UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

or

Commission file number:       0-20784

TRIDENT MICROSYSTEMS, INC.

1090 East Arques Avenue, Sunnyvale, California 94085

(408) 991-8800

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

Yes þ                             No o

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

Yes þ                             No o

The number of shares of the registrant’s Common Stock, $0.001 par value, outstanding at March 31, 2005 was 25,307,113.

TRIDENT MICROSYSTEMS, INC.

INDEX

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TRIDENT MICROSYSTEMS, INC.

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

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TRIDENT MICROSYSTEMS, INC.

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

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TRIDENT MICROSYSTEMS, INC.

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

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TRIDENT MICROSYSTEMS, INC.

Note 1. The Company

     Trident Microsystems, Inc. and its subsidiaries (collectively the “Company”) designs, develops and markets digital media for the masses in the form of integrated circuits (IC) for CRT TVs, CLD TVs, PDP TVs and HDTVs. Trident’s products are sold to a network of, original design manufacturers, OEM’s and system integrators. Our digital media operations are primarily conducted through our majority-owned subsidiary, Trident Technologies, Inc. (“TTI”).

Note 2. Basis of Presentation

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

     In the opinion of the Company, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the financial position, operating results and cash flows for those interim periods presented. The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and are not audited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2004 included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission.

     The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for any other period or for the entire fiscal year, which ends June 30, 2005.

Note 3. Inventories

     Inventories consisted of the following (in thousands) at the following dates:

Note 4. Net income (loss) per share

     Basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is calculated by 1) adjusting the net income (loss) by any additional potential minority interests which would result from additional dilution from subsidiary stock option exercises and

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2) dividing the adjusted net income by the weighted average number of outstanding shares of common stock plus potential common stock shares. The calculation of diluted net income (loss) per share excludes the additional potential minority interests and potential common stock if the effect is antidilutive. Potential common stock shares consist of common stock options, computed using the treasury stock method based on the average stock price for the period.

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

Note 5. Stock-based compensation

     The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of APB No. 25, “Accounting for Stock Issued to Employees” and its related implementation guidance, and complies with the disclosure provisions of Statements of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Under APB No. 25, compensation cost is generally recognized based on the difference, if any, between the quoted market price of the Company’s stock on the date of grant and the amount an employee must pay to acquire the stock.

     Had the Company recorded compensation based on the estimated grant date fair value, as defined by SFAS No. 123, for awards granted under its stock option plans and stock purchase plan, the net income and net income per share would have been changed to the pro forma amounts below for the three and nine months ended March 31, 2005 and 2004:

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     The fair value of Trident Microsystems options issued pursuant to our employee stock-based compensation plans at the grant date were calculated using the Black-Scholes option pricing model as prescribed by SFAS No. 123, with the following weighted average assumptions: dividend yield equal to 0.00, volatility of 0.526, average risk-free interest rate of 4.17%, and expected life of 5 years. Since subsidiary level options from Trident Technologies have been associated with a less liquid private equity security from August 2003 through March 31, 2005 we have included the intrinsic value at the various individual grant dates as an approximation of the fair value of these options as part of the Stock based compensation shown above. The Trident Technologies options were assumed and exchanged for Trident Microsystems options on March 31, 2005 and consequently the intrinsic value as of March 31, 2005 was remeasured as of that date. See Note 8 for further discussion of the impact of this remeasurement and the future impact of FAS 123 on the newly exchanged options.

Note 6. Investment in UMC

     In August 1995, the Company made an investment of $49.3 million in United Integrated Circuits Corporation (“UICC”). On January 3, 2000, United Microelectronics Corporation (“UMC”) acquired UICC and, as a result of this merger, the Company received approximately 46.5 million shares of UMC, and has subsequently received approximately 35.8 million additional shares as a result of stock dividends. The last time the Company sold shares was in the year ended June 30, 2004 when the Company sold 7.2 million shares for cash of $7.4 million, resulting in a gain of $2.7 million. During the quarter ended March 31, 2004 the Company sold 5.3 million shares of its investment in UMC for a net proceeds of $5.4 million resulting in a gain of $1.9 million. As of March 31, 2005, the Company owned approximately 75.1 million shares of UMC, which represents about 0.5% of the outstanding stock of UMC. Shares of the Company’s UMC investment are listed on the Taiwan Stock Exchange. In accordance with SFAS No. 115, as of March 31, 2005, the UMC shares are treated as available-for-sale securities and are classified as short-term investments.

     Due to a an approximate 12% decrease (stock dividend adjusted) in UMC’s stock price from July 1, 2004 to March 31, 2005, a decrease in accumulated other comprehensive income of $4.1 million was recorded in equity as “accumulated other comprehensive income” in accordance with SFAS No. 130, “Reporting Comprehensive Income.” The $4.1 million is equal to a $6.8 million decrease in the market value of the Company’s short-term investment in UMC from July 1, 2004 to March 31, 2005, less deferred income taxes of $2.7 million relating to the unrealized gain.

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Note 7. Gain (loss) on investments, net

     During the nine months ended March 31, 2005, the Company recognized a net gain on investments totaling $331,000 as follows:

     During the quarter ended September 30, 2004 the Company sold 330,000 shares of its subsidiary Trident Technology, Inc. (TTI) for cash of $877,000 resulting in a gain of $694,000. Due to a subsequent change in capital financing strategy, the Company reacquired these shares in March of 2005. (see Note 9)

     In March 2000, the Company invested $550,000 in a private company engaged in broadband server technology. In the quarter ended June 30, 2002, the Company determined that the product outlook and future cash position for this company was unfavorable. Therefore, the Company assessed the estimated fair value of the investment held and concluded that the estimated shortfall was an other-than-temporary impairment. Accordingly, $275,000 of the investment was written off against earnings in accordance with APB No. 18. In the quarter ended September 30, 2004, the Company determined that the product outlook and future cash position for this company had deteriorated further, and the remaining $275,000 investment was written off against earnings in accordance with APB No. 18.

     In January 2004, the Company invested $40,000 in a private company engaged in integrated circuit design. In the quarter ended September 30, 2004, the Company determined that the prospects for recovery of the investment were unfavorable given the deteriorating cash position of the company and the company’s operating losses. Accordingly, all of the investment was written off against earnings in accordance with APB No. 18.

     From December 1999 to November 2001, the Company invested a total of $3.4 million in several venture capital funds. In the quarter ended March 31, 2005, losses were recorded by the funds. Accordingly, the Company recorded an other-than-temporary impairment of $70,000 based on the latest financial statements of the funds.

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

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

     The above transactions closed on July 25, 2003. In addition, on September 30, 2003, the Company sold one third of its investment in XGI to a third party for cash of $7.5 million. The above transactions resulted in a gain of approximately $6.6 million being recognized in the third quarter of 2003. Because XGI was a new company that was merging two businesses with an uncertain future and its equity securities are not traded on a quoted exchange, the Company recognized a gain on the above transactions based only on the actual cash received and retained by the Company and no value was attributed to the Company’s remaining 20% equity interest in XGI on the Company’s balance sheet in the quarter of divestiture which was also the same quarter in which portions of the Company’s equity interest were sold for cash. The Company’s approach to valuing its remaining equity interest was based on the Company’s judgment as to the level of impairment of the underlying business and lack of any expected realization or return based on the trend of operating losses. Further, the Company did not have any additional funding commitments or intentions to provide additional funding or investment to XGI implying potential future dilution if additional financing were required. As of March 31, 2005 the Company’s remaining equity interest in XGI is 12%.

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

Note 8. Purchase of minority interest in subsidiaries

     In the nine months ended March 31, 2005, in a series of steps the Company acquired approximately 20% of the equity interests in TTI from minority shareholders of TTI for approximately $6.0 million in cash and the issuance of approximately 1.9 million Trident Microsystems, Inc. shares. The average value of the share consideration $16.78 per share was based upon the average of the closing market prices of the Company’s common stock on the various agreement dates and the two trading days before and two trading days after each agreement date of each minority interest acquisition step. The acquisition transactions were completed as of March 31, 2005.

     These transactions were accounted for as a purchase transaction in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. The total purchase price was allocated to net tangible assets acquired, in-process research and development and the tangible and identifiable intangible assets assumed on the basis of their fair values on the date of acquisition. The following tables summarize the components of the estimated total purchase price and the allocation (in thousands,):

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