2010 (“Series B Certificate”). The number of shares of Series B Preferred Stock is fixed at four. Each share has a liquidation preference of $1.00, which must be paid prior to any distribution to holders of common stock upon any liquidation of the Company, and no subsequent right to participate in further distributions on liquidation. The shares of Series B Preferred Stock have no dividend rights. The voting rights of the shares of Series B Preferred Stock primarily relate to the nomination and election of up to two members of the Company’s Board of Directors (“Series B Directors”), as distinguished from the other members of the Company’s Board of Directors. On April 28, 2011, the Company and NXP entered into an Amended and Restated Shareholder Agreement, and on June 16, 2011, the Company’s stockholders approved the amendment of the Series B Certificate to reduce the number of Series B Directors from four to two. For so long as the holders of the Series B Preferred Stock beneficially own 11% or more of the Company’s common stock and are entitled to elect a director, the size of the Company’s Board will consist of seven to nine directors, as fixed by a resolution of the board of directors. On July 21, 2011, the Company’s board of directors set the number at eight directors. The holders of the Series B Preferred Stock are solely entitled to elect a number of Series B Directors based on a formula relating to their aggregate beneficial ownership of the Company’s common stock as follows: (a) less than 30% but at least 20%, two Series B Directors and (b) less than 20% but at least 11%, one Series B Director. The Series B Certificate sets forth the rights of the holders of the Series B Preferred Stock to remove and replace the Series B Directors, as well as their rights to vote as a class to amend, alter or repeal any of its provisions that would adversely affect the powers, designations, preferences and other special rights of the Series B Preferred Stock.

Preferred Shares Rights

     On July 24, 1998, the Company’s Board of Directors adopted a Preferred Shares Rights Agreement or Original Rights Agreement. Pursuant to the Agreement, the Company’s Board of Directors authorized and declared a dividend of one preferred share purchase right or Right for each outstanding share of the Company’s common stock, par value $0.001 Common Shares of the Company as of August 14, 1998. The Rights are designed to protect and maximize the value of the outstanding equity interests in Trident in the event of an unsolicited attempt by an acquirer to take over Trident, in a manner or terms not approved by the Board of Directors.

     On July 23, 2008, the Board approved an amendment to the Original Rights Agreement pursuant to an Amended and Restated Rights Agreement dated as of July 23, 2008 or Amended and Restated Rights Agreement. The Amended and Restated Rights

Agreement (i) extended the Final Expiration Date, as defined in the Original Rights Agreement, through July 23, 2018; (ii) adjusted the number of shares of Series A Preferred Stock (“Preferred Shares”) issuable upon exercise of each Right from one one-hundredth to one one-thousandth; (iii) changed the purchase price, (Purchase Price) of each Right to $38.00; and (iv) added a provision requiring periodic evaluation (at least every three years after July 23, 2008) of the Amended and Restated Rights Agreement by a committee of independent directors to determine if maintenance of the Amended and Restated Rights Agreement continues to be in the best interests of the Company and its stockholders. The Company subsequently amended the Amended and Restated Rights Agreement to provide that the issuance of shares of Trident common stock to Micronas and to NXP, respectively, does not trigger the Rights under the Amended and Restated Rights Agreement.

12. NET LOSS PER SHARE

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In thousands, except per share amounts)		2011				2010				2011				2010
Net loss		$	(26,259	)		$	(48,817	)		$	(67,032	)		$	(57,596	)
Shares used in computing net loss per share — basic and diluted			176,056				174,018				175,862				152,059
Net loss per share — basic and diluted		$	(0.15	)		$	(0.28	)		$	(0.38	)		$	(0.38	)
Potentially dilutive securities (1)			7,783				5,409				7,783				5,409

13. INCOME TAXES

     The Company accrued an insignificant amount for interest and penalties, following applicable accounting guidance, related to gross unrecognized tax benefits, which are included in the provision for income taxes for the three and six months ended June 30, 2011.

     The Company included in its unrecognized tax benefit of $30.7 million at June 30, 2011, $23.7 million of tax benefits that, if recognized, would reduce the Company’s annual effective tax rate. It is reasonably possible that the Company’s unrecognized tax benefits could decrease by a range between zero and $2.9 million within the next twelve months, depending on the outcome of certain tax audits or statutes of limitations in foreign jurisdictions.

     A benefit from income taxes of $0.6 million and a provision for income taxes of $0.5 million was recorded for the three and six months ended June 30, 2011, respectively. A benefit from income taxes of $2.3 million and $1.5 million was recorded for the three and six months ended June 30, 2010, respectively. While the Company is in a loss position on a consolidated basis for the three and six months ended June 30, 2011, tax expense recorded in the six month period ended June 30, 2011 resulted primarily from income earned in various jurisdictions as a result of reimbursements for intercompany services. Tax benefits recorded during the three month period ended June 30, 2011, as well as the three and six months ended June 30, 2010, resulted primarily from the release of tax reserves in a foreign jurisdiction, in addition to recognition of losses in some foreign jurisdictions. As a result, our effective tax rates were 2.1% and (0.8%) in the three and six months ended June 30, 2011 respectively giving rise to a significant difference between the 35% federal statutory rate and our effective tax rates, in the three and six months ended June 30, 2011 and June 30, 2010.

     The Company’s ability to use federal and state net operating loss and credit carry forwards to offset future taxable income and future taxes, respectively, is subject to restrictions attributable to equity transactions that result from changes in ownership as defined by Internal Revenue Code (“IRC”) Sections 382 and 383. As discussed in Note 5, “Business Combinations” of Notes to Condensed Consolidated Financial Statements, on February 8, 2010, Trident issued 104,204,348 newly issued shares of Trident common stock to NXP, equal to 60% of the total outstanding shares of Trident common stock. The impact of this event reduced the Company’s availability of net operating loss and tax credit carry forwards for federal and state income tax purposes.

     The Internal Revenue Service has initiated an examination of the Company’s U.S. corporate income tax returns for fiscal years ended December 31, 2009, June 30, 2008 and June 30, 2009. At this time, it is not possible to estimate the potential impact that the

examination may have on income tax expense. Although timing of the resolution or closure on audits is highly uncertain, the Company does not believe it is reasonably possible that the unrecognized tax benefits would materially change in the next 12 months.

14. RELATED PARTY TRANSACTIONS

NXP

     In connection with the NXP acquisition, the Company acquired two inventory notes receivable. The first Note was settled during the quarter ended September 30, 2010. The second Note bears interest at a rate per annum of 250 basis points in excess of the 3-month LIBOR rate. The Company expects the second Note to be settled in the first half of fiscal 2012, when the company successfully implements an enterprise resource planning system.

     Since the Company was unable to successfully implement an enterprise resource planning system by June 30, 2011, the Company entered into an arrangement with NXP to extend the Manufacturing Services Agreement and a Transition Service Agreement for ICT Hardware and ICT Software at a monthly charge of $0.1 million and $0.3 million, respectively. The term of these agreements ends following the readiness of the Company’s enterprise resource planning system, which is currently projected to be implemented in the first half of fiscal 2012, but no later than August 31, 2012.

     Total purchases from NXP for the three months ended June 30, 2011 were $33.9 million. As of June 30, 2011, the outstanding accounts payable to NXP was $16.0 million, the outstanding accounts receivable from NXP was $6.4 million and the outstanding long-term receivable from NXP was $0.5 million. At June 30, 2011, the Company had a note receivable from NXP of $20.9 million related to future inventory purchases from NXP, of which the entire balance was a current asset on the Company’s Condensed Consolidated Balance Sheet. The accounts receivable from NXP of $6.4 million at June 30, 2011, was not related to the sales of product.

     In connection with the acquisition, the Company and NXP entered into the following agreements, each effective as of February 8, 2010:

•

Intellectual Property Transfer and License Agreement: Under this agreement, between TMFE and NXP, NXP has transferred to a newly formed Dutch besloten vennootschap acquired by TMFE, or Dutch Newco, certain patents, software and technology, including those exclusively related to the acquired business lines. Pursuant to the terms of the agreement, NXP has granted a license to Dutch Newco to certain patents, software and technology used in other parts of NXP’s business and Dutch Newco has granted a license back to NXP to certain of the patents, software and technology.

	•		Stockholder Agreement: This agreement, between the Company and NXP, sets forth the designation of nominees to the Company’s Board, providing certain restrictions on the right of NXP to freely vote its shares of Company common stock received pursuant to the Share Exchange Agreement, and providing a two year lock up during which NXP cannot transfer its shares of Company common stock, subject to certain exceptions, including transfers to affiliates. In addition, under this agreement, NXP has agreed to standstill restrictions for nine years, including restrictions on the future acquisition of Company securities, participation in a solicitation of proxies, and effecting or seeking to effect a change of control of Company. The NXP Stockholder Agreement also sets forth certain major decisions that may only be taken by the Company Board upon a supermajority vote of two-thirds of the directors present. The NXP Stockholder Agreement provides NXP with certain demand and piggy-back registration rights related to the Shares, and grants certain preemptive rights to NXP with respect to future issuances of the Company’s common stock.
	•		Transition Services Agreement: Under this agreement, NXP agrees to provide to the Company for a limited period of time specified transition services and support, including order fulfillment and delivery; accounting services and financial reporting services; human resources management (including compensation and benefit plan management, payroll services and training); pensions; office and infrastructure services (including access to certain facilities for a limited period of time); sales and marketing support; supply chain management (including logistics and warehousing); quality control; financial administration; ICT hardware and ICT software and infrastructure; general IT services; export, customs and licensing services; and telecommunications. Depending on the service provided, the term ranges from three to 18 months, provided that the services for IT and ITC could continue into the fourth quarter of 2011.
	•		Manufacturing Services Agreement: Under this agreement, contract manufacturing services are to be provided by NXP for a limited period of time for finished goods as well as certain front end, back end and other related manufacturing services for

			products acquired by the Company. The term of the agreement ends following the readiness of the Company’s enterprise resource planning system, which is currently projected to be implemented in fiscal 2012.
	•		Contract Services Agreement: Under this agreement, certain employees of NXP are to provide contract services to the Company for a limited period of time for services including R&D, IP development, design in support and account management, as well as support for the transition of these activities to Company personnel. Depending on the service provided, the term ranges from 2 to 12 months.

15. EMPLOYEE BENEFIT PLANS

Employee Benefit Plans

     The Company’s Israeli subsidiary has a pension and severance investment plan pursuant to which the Company is required to make pension and severance payments to its retired or former Israeli employees, and in certain circumstances, other Israeli employees whose employment is terminated. This subsidiary has been closed and all severance costs have been paid as of June 30, 2011.

     The Company’s India subsidiary has a gratuity plan and a compensated absence plan pursuant to which the Company is required to make payments. The Company’s liability for gratuity plan is calculated based on the salary of employees multiplied by years of service. The Company’s liability for the compensated absence plan is calculated based on the daily salary of the employees multiplied by 30 days of compensated absence. The resulting balance of $0.7 million is included in other non-current liabilities on the Company’s Condensed Consolidated Balance Sheets. A corresponding asset of $0.4 million is included in other assets, on the Company’s Condensed Consolidated Balance Sheets. The underfunded balance of these plans was $0.3 million as of June 30, 2011.

Employee 401(k) Plan

     The Company sponsors the Trident Microsystems, Inc. 401(k) Retirement Plan (the “Retirement Plan”) — a defined contribution plan that is available to substantially all of its employees in the United States. Under Section 401(k) of the Internal Revenue Code, the Retirement Plan allows for tax-deferred salary contributions by eligible employees. Participants can contribute from 1% to 100% of their annual eligible compensation to the Plan on a pretax basis. Employee contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Code. The Company matches eligible participant contributions at 25% of the first 5% of eligible base compensation. The Retirement Plan allows employees who meet the age requirements and reach the Plan contribution limits to make a catch-up contribution not to exceed the limit set forth in the Internal Revenue Code. The catch-up contributions are eligible for matching contributions. All matching contributions vest immediately, but participants must be employed on the last day of the plan year in order to receive the matching contribution. The Company’s matching contributions to the Plan totaled $0.2 million for the six months ended June 30, 2011.

16. COMMITMENTS AND CONTINGENCIES

     The Company has been, and expects that it will in the future be, a party to various legal proceedings, investigations or claims. In accordance with applicable accounting guidance, the Company records accruals for certain of its outstanding legal proceedings, investigations or claims when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal proceedings, investigations or claims that could affect the amount of any accrual, as well as any developments that would make a loss contingency both probable and reasonably estimable. The Company discloses the amount of the accrual if the financial statements would be otherwise misleading. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability.

     However, if the loss (or an additional loss in excess of a prior accrual) is at least a reasonable possibility and material, then the Company discloses an estimate of the possible loss or range of loss, if such estimate can be made, or discloses that an estimate cannot be made. The assessment whether a loss is probable or a reasonable possibility, and whether the loss or a range of loss is estimable, involves a series of complex judgments about future events. Even as to a loss that is reasonably possible, management may be unable to estimate a range of possible loss, particularly where (i) the damages sought are substantial or indeterminate, (ii) the proceedings are in the early stages, or (iii) the matters involve novel or unsettled legal theories or a large number of parties. In such cases, there is considerable uncertainty regarding the ultimate resolution of such matters, including the amount of any possible loss, fine or penalty. Accordingly, for some proceedings, the Company is currently unable to estimate the loss or a range of possible loss. However, an adverse resolution of one or more of such matters could have a material adverse effect on the Company’s results of operations in a particular quarter or fiscal year.

     The Company has not determined that any current legal proceeding is reasonably likely to result in a loss.

Commitments

NXP Acquisition Related Commitments

     On February 8, 2010, as a result of the acquisition of selected assets and liabilities of the television systems and set-top box business lines from NXP, the Company entered into a Transition Services Agreement, pursuant to which NXP provides to the Company, for a limited period of time, specified transition services and support. Depending on the service provided, the term for the majority of services range from three to eighteen months, and limited services could continue into the fourth quarter of 2011.

     The terms of the agreements allow the Company to cancel either or both the Transition Services Agreement and the Manufacturing Services Agreement with minimum notice periods. Also see Note 14,“Related Party Transactions,” of Notes to Condensed Consolidated Financial Statements.

Contingencies

Intellectual Property Proceedings

     In March 2010, Intravisual Inc. filed complaints against the Company and multiple other defendants, including NXP, in the United States District Court for the Eastern District of Texas, No. 2:10-CV-90 TJW alleging that certain Trident video decoding products infringe a patent relating generally to compressing and decompressing digital video. The complaint seeks a permanent injunction against Trident as well as the recovery of unspecified monetary damages and attorneys’ fees. On May 28, 2010, Trident filed its answer, affirmative defenses and counterclaims. No date for trial has been set. The Company intends to contest this action vigorously. Because this action is in the very early stages, and due to the inherent uncertainty surrounding the litigation process, the Company is unable to reasonably estimate the ultimate outcome of this litigation at this time.

Shareholder Derivative Litigation

     The Company had been named as a nominal defendant in several purported shareholder derivative lawsuits concerning the granting of stock options. The federal court cases were consolidated as In re Trident Microsystems Inc. Derivative Litigation, Master File No. C-06-3440-JF. Plaintiffs in all cases alleged that certain of the Company’s current or former officers and directors caused it to grant options at less than fair market value, contrary to its public statements (including its financial statements); and that as a result those officers and directors were liable to the Company. No particular amount of damages was alleged against the Company. The Company’s Board of Directors appointed a Special Litigation Committee (“SLC”) composed solely of independent directors to review and manage any claims that it may have had relating to the stock option grant practices investigated by the Special Committee. The scope of the SLC’s authority included the claims asserted in the derivative actions.

     On March 26, 2010, the federal court approved settlements with all defendants other than Frank Lin, the Company’s former CEO. The details of that partial settlement, which disposed of the federal litigation as to all individual defendants other than Mr. Lin and as to the consolidated state court action in its entirety, were previously disclosed in the Company’s Form 8-K filed on February 10, 2010.

     On June 8, 2010, Mr. Lin filed a counterclaim against the Company. In that counterclaim, Mr. Lin sought recovery of payments he claimed he was promised during the negotiations surrounding his eventual termination and also losses he claimed he had suffered because he was not permitted to exercise his Trident stock options between January 2007 and March 2008. On February 11, 2011, the Company entered into a settlement agreement with Mr. Lin regarding his counterclaims, contingent on the settlement of the derivative litigation pursuant to certain terms.

     On February 15, 2011, the Company entered into a Stipulation of Settlement to resolve the federal litigation in its entirety, or Settlement, and on February 17, 2011, the federal court preliminarily approved the Settlement. The details of the Settlement were previously disclosed in the Company’s Form 8-K filed on February 16, 2011. On April 19, 2011, the federal court entered an order finally approving the Settlement. On May 19, 2011, the Settlement became effective, thus satisfying the contingency in the settlement of Mr. Lin’s counterclaims against the Company and ending the derivative actions. In connection with the approved settlements, payments of approximately $5.4 million were made to the Company and recorded in other income on the Company’s Condensed Consolidated Statement of Operations during the three and six months ended June 30, 2011. In addition, the Company transferred certain investments to Mr. Lin. The Company concluded that the value of these investments approximated the $2.8 million that it had previously recorded as a contingent liability accrual. As the book value of the transferred investments was $0.6 million, the Company recorded the remaining $2.1 million as a gain on investment in other income during the period to reflect the fair value of the transferred assets.

Special Litigation Committee

     Effective at the close of trading on September 25, 2006, the Company temporarily suspended the ability of optionees to exercise vested options to purchase shares of its common stock, until the Company became current in the filing of its periodic reports with the SEC and filed a Registration Statement on Form S-8 for the shares issuable under the 2006 Plan, or 2006 Plan S-8. This suspension continued in effect through August 22, 2007, the date of the filing of the 2006 Plan S-8, which followed the Company’s filing, on August 21, 2007, of its Quarterly Reports on Form 10-Q for the periods ended September 30, 2006, December 31, 2006 and March 31, 2007. As a result, the Company extended the exercise period of approximately 550,000 fully vested options held by 10 employees, who were terminated during the suspension period, giving them either 30 days or 90 days after the Company became current in the filings of our periodic reports with the SEC and filed the 2006 Plan S-8 in order to exercise their vested options. During the three months ended September 30, 2007, eight of these ten former employees stated above exercised all of their vested options. However, on September 21, 2007, the SLC decided that it was in the best interests of the Company’s stockholders not to allow the remaining two former employees, as well as the Company’s former CEO, Frank Lin, and two former non-employee directors, to exercise their vested options during the pendency of the SLC’s proceedings, and extended, until March 31, 2008, the period during which these five former employees could exercise approximately 428,000 of their fully vested options. Moreover, the SLC allowed one former employee to exercise all of his fully vested stock options and another former employee agreed to cancel all of such individual’s fully vested stock options during the three months ended March 31, 2008.

     On January 31, 2008, the SLC extended, until August 31, 2008, the period during which the two former non-employee directors could exercise their unexpired vested options. On March 31, 2008, the SLC entered into an agreement with Mr. Lin allowing him to exercise all of his fully vested stock options. Under this agreement, he agreed that any shares obtained through these exercises or net proceeds obtained through the sale of such shares would be placed in an identified securities brokerage account and not withdrawn, transferred or otherwise removed without either (i) a court order granting him permission to do so or (ii) the written permission of the Company.

     On May 29, 2008, the SLC permitted one of the Company’s former non-employee directors to exercise his fully vested stock and entered into an agreement with the other former non-employee director on terms similar to the agreement entered into with Mr. Lin, allowing him to exercise all of his fully vested stock options. Because the Company’s stock price as of June 30, 2008 was lower than

the prices at which Mr. Lin and each of the two former non-employee directors had desired to exercise their options, as indicated in previous written notices to the SLC, the Company recorded a contingent liability in accordance with accounting guidance, totaling $4.3 million, which was included in “Accrued expenses and other current liabilities” in the Consolidated Balance Sheet as of June 30, 2008 and the related expenses were included in “Selling, general and administrative expenses” in the Consolidated Statement of Operations for the year then ended. Following the March 2010 partial settlement of the derivative litigation, which included a release of claims by the Company’s two former non-employee directors, the Company reduced the contingent liability by $1.6 million. On April 19, 2011, the federal court approved a comprehensive settlement with Mr. Lin and the Company, which became effective on May 19, 2011.

Indemnification Obligations

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

Commercial Litigation

     In June 2010, Exatel Visual Systems, Ltd (“Exatel”) filed a complaint against the Company and NXP Semiconductors USA, Inc. (“NXP”), in Superior Court for the State of California, No. 1-10-CV-174333, alleging the following five counts: (1) breach of contract, (2) breach of implied covenant of good faith and fair dealing, (3) fraud by misrepresentation and concealment, (4) negligent misrepresentation, and (5) breach of fiduciary duty. The complaint arises from a series of alleged transactions between Exatel and NXP’s predecessor, Conexant Systems, Inc. pertaining to a joint product development project they undertook commencing in 2007. The Company and NXP have each tendered an indemnity claim to the other for damages and fees arising out of the lawsuit pursuant to a contractual indemnity agreement between them. Both have refused. The Company has filed a demurrer seeking to dismiss the lawsuit primarily on the grounds that it is not a party to any contract with Exatel. Prior to the hearing on demurrer, Exatel dismissed NXP without prejudice from the lawsuit and agreed to arbitration after NXP filed a motion to compel arbitration for the claims against it pursuant to contractual arbitration provisions within the relevant contracts. On December 7, 2010, the court sustained the Company’s demurrer as to all causes of action, with leave to amend. Exatel has filed an amended complaint. The Company demurred again and the demurrer was sustained with leave to amend at a hearing held on June 23, 2011. On July 22, 2011, Exatel filed a Second Amended Complaint. The Company expects to demur again, however, as of August 1, 2011, the next hearing date had not been set. Because this action is in the very early stages, and due to the inherent uncertainty surrounding the litigation process, we are unable to reasonably estimate the ultimate outcome of this litigation at this time.

General

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

17. GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS

     The Company operates in one reportable segment called digital media solutions. The Company has two operating segments, television systems and set-top boxes, aggregated as one reportable segment. The digital media solutions business segment designs, develops and markets integrated circuits for digital media applications, such as digital television and liquid crystal display, or LCD, television. Generally accepted accounting principles in the United States of America establish standards for the method public

business enterprises use to report information about operating segments in annual consolidated financial statements and require that those enterprises report selected information about operating segments in interim financial reports. The accounting guidance also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company’s Chief Executive Officer, who is considered to be the chief operating decision maker, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance.

Geographic Information

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

(In thousands)		Three months Ended June 30,								Six Months Ended June 30,
Revenues:		2011				2010				2011				2010
South Korea		$	13,237			$	60,756			$	31,619			$	99,968
Europe			19,108				43,216				48,920				64,621
Asia Pacific			28,100				36,586				55,542				51,749
Japan			1,853				22,123				6,970				33,386
Americas			7,271				8,967				14,851				12,327
Total revenues		$	69,569			$	171,648			$	157,902			$	262,051

     The Company’s long-lived assets are located in the following countries:

		June 30,				December 31,
		2011				2010
		(Dollars in thousands)
China		$	20,311			$	21,422
Europe			1,912				3,076
Americas			6,956				5,068
Taiwan			787				760
Asia Pacific			1,110				1,240
Total		$	31,076			$	31,566

Major Customers

     The following table shows the percentage of the Company’s revenues for the three and six months ended June 30, 2011 and June 30, 2010 that was derived from customers who individually accounted for more than 10% of revenues in that period.

		Three months Ended June 30,								Six Months Ended June 30,
Revenue:		2011				2010				2011				2010
Philips			12	%			14	%			14	%			13	%
Samsung			*				24	%			*				26	%
Arrow Electronics			14	%			*				13	%			*

     As of June 30, 2011, the Company had a high concentration of accounts receivable with Arrow Electronics which accounted for 15% of gross accounts receivable, Philips group of companies which accounted for 13% of gross accounts receivable, Humax Co., Ltd. which accounted for 10% and Motorola Mobility, Inc. which also accounted for 10%.

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

     Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated condensed financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows.

     Various sections of this MD&A contain a number of forward-looking statements. Words such as “expects,” “goals,” “plans,” “believes,” “continues,” “may,” “will,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing (see also “Risk Factors” in Part II, Item 1A of this Form 10-Q). Our future results could differ significantly from the forward-looking statements contained herein.

Our MD&A is organized as follows:

	•		Overview. Discussion of our business.
	•		Recent Acquisitions. Discussion of our recent acquisition of the NXP product lines and the Micronas product lines.
	•		Outlook and Challenges. Discussion of our business and overall analysis of financial and other highlights affecting the company in order to provide context for the remainder of MD&A.
	•		Critical Accounting Policies. Accounting estimates that we believe are most important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.
	•		Results of Operations. An analysis of our financial results comparing the three months ended June 30, 2011 to the three months ended June 30, 2010.
	•		Liquidity and Capital Resources. An analysis of changes in our balance sheets and cash flows, and discussion of our financial condition and potential sources of liquidity.

Overview

     Trident Microsystems, Inc. (including our subsidiaries, referred to collectively in this Report as “Trident,” “we,” “our” and “us”) is a provider of high-performance multimedia semiconductor solutions for the digital home entertainment market. We design, develop and market integrated circuits, or ICs, and related software for processing, displaying and transmitting high quality audio, graphics and images in home consumer electronics applications such as digital TVs (DTV), PC and analog TVs, and set-top boxes. Our product line includes system-on-a-chip, or SoC, semiconductors that provide completely integrated solutions for processing and optimizing video, audio and computer graphic signals to produce high-quality and realistic images and sound. Our products also include frame rate converter, or FRC, demodulator or DRX and audio decoder products, interface devices and media processors. Trident’s customers include many of the world’s leading original equipment manufacturers, or OEMs, of consumer electronics, computer display and set-top box products. Our goal is to become a leading provider for the “connected home,” with innovative semiconductor solutions that make it possible for consumers to access their entertainment and content (music, pictures, internet, data) anywhere and at anytime throughout the home.

Recent Acquisitions

     On February 8, 2010, we and our wholly-owned subsidiary Trident Microsystems, (Far East), Ltd., or TMFE, a corporation organized under the laws of the Cayman Islands, completed the acquisition of the television systems and set-top box business lines from NXP B.V., a Dutch besloten vennootschap; or NXP. As a result of the acquisition, we issued 104,204,348 shares of Trident common stock to NXP, or Shares, equal to 60% of our total outstanding shares of Common Stock, after giving effect to the share issuance to NXP, in exchange for the contribution of selected assets and liabilities of the television systems and set-top box business lines from NXP and cash proceeds in the amount of $44 million. In accordance with U.S. generally accepted accounting principles, the closing price on February 8, 2010 was used to value Trident common stock issued which is traded in an active market and considered

Level 1 input. In addition, we issued to NXP four shares of a newly created Series B Preferred Stock or the “Preferred Shares.” The purchase price and fair value of the consideration transferred by Trident was $140.8 million. For details of the acquisition, see Note 5, “Business Combinations,” of Notes to Condensed Consolidated Financial Statements.

Outlook and Challenges

     Our results of operations were as follows:

(In thousands)		Q2 2011				Q1 2011				Q2 2010
Net revenue		$	69,569			$	88,333			$	171,648
Gross profit			18,002				19,877				32,926
Operating loss			(33,935	)			(40,571	)			(51,359	)
Net loss			(26,259	)			(40,773	)			(48,817	)

     Subsequent to our second quarter earnings release included in our Current Report on Form 8-K dated July 28, 2011, we performed further analysis in the course of finalizing the consolidated financial statements included in the Form 10-Q for the three and six months ended June 30, 2011, and concluded that it was appropriate to adjust restructuring expense by $674,000. The adjustment reduced restructuring expenses by $674,000 for the three and six months ended June 30, 2011. This adjustment does not indicate a significant change in our previously reported operating performance.

      Our revenues have declined significantly over the past year as a result of the loss of TV SOC and FRC market share at Samsung, reduced demand for older TV and STB products that were acquired through the NXP and Micronas acquisitions, and generally soft demand for TV and STB chips due to high inventories globally. In addition, sales of many of our newest TV and STB products, which normally would be expected to offset the decline of older products, are not expected to begin in volume until the second half of 2011. Despite the challenging environment, we have improved gross margin percentage through a better mix of products and significantly lowered operating expenses, particularly costs related to transitional support services from NXP. We also have benefited from lower amortization related to acquired intangible assets. Net loss for the second quarter was $26.3 million, or $0.15 per share. This compares with a net loss of $40.8 million, or $0.23 per share in the prior sequential quarter and a net loss of $48.8 million, or $0.28 per share, in the quarter ended June 30, 2010.

      In our third quarter ending September 30, 2011, we expect our revenues to increase slightly as we begin to ramp multiple new customer programs in both DTV and STB. We expect to report a GAAP operating loss in the range of $28 million to $34 million, including the impact of approximately $11 million of non-cash intangibles amortization and stock-based compensation. We expect to consume cash to support operations and for working capital purposes for the third quarter of 2011 and expect our cash balance as of the end of the quarter to be in the range of $30 million to $40 million. We expect certain transactions will increase our cash position during the second half of 2011, including expected proceeds from the sale/lease-back of our building in Shanghai, which has a net book value of approximately $15 million, and proceeds from intellectual property licensing and sales transactions. We are continuing to reduce operating expenses with the objective of lowering our break even level and currently are competing to win designs for 2012 production. If we are successful in both of these efforts we expect to grow our revenues in 2012 and achieve improved bottom-line performance, however there can be no assurance that we will be successful in reducing costs or increasing revenues .

Critical Accounting Estimates

     References included in this Quarterly Report on Form 10-Q to “accounting guidance” means U.S. generally accepted accounting principles, or GAAP. The preparation of our financial statements and related disclosures in conformity with GAAP, requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company’s critical accounting policies are based on historical experience and on various other factors that we believe are reasonable under the circumstances. We periodically review our critical accounting policies and make adjustments when facts and circumstances dictate. Our critical accounting policies that are affected by estimates, assumptions, and judgments, and are used in used in the preparation of the Company’s condensed consolidated financial statements, could differ from actual results and have a material

financial impact on the Company’s reported financial condition and results of operations. The Company’s critical accounting policies include revenue recognition, long-lived assets, inventories and income taxes. Below is a summary of the Company’s critical accounting policies. A further discussion of these critical accounting policies can also be found in the Management’s Discussion & Analysis of Financial Condition and Results of Operations section included in our Report on Form 10-K for the year ended December 31, 2010.

Recent Accounting Standards

     For a description of the recent accounting standards, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated financial statements, see Note 2, “Basis of Presentation” in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

Financial Data for the Quarter Ended June 30, 2011 Compared to the Quarter Ended June 30, 2010

Net Revenues

     Our revenue has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, market demand; supply constraints, including manufacturing capacity at the foundries that are our primary source for manufacturing our products; capabilities of our products relative to market requirements and the timeliness of our products relative to our customers’ design-in windows; and competitive factors, including product pricing.

     From time to time, our key customers may cancel purchase orders with us, thereby causing our net revenues to fluctuate significantly. Our products are manufactured primarily by two foundries, Taiwan Semiconductor Manufacturing Corp., or TSMC, and United Microelectronics Corporation, or UMC, both based in Taiwan. We also use certain manufacturing capabilities that currently are provided by Micronas and NXP.

     Digital media solutions revenues represented all of our revenues for the quarters ended June 30, 2011 and June 30, 2010. Net revenues are revenues less reductions for rebates and allowances for sales returns.

     The following tables present the comparison of net revenues by regions in dollars and in percentages for the three and six months ended June 30, 2011 and 2010:

Net revenues comparison by dollars

		Three Months Ended																Six Months Ended
(Dollars in thousands)		June 30,																June 30,
										Dollar				Percent												Dollar				Percent
Revenues by region (1)		2011				2010				Variance				Variance				2011				2010				Variance				Variance
South Korea		$	13,237			$	60,756			$	(47,519	)			(78.2	%)		$	31,619			$	99,968			$	(68,350	)			(68.4	%)
Europe			19,108				43,216				(24,108	)			(55.8	%)			48,920				64,621				(15,701	)			(24.3	%)
Asia Pacific (2)			28,100				36,586				(8,486	)			(23.2	%)			55,542				51,749				3,793				7.3	%
Japan			1,853				22,123				(20,270	)			(91.6	%)			6,970				33,386				(26,416	)			(79.1	%)
Americas			7,271				8,967				(1,696	)			(18.9	%)			14,851				12,327				2,524				20.5	%
Total net revenues		$	69,569			$	171,648			$	(102,079	)			(59.5	%)		$	157,902			$	262,051			$	(104,150	)			(39.7	%)

Net revenues comparison by percentage of total net revenues

		Three Months Ended												Six Months Ended
		June 30,												June 30,
Revenues by region (1)		2011				2010				Variance				2011				2010				Variance
South Korea			19.0	%			35.4	%			(16.4	%)			20.0	%			38.1	%			(18.1	%)
Europe			27.5	%			25.2	%			2.3	%			31.0	%			24.8	%			6.3	%
Asia Pacific (2)			40.4	%			21.3	%			19.0	%			35.2	%			19.7	%			15.5	%
Japan			2.7	%			12.9	%			(10.2	%)			4.4	%			12.7	%			(8.3	%)
Americas			10.4	%			5.2	%			5.3	%			9.4	%			4.7	%			4.7	%
Percentage of net revenues			100	%			100	%							100	%			100	%

     The following table shows the percentage of our revenues during the three and six months ended June 30, 2011 and 2010 that were derived from customers who individually, or through their Electronic Manufacturing Service providers accounted for more than 10% of revenues for those quarters:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
Revenues:		2011				2010				2011				2010
Philips			12	%			14	%			14	%			13	%
Samsung			*				24	%			*				26	%
Arrow Electronics			14	%			*				13	%			*

     The majority of sales made to distributors are recognized when shipment is made to end user customers (sell-through basis). For the quarter ended June 30, 2011, distribution revenue recognized on a sell-through basis was 31% of total revenues.

     As of June 30, 2011, we had a high concentration of accounts receivable with Arrow Electronics which accounted for 15% of gross accounts receivable, Philips group of companies which accounted for 13% of gross accounts receivable, Humax Co., Ltd. which accounted for 10% and Motorola Mobility, Inc. which also accounted for 10%.

Gross Profit

		Three Months Ended																				Six Months Ended
		June 30,																June 30,
										Dollar				Percent												Dollar				Percent
(Dollars in thousands)		2011				2010				Variance				Variance				2011				2010				Variance				Variance
Gross profit		$	18,002			$	32,926			$	(14,924	)			(45.3	)%		$	37,879			$	46,711			$	(8,832	)			(18.9	)%
Gross profit %			25.9	%			19.2	%											24.0	%			17.8	%