Forward-Looking Statements
This Quarterly Report on Form 10-Q, including the Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, contains "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 which provides a "safe harbor" for statements about future events, products and future financial performance that are based on the beliefs of, estimates made by and information currently available to the management of Trident Microsystems, Inc. ("we," "ours" "Trident", or the" Company"). The outcome of the events described in these forward-looking statements is subject to risks and uncertainties. Actual results and the outcome or timing of certain events may differ significantly from those projected in these forward-looking statements due to the factors listed under "Risk Factors," and from time to time in our other filings with the SEC. For this purpose, statements concerning industry or market segment outlook, market acceptance of or transition to new products, revenues, earnings growth, other financial results and any statements using the terms "believe," "expect," "seek," "targets," "goals," "intend," "plan," "believe," "anticipate," "continues," "can," "should," "would," "could," "estimate," "appear," "based on," "may," "potential," "are emerging" and "possible" or similar statements are forward-looking statements that involve risks and uncertainties that could cause our actual results and the outcome and timing of certain events to differ materially from those projected or management's current expectations. By making forward-looking statements, we have not assumed any obligation to, and you should not expect us to, update or revise those statements because of new information, future events or otherwise.
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this report. Our fiscal year ends on June 30 of each year. Overview
We design, develop and market integrated circuits for digital media applications, such as digital television, liquid crystal display television, or LCD TV. Our System-on-chip, or SoC, semiconductors provide the "intelligence" for these new types of displays by processing and optimizing video and computer graphic signals to produce high-quality and realistic images. Many of the world's leading manufacturers of consumer electronics and computer display products utilize our technology to enhance image quality and ease of use of their products. Our goal is to provide the best image quality enhanced digital media integrated circuits at competitive prices to our customers. We sell our products primarily to digital television Original Equipment Manufacturers, or OEMs, in Japan, Asia Pacific and Europe, either directly or through their supplier channels. We consider these OEMs to be our customers. Historically, significant portions of our revenues have been generated by sales to a relatively small number of customers. For the three months ended March 31, 2009, approximately 33% of our revenues were derived from sales to one customer, Midoriya (a distributor supplying Sony). Substantially all of our revenues to date have been denominated in U.S. dollars. Our products are manufactured primarily by United Microelectronics Corporation, or UMC, a semiconductor manufacturer located in Taiwan.
Business structure
Since June 2003, we have focused our business primarily in a growing DPTV market and related areas. We conduct this business primarily through our Cayman Islands subsidiary, Trident Microsystems (Far East) Ltd., or TMFE. Research and development services relating to existing projects and certain new projects are conducted by Trident Microsystems, Inc. and our subsidiaries, Trident Multimedia Technologies (Shanghai) Co. Ltd., or TMT, and Trident Microsystems (Beijing) Co., Ltd., or TMBJ. TMBJ was previously a privately held company known as Beijing Tiside Electronics Design Co., Ltd., or Tiside, which we acquired in March 2008 and subsequently renamed as TMBJ. Operations and field application engineering support and certain sales activities are conducted through our Taiwanese subsidiary, Trident Microelectronics Co. Ltd., or TML, and other affiliates. In September 2008, we established a new subsidiary in South Korea, Trident Microsystems (Korea) Limited, or TMK, to primarily provide sales liaison and marketing services in South Korea. Trident Multimedia Systems, Inc., or TMS, was inactive at March 31, 2009. Trident Technologies, Inc., or TTI, which was 99.9% owned by Trident at March 31, 2009, is in the process of being dissolved. In the third quarter of fiscal year 2009, we evaluated the viability of our set-top-box ("STB") business in China, including STB products under development by Trident Microsystems (Beijing) Co., Ltd. ("TMBJ"), and determined that continuing this business would not be consistent with our current digital TV market strategy. Accordingly, we decided to allocate all

of the STB business resources in TMBJ to our SoC business in order to focus on SoC development. In addition, on March 31, 2009, we entered into an agreement with Micronas Semiconductor Holding AG, a Swiss Corporation or Micronas to acquire selected assets of the frame rate converter, demodulator and auditor product lines of Micronas' Consumer Division. We expect to complete the acquisition of Micronas by the quarter ended on June 30, 2009.
References to "we," "our," "Trident" or the "Company" in this report refer to Trident Microsystems, Inc. and our subsidiaries, including TMBJ, TMK, TMFE, TML, TMT, TMS, and TTI.
Critical Accounting Estimates
The preparation of our financial statements and related disclosures in conformity with generally accepted accounting principles in the United States of America, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical experience and various other factors that we believe are reasonable under the circumstances. We periodically review our accounting policies and estimates and make adjustments when facts and circumstances dictate. Actual results may differ from these estimates under different assumptions or conditions. In addition to the accounting policies that are more fully described in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, we consider the following critical accounting policies to be affected by critical accounting estimates: revenue recognition, allowance for sales returns and pricing adjustments, stock-based compensation expense, the assessment of recoverability of long-lived assets including goodwill, acquisition-related intangible assets and purchased intangible assets, investments, inventories, product warranty, income taxes, litigation and other loss contingencies and accrued expenses. Such accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Condensed Consolidated Financial Statements, and actual results could differ materially from these estimates. Discussion of these critical accounting estimates can be found in the Management's Discussion & Analysis of Financial Condition and Results of Operations section included in our Annual Report on Form 10-K for fiscal year 2008. There have been no changes to the description of these critical accounting estimates subsequent to June 30, 2008.
Results of Operations
Financial Data for the Three and Nine Month Periods Ended March 31, 2009 Compared to the Three and Nine Month Periods Ended March 31, 2008. Net revenues
Net revenues comparison by dollars

                            Three Months Ended                                                       Nine Months Ended
(Dollars in thousands)          March 31,                                                                March 31,
Revenues by region (1)     2009          2008        Dollar Variance       Percent Variance         2009         2008         Dollar Variance      Percent Variance
Japan                    $   3,595     $ 18,070     $         (14,475 )                  (80 %)   $ 37,913     $  67,401     $         (29,488 )                 (44 %)
Asia Pacific (2)             1,891        6,126                (4,235 )                  (69 %)     10,909        27,065               (16,156 )                 (60 %)
Europe                       1,008       13,174               (12,166 )                  (92 %)     11,168        46,418               (35,250 )                 (76 %)
South Korea                    358       17,661               (17,303 )                  (98 %)        832        77,311               (76,479 )                 (99 %)
Americas                         -          253                  (253 )                 (100 %)         27           247                  (220 )                 (89 %)

Total net revenues       $   6,852     $ 55,284     $         (48,432 )                  (88 %)   $ 60,849     $ 218,442     $        (157,593 )                 (72 %)

Net revenues comparison by percentage of total net revenues

                                     Three Months Ended                    Nine Months Ended
                                         March 31,                             March 31,
 Revenues by region (1)        2009       2008       Variance        2009       2008       Variance
 Japan                          52.5 %     32.7 %         19.8 %      62.3 %     30.9 %         31.4 %
 Asia Pacific (2)               27.6 %     11.1 %         16.5 %      17.9 %     12.4 %          5.5 %
 Europe                         14.7 %     23.8 %         (9.1 %)     18.4 %     21.2 %         (2.8 %)
 South Korea                     5.2 %     31.9 %        (26.7 %)      1.4 %     35.4 %        (34.0 %)
 Americas                          -        0.5 %         (0.5 %)        -        0.1 %         (0.1 %)

 Percentage of net revenues      100 %      100 %                      100 %      100 %

(1) Net revenues by region are classified based on the locations of the customers' principal offices even though our customers' revenues may be attributable to end customers that are located in a different location.

(2) Net revenues from China, Taiwan and Singapore are included in the Asia Pacific region.

Digital media product revenues represented substantially all of our total revenues in the three and nine months ended March 31, 2009 and 2008. Our digital media products include integrated circuit chips used in digital television and LCD TV. Net revenues are revenues less reductions for rebates and allowances for sales returns.
During the three and nine months ended March 31, 2009, net revenues decreased in all regions. Revenues in South Korea decreased significantly primarily due to a major South Korean customer's shifting its strategy to design and produce portions of its silicon products internally rather than outsourcing the design to a third-party vendor. Revenues in Japan and Europe decreased primarily due to the absence of major design wins for our SoC products at tier one customers and lower revenues generated from our existing products that are going to be phased out of production. Revenues in Asia Pacific decreased primarily due to the continued decrease in sales of SVP products and intense price competition in the market where we sell discrete image process controllers.
Overall, the revenue decline in the third quarter of fiscal year 2009 was due to decreased sales of our legacy SVP products and the loss of design win opportunities relating to our new SoC products, and was accelerated by the global economic downturn. The economic environment that we face in fiscal year 2009 is uncertain and we anticipate that our revenues will continue to decline on a year-over-year basis in the fourth quarter of fiscal year 2009. Historically, a relatively small number of customers have accounted for a significant portion of our revenues. The following table shows the percentage of our revenues for the three and nine months ended March 31, 2009 and March 31, 2008 that was derived from customers who individually accounted for more than 10% of revenues in each year:

                                              Three Months Ended         Nine Months Ended
                                                  March 31,                  March 31,
   Revenues:                                  2009          2008         2009         2008
   Midoriya (distributor supplying Sony)        33 %          26 %         44 %          24 %
   Philips                                       -            20 %         12 %          19 %
   Tomen (distributor supplying Sharp)           -             -           13 %           -
   Samsung                                       -            31 %          -            34 %

We expect that a small number of our customers will continue to account for a substantial portion of our net revenues in fiscal year 2009. The composition of our top customers has varied in the past and will likely continue to vary from period to period. The primary factors that cause the composition of our top customers to change are (i) design wins, (ii) product mix changes with our top customers and (iii) future demand from end-customers who purchase digital televisions and LCD TVs.

Midorya's revenue decreased commensurate with the decline in total net revenues in the quarter and represented 33% of total revenues. This was our only customer in the quarter whose revenues exceeded 10% of our total revenues for the period.

Gross Margin

                                               Three Months Ended                                                    Nine Months Ended
                                                   March 31,                                                             March 31,
(Dollars in thousands)   2009        2008        Dollar Variance      Percent Variance         2009         2008         Dollar Variance      Percent Variance

Gross profit             $ 461     $ 25,312     $         (24,851 )                 (98 %)   $ 18,706     $ 103,266     $         (84,560 )                 (82 %)
Gross margin               6.7 %       45.8 %                                                    30.7 %        47.3 %

Cost of revenues includes the cost of purchasing wafers manufactured by an independent foundry, costs associated with our purchase of assembly, test and quality assurance services, royalties, product warranty costs, provisions for excess and obsolete inventories, contingent liability reserves, operation support expenses that consist primarily of personnel-related expenses including payroll, stock-based compensation expenses, and manufacturing costs related principally to the mass production of our products, tester equipment rental and amortization of acquisition-related intangible assets and purchased intangible assets.
Gross margin is calculated as net revenues less cost of revenues as a percentage of net revenues. Gross margin has continued to be impacted by our product mix and volume of product sales, including sales to high volume customers at lower margin, royalties, competitive pricing programs, product warranty costs, provisions for excess and obsolete inventories and costs associated with operational support.
Gross margin for the three and nine months ended March 31, 2009 decreased 39.1 percentage points and 16.6 percentage points, respectively, compared to the three and nine months ended March 31, 2008 primarily due to (i) significantly lower revenues that did not offer the economies of scale needed to cover fixed manufacturing support costs, (ii) a weaker product mix of SVP and SoC products and (iii) price erosion on average selling prices on our blended flat panel.

Research and Development

                                                         Three Months Ended                                                              Nine Months Ended
                                                              March 31,                                                                      March 31,
(Dollars in thousands)           2009           2008          Dollar Variance        Percent Variance           2009           2008          Dollar Variance         Percent Variance

Research and development       $ 11,434       $ 14,407       $          (2,973 )                   (21 %)     $ 37,214       $ 39,385       $          (2,171 )                     (6 %)
Percentage of net revenues        166.9 %         26.1 %                                                          61.2 %         18.0 %

Research and development expenses consist primarily of personnel-related expenses including payroll expenses, stock-based compensation, engineering costs related principally to the design of our new products and depreciation of property and equipment. Because the number of new designs we release to our third-party foundry can fluctuate from period to period, research, development and related expenses may fluctuate significantly. We anticipate that research and development expenses will remain relatively flat in the fourth quarter of fiscal year 2009 compared to the prior quarter.
The decrease in research and development expenses for the three months ended March 31, 2009 compared to March 31, 2008 was primarily due to (i) a $1.9 million decrease resulted from mask tooling fees, (ii) a $1.5 million less expense incurred for the prior years' software license fees, (iii) a $0.3 million decrease in stock-based compensation expense, partially offset by
(iv) a $1.3 million increase in third-party IP licenses. The decrease in research and development expenses for the nine months ended March 31, 2009 compared to the nine months ended March 31, 2008 was primarily due to (i) a $3.3 million decrease in stock-based compensation expense principally due to certain options modifications and contingent liabilities associated with vested options of certain terminated employees that occurred only during the nine months ended March 31, 2008, (ii) a $2.1 million less expense incurred for prior years' software license fees, (iii) a $0.6 million decrease resulted from the mask tooling fees, partially offset by (iii) a $3.9 million increase in third-party IP licenses and hiring of additional employees.

Selling, General and Administrative

                                                         Three Months Ended                                                              Nine Months Ended
                                                              March 31,                                                                      March 31,
(Dollars in thousands)           2009           2008          Dollar Variance        Percent Variance           2009           2008          Dollar Variance        Percent Variance

Selling, general and
administrative                 $  3,626       $  7,120       $          (3,494 )                   (49 %)     $ 22,196       $ 38,391       $         (16,195 )                   (42 %)
Percentage of net revenues         52.9 %         12.9 %                                                          36.5 %         17.6 %

Selling, general and administrative expenses consist primarily of personnel related expenses including stock-based compensation, commissions paid to sales representatives and distributors and professional fees.
The decrease in selling, general and administrative expenses for the three month period ended March 31, 2009 compared to the three month period ended March 31, 2008, resulted primarily from (i) a $1.5 million decrease in stock-based compensation expense, (ii) a $1.3 million decrease in sales commission paid to distributors' representatives due to the decrease in revenues for the three months ended March 31, 2009 compared to the three months ended March 31, 2008,
(iii) a $1.0 million decrease in legal and professional fees due to the completion of the investigation into our stock option granting process in September 2007, partially offset by (iv) a $0.3 million increase in IP amortization due to the write down of acquisition-related IP. During the three months ended March 31, 2009 and March 31, 2008, we received $4.3 million and $4.1 million, respectively, in reimbursements from our directors and officers insurance carriers for certain expenses we incurred in connection with the investigation of our historical stock option grant practices. These reimbursements are reflected as an offset to legal fees. The increase in IP amortization is due to the write down of the acquisition-related intangible assets. Based on the results of the intangible assets impairment analysis performed in accordance with SFAS 144, we recognized intangible assets impairment charges of $0.6 million on acquisition-related intangible assets for TMBJ, of which $0.3 million related to tradename was included as "Selling, general and administrative expenses" in the Condensed Consolidated Statement of Operations for the three months ended March 31, 2009. Refer to Note 4, "Goodwill and Intangible Assets," of Notes to Condensed Consolidated Financial Statements in Item 1 of this report for further information. The decrease in selling, general and administrative expenses for the nine month period ended March 31, 2009 compared to the nine month period ended March 31, 2008, resulted primarily from a $10.6 million decrease in stock-based compensation expense primarily related to the extension of the option exercise period and contingent liabilities associated with vested options of certain terminated employees and a $3.9 million decrease in legal and professional fees due to the completion of our investigation into our stock option granting prices in September 2007. The legal and professional fees related to the cost of the investigation into our historical stock option grant practices were $4.3 million for the nine month period ended March 31, 2009 compared to $6.7 million for the nine month period ended March 31, 2008.

During the three and nine months ended March 31, 2009, we capitalized $1.7 million of legal and professional fees related to due diligence in connection with the acquisition of Micronas in accordance with SFAS 141. We anticipate that our selling, general and administrative expenses will remain relatively flat for the fourth quarter of fiscal year 2009 compared to the prior quarter.

Goodwill Impairment

                                                         Three Months Ended                                                             Nine Months Ended
                                                              March 31,                                                                     March 31,
(Dollars in thousands)           2009           2008          Dollar Variance        Percent Variance          2009           2008          Dollar Variance        Percent Variance

Goodwill impairment            $  1,432       $      -       $           1,432                     100 %     $  1,432       $      -       $           1,432                     100 %
Percentage of net revenues         20.9 %          0.0 %                                                          2.4 %          0.0 %

During the third quarter of fiscal year 2009, we triggered an impairment test by redeploying our engineering resources in TMBJ and by canceling our STB efforts to better support our focus on SoC development. This factor is considered an indicator of potential impairment, and as a result, we performed an interim impairment analysis of our goodwill in accordance with SFAS 142. Based on the results of this goodwill impairment analysis, we determined that there would be no remaining implied value attributable to goodwill at TMBJ, and accordingly, we wrote off the entire goodwill balance at TMBJ and recognized goodwill impairment charges of $1.4 million under "Goodwill impairment" in the Condensed Consolidated Statements of Operations for the three months and nine months ended March 31, 2009. Refer to Note 4, "Goodwill and Intangible Assets," of Notes to Condensed Consolidated Financial Statements in Item 1 of this report for further information.

Restructuring and Charges

                                                        Three Months Ended                                                          Nine Months Ended
                                                            March 31,                                                                   March 31,
(Dollars in thousands)          2009          2008         Dollar Variance        Percent Variance         2009          2008          Dollar Variance        Percent Variance

Restructuring charges          $    41       $     -       $             41                     100 %     $   802       $     -       $             802                     100 %
Percentage of net revenues         0.6 %         0.0 %                                                        1.3 %         0.0 %

During the second quarter of fiscal year 2009, we implemented a global cost reduction plan that reduced the number of our employees by approximately 100 employees worldwide. The reduction plan consisted primarily of involuntary employee termination and benefit costs. We recorded a restructuring charge of $41,000 and $0.8 million for the three and nine months ended March 31, 2009, respectively, in connection with the second quarter 2009 restructuring. Loss on Sale of Short-term Investments

                                                         Three Months Ended                                                               Nine Months Ended
                                                             March 31,                                                                        March 31,
(Dollars in thousands)          2009           2008          Dollar Variance         Percent Variance           2009            2008          Dollar Variance         Percent Variance

(Gain) loss on sale of
short-term investments        $      7       $      -       $               7                     (100 %)     $ (8,952 )      $      -       $          (8,952 )                   (100 %)
Percentage of net
revenues                           0.1 %          0.0 %                                                          (14.7 %)          0.0 %

We sold the remaining short-term investment and recognized a small loss during the three months ended March 31, 2009. As of March 31, 2009, we did not have any short-term investments on hand.

Interest Income

. . .