Forward-Looking Statements
This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can also be identified by words such as "anticipates," "expects," "believes," "plans," "predicts," and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in "Item 1A-Risk Factors" above. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of this report. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
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, or ICs, for digital media applications, such as digital television, or DTV, and liquid crystal display television, or LCD TV. Our system-on-a-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. Our discrete products include frame rate converter, or FRC, demodulator, or DRX, and audio decoder products. 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. Since 1987 we have designed, developed and marketed very large-scale ICs for graphics applications, for the personal computer, or PC, market, and since 1999 for digital TVs, or DTVs, in the consumer television market.
Business structure
Since June 2003, when we announced a restructuring of our business to divest our legacy graphics business, we have focused our business primarily in the high definition television, or HDTV, market and related areas. In a separate transaction completed in June 2003, we merged our digital media segment with Trident Technologies, Inc., or TTI, a Taiwanese company that was liquidated by Trident as of June 30, 2009. Since September 1, 2006, we have conducted 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 subsidiaries, Trident Microelectronics Co. Ltd., or TML, and Trident Microsystems (Taiwan) Ltd., or TMTW, and other affiliates.
On May 14, 2009, we completed the acquisition of selected assets of the FRC, DRX and audio decoder product lines from Micronas Semiconductor Holding AG or Micronas, a Swiss corporation. In connection with the acquisition, we established three new subsidiaries in Europe, Trident Microsystems (Europe) GmbH or TMEU, Trident Microsystems Nederland B.V. or TMNM and Trident Microsystems Holding B.V. or TMH to primarily provide sales liaison, marketing and engineering services in Europe. TMEU is located in Munich, Germany and TMNM and TMH are located in Nijmegen, The Netherlands.
In fiscal year ended June 30, 2009, 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 and a new subsidiary in Hong Kong, Trident Microsystems (Hong Kong) Limited, or TMHK, to handle sales and inventory distribution for the entire company. Trident Multimedia Systems, Inc., or TMS, was inactive at September 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, TMHK, TMEU, TMNM, TMS, TMTW 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. 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 2009. Except for allowance for doubtful accounts, there are no changes to the description of these critical accounting estimates subsequent to June 30, 2009. Allowance for doubtful accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. Prior to the Micronas acquisition, customers either prepaid for our products or were offered net 30 days credit terms. As a result of the Micronas acquisition, more customers receive open account credit terms. If the financial conditions of any customer were to deteriorate, resulting from impairment of its ability to make payments, additional allowances could be required. Results of Operations
Financial Data for the Three Months Ended September 30, 2009 Compared to the Three Months Ended September 30, 2008.
Net Revenues
Our net revenues are generated by sales of our discrete and SoC products, which represented 92% and 8%, respectively, of our net revenues for the three months ended September 30, 2009. We sell our products primarily to digital television original equipment manufacturers, or OEMs, in South Korea, Europe, Asia Pacific and Japan, either directly or through their supplier channels. We consider these OEMs to be our customers and historically, significant portions of our revenues have been generated by sales to a relatively small number of customers. The acquisition of the selected assets of the frame rate converter or FRC, demodulator or DRX, and audio decoder product lines and IP from Micronas significantly strengthened our system-on-chips or SoC capabilities and enabled us to win the large, strategic OEMs. For the three months ended September 30, 2009, 76% of our revenues were from FRC, DRX, and audio decoder product lines that we acquired from Micronas on May 14, 2009.
From time to time, our key customers may cancel purchase orders from us, thereby causing our quarterly net revenues to fluctuate significantly. We expect that these fluctuations could continue due to the uncertainty in the current economic environment. Our products are manufactured primarily by two foundries: United Microelectronics Corporation, or UMC, based in Taiwan and Micronas Semiconductor Holding AG, or Micronas, based in Germany.
All of our revenues to date have been denominated in U.S. dollars and Euros.

Net revenues comparison by dollars

                                                  Three Months Ended
                                                     September 30,
                                                              Dollar        Percent
         (Dollars in thousands)      2009         2008       Variance      Variance

         Revenues by regions (1)
         South Korea               $ 13,586     $    294     $  13,292          4521 %
         Europe                       8,586        4,733         3,853            81 %
         Asia Pacific                 5,273        5,589          (316 )          (6 %)
         Japan                        3,333       23,955       (20,622 )         (86 %)
         Americas                       315          211           104            49 %

         Total net revenues        $ 31,093     $ 34,782     $  (3,689 )         (11 %)

Net revenues comparison by percentage of total net revenues

                                                  Three Months Ended
                                                    September 30,
                                            2009       2008       Variance

              Revenues by region (1)
              South Korea                    43.7 %      0.8 %         42.9 %
              Europe                         27.6 %     13.6 %         14.0 %
              Asia Pacific (2)               17.0 %     16.1 %          0.9 %
              Japan                          10.7 %     68.9 %        (58.2 %)
              Americas                        1.0 %      0.6 %          0.4 %

              Percentage of net revenues      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 months ended September 30, 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 allowance for sales returns.
During the three months ended September 30, 2009, net revenues increased in all regions except Japan and Asia Pacific. Revenues in South Korea and Europe increased significantly during the three months ended September 30, 2009 compared to the three months ended September 30, 2008 primarily due to the full-quarter impact of the product lines that we acquired from Micronas on May 14, 2009. Revenues in Japan decreased primarily due to the absence of major design wins for our discrete or SoC products at tier one customers. 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 months ended September 30, 2009 and 2008 that was derived from customers who individually accounted for more than 10% of revenues in each year:

                                                               Three Months Ended
                                                                 September 30,
                                                              2009             2008

 Revenues:
 Samsung Electronics, Co., Ltd.                                    27 %            *
 LG Eletronics Inc.                                                15 %            *
 Philips Consumer Electronics International B.V.                   11 %            *
 Midoriya Electric Co., Ltd. (distributor supplying Sony)           *             52 %
 Sharp Corporation                                                  *             13 %

* Less than 10% revenue.

The DTV market is very concentrated. The two largest Korean OEMs together currently comprise approximately 42% of our revenues. Roughly 60% of our revenues are controlled by four customers and 75% of the revenues are controlled by our top ten customers. See Note 11, "Segment and Geographic Information and Major Customers," of Notes to Condensed Consolidated Financial Statements, included in Part I of this Report.
We expect that a small number of our customers will continue to account for a substantial portion of our net revenues in fiscal year 2010. 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 consumers who purchase digital televisions and LCD TVs.

Gross Margin

                                                 Three Months Ended
                                                    September 30,
                                                             Dollar        Percent
         (Dollars in thousands)     2009         2008       Variance      Variance

         Gross profit             $ 10,501     $ 12,075     $  (1,574 )         (13 %)
         Gross margin                 33.8 %       34.7 %

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, freight, 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.
Gross margin is calculated as net revenues less cost of revenues as a percentage of net revenue. Gross margin has continued to be impacted by our product mix and volume of product sales, including sales to high volume customers, royalties, competitive pricing programs, product warranty costs, provisions for excess and obsolete inventories, and costs associated with operational support. Gross margin for the three months ended September 30, 2009 decreased 0.9 percentage points compared to the three months ended September 30, 2008 primarily due to (i) a 7.3 percentage point decrease in gross margin due to price erosion on average selling prices and product mix change, (ii) a 3.2 percentage point decrease in gross margin due to lower revenues that did not offer the economies of scale needed to cover fixed manufacturing support costs and higher freight costs, partially offset by (iii) a 5.1 percentage point increase in gross margin due to a $1.3 million decrease in additional general inventory reserve during the three months ended September 30, 2009 compared to the three months ended September 30, 2008, (iv) a 2.8 percentage point increase in gross margin due to the absence of intangible assets impairment during the three months ended September 30, 2009 compared to a $0.8 million write down of intangible assets during the three months ended September 30, 2008 and (v) a 1.5 percentage point increase in gross margin due to lower royalties on product mix change.
The net impact on gross profit of the additions to inventory reserves and sales of previously reserved products is as follows:

                                                      Three Months Ended
                                                         September 30,
          (Dollars in thousands)                      2009           2008
          Additions to inventory reserves           $      63      $  1,385
          Sales of previously reserved products          (415 )      (1,057 )

          Net (increase) decrease in gross profit   $    (352 )    $    328

In three months ended September 30, 2009, as shown in the table above, revenues from the sale of previously reserved products were $0.4 million or 1% of total net revenues. Due to the previously recorded reserves, no cost of revenues was reflected with respect to these product sales, which in effect, provided a benefit to the current income statement to the extent of the selling price. In addition, we recorded additional inventory reserves for the three months ended September 30, 2009 in the amount of approximately $0.1 million. Sales of previously reserved inventory largely depend on the timing of transitions to newer generations of similar products. When we introduce new products that are designed to enhance or replace our older products, we typically provide inventory reserves on our older products based on the expected timing and volume of customer purchases of the new product. The timing and volume of the new product introductions can be significantly affected by events out of our control, including changes in customer product introduction schedules. Accordingly, we may end up selling more of our older fully reserved product until the customer is able to execute on its changeover plan.

Research and Development

                                                    Three Months Ended
                                                      September 30,
                                                                Dollar        Percent
       (Dollars in thousands)         2009         2008        Variance      Variance

       Research and development     $ 16,350     $ 13,065     $    3,285            25 %
       Percentage of net revenues       52.6 %       37.6 %

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 foundries can fluctuate from period to period, research, development and related expenses may fluctuate significantly.
The increase in research and development expenses for the three months ended September 30, 2009 compared to September 30, 2008 was primarily due to (i) a $2.4 million increase in salary and payroll-related expenses associated with increased employee headcount acquired from Micronas, (ii) a $1.3 million increase in amortization of intellectual property ("IP") due to the increased expenditure for third-party IP licenses, , partially offset by (iii) a $1.0 million decrease in stock-based compensation expense.

Selling, General and Administrative

                                                        Three Months Ended
                                                          September 30,
                                                                   Dollar        Percent
   (Dollars in thousands)                 2009         2008       Variance      Variance

   Selling, general and administrative   $ 8,837     $ 10,105     $  (1,268 )         (13 %)
   Percentage of net revenues               28.4 %       29.1 %

Selling, general and administrative expenses consist primarily of personnel related expenses including salaries, stock-based compensation, commissions paid to sales representatives and distributors and professional fees. The decrease in selling, general and administrative expenses for the three months ended September 30, 2009 compared to the three months ended September 30, 2008, resulted primarily from (i) a $2.8 million decrease in legal fees, which included $1.6 million of insurance reimbursement for Director's and Officer's insurance and a $1.2 million decrease in legal fees due to reduced activity of the stock option investigation, (ii) a $1.0 million decrease in sales commission paid to distributors' representatives due to product mix change and the decrease in overall revenues, (iii) a $0.6 million decrease in consulting fees, (iv) a $0.6 million decrease in stock-based compensation expense, partially offset by
(v) a $2.8 million increase in professional fees related to the proposed acquisition of NXP's television and set-top-box product lines, and (vi) a $0.9 million increase in salary and payroll-related expenses associated with increased employee headcount in the three months ended September 30, 2009 compared to same period in the prior year.

Loss on Sale of Short-term Investments

                                                         Three Months Ended
                                                            September 30,
                                                                    Dollar        Percent
  (Dollars in thousands)                   2009        2008        Variance      Variance

  Loss on sale of short-term investments   $   -     $ (8,913 )   $    8,913          (100 %)
  Percentage of net revenues                 0.0 %       25.6 %

During the three months ended September 30, 2008, we sold 50.2 million shares of UMC common stock for net proceeds of $16.6 million and recorded a loss on the sale of $8.9 million.

Restructuring Charges

                                                    Three Months Ended
                                                      September 30,
                                                              Dollar        Percent
         (Dollars in thousands)        2009       2008       Variance      Variance

         Restructuring charges        $ 1,508     $   -     $    1,508           100 %
         Percentage of net revenues       4.8 %     0.0 %

Restructuring expenses consist of employee severance and other exist costs. During the three months ended September 30, 2009, we reduced the number of our employees by approximately 70 employees worldwide.

Interest Income

                                                   Three Months Ended
                                                      September 30,
                                                             Dollar        Percent
         (Dollars in thousands)       2009       2008       Variance      Variance

         Interest income              $  81     $ 1,266     $  (1,185 )         (94 %)
         Percentage of net revenues     0.3 %       3.6 %

We invest our cash and cash equivalents in interest-bearing accounts consisting primarily of certificates of deposits and treasury bills. The average interest rates earned during the three months ended September 30, 2009 and 2008 were 0.1% and 0.6%, respectively. The decrease in the interest income for the three months ended September 30, 2009 was primarily due to (i) a decrease in our average cash and cash equivalent balances from $229 million as of September 30, 2008 to $161 million as of September 30, 2009, (ii) a reduction in the federal funds rate from 1.81% to 0.15% by the Federal Reserve Bank and (iii) a larger percentage of our investment portfolio invested in lower yielding U.S. Treasuries during the three months ended September 30, 2009 compared to a larger percentage of our investment portfolio invested in money market funds during the three months ended September 30, 2008.

Other Income (expense), Net

                                                    Three Months Ended
                                                      September 30,
                                                               Dollar        Percent
       (Dollars in thousands)         2009        2008        Variance      Variance

       Other income (expense), net   $ (614 )    $ 3,063      $  (3,677 )        (120 %)
       Percentage of net revenues      (2.0 %)      (8.8 %)

Other income (expense), net primarily represents dividend income received from our investments and the foreign currency remeasurement gain or loss. The decrease in other income (expense), net for the three months ended September 30, 2009, compared to the three months ended September 30, 2008, was primarily attributable to (i) a $2.0 million foreign currency remeasurement gain related to income taxes payable in foreign jurisdictions, which resulted from the relative strengthening of the U.S. dollar in the first quarter of fiscal year 2009 compared to a $0.6 million foreign currency remeasurement loss related to income taxes payable in foreign jurisdictions, which resulted from the relative weakness of the U.S. dollar in the first quarter of fiscal year 2010, and (ii) a $1.2 million decrease in dividend income during the three months ended September 30, 2009 compared to the three months ended September 30, 2008 due to the sale of the UMC investment during the first quarter of fiscal year 2009.

Provision for Income Taxes

                                                   Three Months Ended
                                                      September 30,
                                                             Dollar        Percent
         (Dollars in thousands)       2009       2008       Variance      Variance

         Provision for income taxes   $ 429     $ 1,861     $  (1,432 )         (77 %)
         Effective income tax rate      2.6 %      11.6 %

The effective income tax rate for the three months ended September 30, 2009 decreased by 9 percentage points compared to the three months ended September 30, 2008. The decrease was primarily due to the decrease in amortization of foreign taxes associated with intercompany profit on assets remaining within Trident's consolidated group. The amortization of foreign taxes associated with intercompany profit on assets remaining within Trident's consolidated group was completed during the fiscal year ended June 30, 2009. Liquidity and Capital Resources
Cash and cash equivalents totaled $161 million and $188 million at September 30, 2009 and June 30, 2009, respectively.
At September 30, 2009, approximately $53.4 million, or 33%, of our total cash and cash equivalents was held in the United States. The remaining balance, representing approximately $107.6 million, or 67% of total cash and cash equivalents, was held outside the United States, primarily in Hong Kong, and could be subject to additional taxation if it were to be repatriated to the . . .