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Article by DailyStocks_admin    (03-24-08 03:37 AM)

The Daily Magic Formula Stock for 03/21/2008 is Trident Microsystems Inc. According to the Magic Formula Investing Web Site, the ebit yield is 41% and the EBIT ROIC is >100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

Overview
We design, develop and market integrated circuits, or ICs, and associated software for digital media applications, such as digital television, or digital TV, liquid crystal display television, or LCD TV, and digital set-top boxes, or STB. Since 1987 we have designed, developed and marketed very large-scale ICs for graphics applications, historically for the personal computer, or PC, market, and since 1999 for digitally processed televisions, or DPTV TM , for the consumer television market. In June 2003 we announced a restructuring of our business to divest our legacy graphics business and in a separate transaction merged our digital media segment with Trident Technologies, Inc., or TTI, – a Taiwanese company that was 99.9% owned by Trident at June 30, 2007, 2006 and 2005, in order to strengthen and extend our digital TV business. TTI had previously been operating primarily as a Taiwan-based semiconductor design house which had developed various video processing technologies useful for digital media applications. As a result, since June 2003, we have focused our business primarily in the rapidly growing DPTV market and related areas.
We reorganized again in 2006, and since September 1, 2006, we have conducted this business primarily through our subsidiary, Trident Microsystems (Far East) Ltd., or TMFE, located in the Cayman Islands, with research and development services relating to existing projects and certain new projects, conducted by both Trident Microsystems, Inc. and its subsidiary, Trident Multimedia Technologies (Shanghai) Co. Ltd., or TMT, located in Shanghai, China. Operations and field application engineering support and certain sales activities are conducted through our subsidiary, Trident Microelectronics Co. Ltd., or TML, located in Taiwan and other affiliates. TTI is in the process of being dissolved.
We operate in one reportable segment: digital media. During the fiscal years ended June 30, 2007, 2006 and 2005, the digital media segment accounted for nearly all of our revenues. For the fiscal years ended June 30, 2007, 2006 and 2005, the digital media segment accounted for $270.8 million, $171.3 million, and $68.5 million in revenues, respectively. As a percentage of total revenues for the fiscal years ended June 30, 2007, 2006 and 2005, the digital media segment accounted for 100%, 99%, and 99% of our revenues for those years, respectively. We also sell a product that focuses on digital television in the PC market and revenues generated from this product are included in the digital media segment. We have done some engineering consulting, which has historically been accounted for separately from our digital media revenue stream and is included in other revenue.
We have been investing in and experiencing success in the digital media market for several years. During that time, the digital television industry has grown rapidly and we believe that this industry is entering into a further growth phase. To date, we have invested in developing strong relationships with large original equipment manufacturers, or OEMs, in the consumer electronics area, such as Sony, Samsung, Sharp, Philips and others. We are also focused on developing strong relationships with fast growing Chinese manufacturers such as Skyworth, TCL, Konka, Changhong, Xoceco and Hisense, and leading European manufacturers such as Vestel, although a majority of the market today is held by large OEMs. We believe that over time more of the high volume digital media business will migrate to the Taiwanese and Chinese original-design manufacturers, or ODMs; accordingly, we believe that it is important to have strong relationships among customers operating at both ends of the market. We have also invested in integrating key technologies and providing integrated system-on-chip, or SOC, advantages to our customers, including innovation in video quality.

We believe that this combination of our early entrance and success in this area of the market, our many years of experience in enhancing digital image quality, and our growing reputation and success with top tier world class TV manufacturers will provide a strategic advantage for us in this emerging SOC market.
Trident’s market strategy relies on leveraging television display controller design wins to further supply digital decoding and other value-added portions of television systems to leading consumer electronics OEMs. Trident’s goal is to create an integrated video decoder and processor that achieves superior image quality attractive to the world’s leading television OEMs. Achievement of this goal will require both mixed signal semiconductor and television system knowledge as well as the ability to work with customers who are experts in these areas in a heuristic learning process that involves multiple design cycles.
Successful execution of this strategy will require us to be an early mover with new technology and to achieve outstanding execution of complex system-on-chip designs. We have established our position as an early mover through the industry’s first integration of multi-standard video decoding and comb filtering with advanced video processing with the introduction of the DPTV-DX chip in 2001. We again demonstrated our ability to lead with new technology by introducing the industry’s first integrated 10-bit ADC in the DPTV 3D Pro in 2002. In 2005 we introduced advanced video processing integrated with ATSC/DVB decoding and HDMI integrated with 10-bit 3D multi-standard video decoding. DVB, short for Digital Video Broadcasting, is a suite of internationally accepted open standards for digital television. Advanced Television Systems Committee, or ATSC, is defined as digital television standards. HDMI, or high-definition multimedia interface, is an all-digital audio/video interface capable of transmitting uncompressed streams. Achieving such industry firsts demonstrates our ability to timely execute highly complex chip designs which add significant additional features and performance. In 2007 we have continued to evolve our technology by developing products that include motion estimation and motion compensation technology that helps to eliminate motion judder, which is most notable when a camera pans across a wide area. In addition, we have continued to focus on enhancing our highly integrated solution that adds MPEG decoding to image processing in the form of our high definition digital television, or HiDTV ® , product lines. MPEG stands for Moving Picture Experts Group, the family of standards used for coding audio-visual information (e.g., movies, video and music) in a digital compressed format.
Our business is subject to various risks and uncertainties. You should carefully consider the factors described in Item 1A “Risk Factors” in conjunction with the description of our business set forth below and the other information included in this Annual Report on Form 10-K.
Markets and Applications
In fiscal 2007, we focused our principal design, development and marketing efforts on our digital media products. Our digital media products accounted for 99% or more of total revenues for each of our fiscal years ended June 30, 2007, 2006 and 2005. We plan to continue developing our next generation DPTV product, as well as other advanced products for digital TV and digital set top boxes, or STB, for the worldwide digital television market. The DPTV family’s high levels of functional integration and video quality enable our customers to have flexibility and cost advantages in their advanced TV designs. The DPTV video processor converts both standard and high-definition analog TV signals into a high-quality progressive-scan video signal suitable for today’s advanced digital televisions. The HiDTV family applies the same concept of functional integration and video quality excellence to standard and high-definition digital broadcast signals. We expect that the worldwide television market will eventually be dominated by digitally broadcast content; therefore, we believe that our future success depends on our ability to integrate additional technologies and have our products support that market volume opportunity on an ongoing basis. However, we anticipate that the digital television market will generate substantially all of our revenues in the near term.

Current Digital Media Products:
We have been developing products for other digital media applications, such as set top boxes and progressive television sets, since 1999. The DPTV market in particular has begun to emerge as a high volume market for these products. Our DPTV products are designed to optimize and enhance video quality for various display devices, such as cathode ray television (“CRT TV”), liquid crystal display television , plasma display panel (“PDP”), projection television, liquid crystal display projection TV and AV notebooks.
DCRe ® . DCRe, Digital Cinema Reality Engine, is Trident’s proprietary technology to address the need for today’s high-end multimedia digital television application requirement. It embodies Trident’s DPTV design by offering a highly integrated and common-chassis multimedia digital television design platform that is both a high quality television set as well as a multimedia display terminal for PC graphics. This design platform is able to receive and decode the conventional NTSC, PAL and SECAM broadcasting signals, the three main video broadcast standards, to display PC VGA inputs and to receive high definition component inputs from the digital set-top box.
SVP-UX/WX TM . SVP UX/WX is Trident’s seventh-generation all-in-one video processor product family. The video processors are highly integrated system-on-a-chip devices for providing the highest performance, targeting the fast growing HDTV and PC-ready LCD TV, PDP TV, and DLP TV applications where high precision processing of video and data are the requirements. SVP UX/WX contains dual purposed triple 10-bit high-precision and high speed video ADCs for both PC and video inputs, the high speed HDMI could support all HDMI inputs up to 162 MHz with HDCP format, the high performance multi-format 3D digital comb video decoder that supports NTSC, PAL, and SECAM, a HDTV sync separator, and motion adaptive de-interlacing engine. SVP UX/WX is Trident’s 7th generation DCRe super video processor which integrates a high performance MEMC (motion estimation motion compensation) engine. The MEMC technology analyzes the movements between successive fields through the method of motion estimation engine and then inserts motion compensated frames to remove motion judders for video sources from movie films. The DCRe technology integrates advanced 3D-comb video decoding, motion adaptive deinterlacing, object-based digital noise reduction, advanced seventh generation scaling engine, film mode support, average picture level (APL), edge smoothing and dynamic sharpness enhancement.
SVP-AX TM . The SVP-AX is Trident’s seventh-generation all-in-one video processor for entry-level advanced digital TVs. Optimizing DCRe technology to meet the needs of cost-effective systems, the SVP-AX targets mid to large-size displays up to “1080p” (1920x1080p) resolution. The SVP AX includes many of the improvements in video decoding, video processing, and display interface, as found in the SVP-WX. In addition, the SVP AX features an embedded multi-standard audio decoder and processor. The SVP-AX targets the entry-level market for LCD, PDP, and DLP TVs for the leading branded TV OEMs.
SVP-PX TM . The SVP PX video processor is a highly integrated system-on-chip device, targeting the converging HDTV-ready and PC-ready LCD TV, PDP TV, and DLP TV applications where high-precision processing of video and data are required. SVP-PX contains our sixth generation dual-purpose triple 10-bit high-precision and high-speed video analog to digital converters, or ADCs, for both PC and video inputs, the high-performance multi-format 3D digital “comb filter” or television video decoder that supports NTSC, PAL and SECAM broadcasting signals, a HDTV sync separator, motion adaptive de-interlacing engine, and the video format conversion engine, supporting multi-window display in many different output modes. Trident’s DCRe engine—digital cinema reality engine, is integrated inside the SVP PX to provide the most natural cinema-realistic images. The DCRe technology integrates advanced 3D-comb video decoding, advanced motion adaptive de-interlacing, object-based digital noise reduction, our advanced sixth generation scaler, film mode support, average picture level, or APL, edge smoothing and dynamic sharpness enhancement. Trident’s patented Unified Memory Architecture, or UMA, allows frame rate conversion, 3D comb video decoding, and video enhancement processing to share the same frame buffer memory that is made up of high-speed and cost-effective PC graphic memory. All of these advanced digital processing techniques are combined with a true 10-bit video data processing for the most optimal video fidelity in order to provide the most natural and cinema-quality video images. Designed for maximum system design flexibility, SVP-PX integrates all video interfaces to support converging digital video, analog video and PC data applications. The users of Trident’s single chip SVP PX video processor(s) will benefit from many features while maintaining a price competitive advantage over existing solution(s).
SVP-LX TM . The SVP-LX is Trident’s sixth-generation all-in-one video processor for high-end advanced digital TVs. The SVP-LX targets large-size high-definition (1920x1080p resolution) displays. The SVP-LX includes improvements in video decoding, video processing, display interface, and specific European-market functionality such as SCART, a French-originated standard and associated 21-pin connector for connecting audio-visual equipment. The SVP-LX targets the high-end market for LCD, PDP, and DLP TVs.
SVP-CX TM . The SVP-CX is Trident’s sixth-generation all-in-one video processor for entry-level advanced digital TVs. Optimizing DCRe technology to meet the needs of cost-effective systems, the SVP-CX targets small and mid-size displays up to “WXGA” (1366x768p resolution) resolution. The SVP-CX includes many of the improvements in video decoding, video processing, display interface, and specific European-market functionality as the SVP PX. The SVP-CX targets the entry-level market for LCD, PDP, and DLP TVs for the leading branded TV OEMs.
SVP-EX TM . The SVP-EX is Trident’s fifth-generation all-in-one video processor product family. It features the industry’s first Truevideo TM 10-bit video processing technology that is optimized for 1080i HDTV component input. Embedded with a DCRe engine, the SVP-EX video processor delivers the highest quality digital video images. The DCRe technology integrates an advanced 3D-comb video decoder, advance motion adaptive de-interlacing engine for up to 1080i input, object-based digital noise reduction, cubic-4 image scaling, film mode support, APL feedback to increase the TV set dynamic range, edge smoothing, and dynamic sharpness enhancement. The SVP-EX video processor is equipped with numerous outputs, including a 24-bit transistor-transistor logic, or TTL, digital to analog converter, or DAC, and low voltage differential signaling, or LVDs interface, providing versatility with Trident proprietary DCRe technology. It delivers vivid cinema-realistic motion and still images. The SVP-EX processor targets the high-performance flat-panel LCD, rear-projection, flat CRT and plasma display TV markets.
HiDTV ® . HiDTV is the first generation, system-on-a-chip digital TV engine for the design of high definition digital TV, or HiDTV, systems. It integrates a 32-bit embedded CPU microprocessor, a MPEG2 MP@HL decoder, a programmable MPEG audio decoder supporting AC3, AAC and MP3, a transport stream demultiplexer that supports ATSC and DVB standards, TDES and DVB common descrambler, a high performance graphics engine, and key video enhancement processing technologies for the DPTV products to enhance the analog TV signals. A unified external DDR DRAM is used for both system buffers and application programming. HiDTV integrates all key functions needed to support both digital and analog TV broadcasting with minimum external components.
Components such as video decoders and demodulators can interface with HiDTV without external glue logic. HiDTV integrates standard I/O interfaces such as UART, IR, and smart card interface.
HiDTV ® PRO. HiDTV PRO is Trident’s second generation, system-on-chip digital TV engine for the design of HiDTV systems. It integrates dual 32-bit embedded CPU, dual MPEG2 MP@HL decoders, a programmable MPEG audio decoder supporting AC3, AAC and MP3, a transport stream demultiplexer that supports ATSC, DVB and ARIB standards, TDES, Multi2 and DVB common descrambler, a high-performance 2D graphics engine, and Trident’s SVPTMLX with DCRe video processing to enhance all essential video signals. A unified external DDR2 DRAM is used for both system buffers and application programming. HiDTV PRO integrates all key functions needed to support both digital and analog TV broadcasting with minimum external components. Components such as video decoders and demodulators can interface with HiDTV PRO without external glue logic. HiDTV PRO integrates standard I/O interfaces such as UART, IR, and smart card interface. It also integrates a POD controller that supports US digital cable-ready applications.
HiDTV ® LX. HiDTV LX integrates Trident’s dual-channel fourth-generation video processor core with a 180MHz 32-bit embedded CPU, a single-stream high-definition MPEG2 decoder, and peripheral interface functions such as PCI. The HiDTV LX enables TV system OEMs to create high-quality digital television systems capable of decoding ATSC, DVB, and ARIB transport streams with no sacrifice in picture quality.
HiDTV ® Pro PX/LX . HiDTV Pro PX/LX integrates Trident’s sixth-generation dual-channel video processor core with a 250MHz 32-bit embedded CPU, a dual-stream high-definition MPEG2 decoder, and additional peripheral interface functions such as USB 2.0 and logic supporting digital-cable-ready, or DCR, and common-interface, or CI, protocols. HiDTV Pro PX supports 1366x768-resolution displays while HiDTV Pro LX supports 1920x768 HD displays. In conjunction with the Trident Analog Front End, or TAFE, chip the HiDTV Pro family enables leading digital TV OEMs to create cost-effective no-compromise solutions for the rapidly-growing integrated digital decoding segment of the world-wide DTV market.
TAFE TM . Our TAFE product is the result of our collaboration with a third party in integrating HDMI with advanced digital TV functions. TAFE integrates dual HDMI receivers with Trident’s sixth-generation 3D video decoder. A 30-bit interface to Trident’s HiDTV Pro family of integrated digital video processors ensures that video quality is not compromised. TAFE and HiDTV Pro PX/LX represent Trident’s market strategy to meet the needs of top-tier digital TV OEMs.
Current PCTV Application Products:
TV Master TM TM6000. The TV Master TM6000 is a highly integrated system-on chip device, designed to transform ordinary notebooks and desktop PCs into high quality PC/TVs and media center PCs. The TV Master TM6000 integrates dual 10-bit high-quality video ADCs with a 2D digital comb filter, multi-standard color decoder, dual 16-bit audio ADCs, USB2.0 controller and PHY, the electronic IC or functional block of a circuit that takes care of encoding and decoding between a pure digital domain, and a modulation in the analog domain, and an embedded MPU. Our TV Master TM6000 has achieved a high level of integration for the USB2.0 TV tuner box and TV add-in card application. TV Master TM6000 also supports digital AV streams in transport-stream, or TS, format and is one of the first USB 2.0 TV capture device to support both analog and digital TVs (DVB-T/S/C/H, ATSC, DMB, and etc) with minimum external components.
TV Master TM TM5600. The TV Master TM5600 is a pin-to-pin compatible IC with TM6000; containing the same application functions as TM6000, but without the support on digital TV TS input.
Sales, Marketing and Distribution
We sell our products through direct sales efforts, distributors and independent sales representatives. Our digitally processed television products are marketed primarily from our offices in Taipei, Taiwan; Shanghai, China; and Santa Clara, California. Our offices are staffed with sales, applications engineering, technical support, customer service and administrative personnel to support our direct customers.
Our future success depends in large part on the success of our sales to leading digital television manufacturers. Accordingly, the focus of our sales and marketing efforts is to increase sales to the leading digital television manufacturers and OEM channels. Competitive factors of particular importance to success in such markets include TV platform support, product performance and the integration of functions on a single integrated circuit chip.
Our digitally processed television customers include leading manufacturers of TVs in Japan, South Korea, China, Taiwan, Europe and Turkey. We service these customers primarily through our offices in the United States, Taiwan and China. As digital media is rapidly developing in the United States, Europe, Japan, South Korea, China, and elsewhere, we expect that leadership in the digital media industry will also rapidly change. Our goal is to become a leading supplier to a broad range of manufacturers in this marketplace, and to manufacturers for other markets as DPTV sales increase in those markets.
During fiscal 2007, we generated nearly all of our revenues from customers located in Asia. A small number of customers often account for a majority of our revenues in any quarter. Our top five customers accounted for 82% of our total revenues for the fiscal year ended June 30, 2007. However, sales to any particular customer may fluctuate significantly from quarter to quarter. During the fiscal years ended June 30, 2007 and 2006, sales to two customers, Samsung and Midoriya (a distributor for Sony), each accounted for more than 10% of total revenues. During the fiscal year ended June 30, 2005, sales to three customers, Midoriya, Skyworth and Samsung, each accounted for more than 10% of total revenues. Fluctuations in sales to any of these key customers may adversely affect our operating results in the future. For additional information on foreign and domestic operations, see Note 13, “Segment and Geographic Information and Major Customers,” to the Consolidated Financial Statements.
During fiscal years 2007, 2006 and 2005, a majority of our digital media product revenues was generated through sales to customers located in Asia. We anticipate that sales to customers in Asia will continue to account for a substantial percentage of our revenues. In addition, the foundries that manufacture our products are located in Asia. Due to this concentration of international sales and manufacturing capacity in Asia, we are subject to the risks of conducting business internationally, including unexpected changes in regulatory requirements, fluctuations in the U.S. dollar which could increase our products’ sales price in local currencies in foreign markets, tariffs and other barriers and restrictions, and the burdens of complying with a wide variety of foreign laws. In addition, we are subject to general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships, in connection with our sales, support and third-party fabrication efforts in Hong Kong, Taiwan and elsewhere. Also, political instability or significant changes in economic policy could disrupt our operations in foreign countries or result in the curtailment or termination of such operations.
Competition
The global digital media market and related industries are highly competitive and characterized by rapid technological change. Our ability to compete depends primarily on our ability to commercialize our technology, continually improve our products and develop new products that meet constantly evolving customer requirements. We expect competition to continue to increase. The principal factors upon which competitors compete in our markets include, but are not limited to, price, performance, the timing of new product introductions by us and our competitors, product features, level of integration of various functions, quality and customer support. Substantial competition exists in all areas of our business. In the digital media market our principal competitors are Broadcom Corporation, Micronas AG, Media Tek Ltd., Toshiba, NXP Semiconductors (formerly Philips Semiconductor), Pixelworks, Inc., Genesis Microchip, Inc., Advanced Micro Devices, Inc., Zoran Corporation, ST Microelectronics, Morning Star, and Huaya. Other smaller competitors supplying LCDTV chip sets may arise in the future. Certain of our current competitors and many potential competitors have significantly greater technical, manufacturing, financial and marketing resources than we have.

We plan to continue developing the next generation DPTV and HiDTV products as well as other advanced products for digitally processed television and digital set top boxes for worldwide markets. We believe the market for digital media will continue to be competitive and will require substantial research and development, sales, and marketing efforts to remain competitive. We expect to devote significant resources to compete in this market.

CEO BACKGROUND
Glen M. Antle became Acting Chief Executive Officer and Chairman of the Board of Directors effective November 15, 2006. He has served as a director of Trident since July 1992. From July 1996 to August 1997, Mr. Antle was a director of Compass Design Automation, a company providing EDA tools and libraries. From February 1991 to June 1993, he served as Chairman of the Board of Directors of PiE Design Systems, an electronic design automation company, and from August 1992 to June 1993 as its Chief Executive Officer. In June 1993, PiE merged into Quickturn Design Systems, Inc., also an electronic design automation company, and Mr. Antle served as Chairman of the Board of Directors of Quickturn from June 1993 to June 1999. From June 1989 to February 1991 Mr. Antle was retired. Mr. Antle was a co-founder of ECAD, Inc., now Cadence Design Systems, Inc., and served as its Co-Chairman of the Board of Directors from May 1988 to June 1989 and as its Chairman of the Board of Directors and Chief Executive Officer from August 1982 to May 1988. Mr. Antle is also a director of Semtech, a semiconductor corporation.

Brian R. Bachman has served as a member of the Board of Directors since May 2007. Mr. Bachman is a private investor. From 2000 to 2002, Mr. Bachman served as Chief Executive Officer and Vice Chairman of Axcelis Technologies, which produces equipment used in the fabrication of semiconductors. Mr. Bachman also serves as a director of Kulicke & Soffa Industries, Keithley Instruments and Ultra Clean Technology. Mr. Bachman holds a B.S. degree in engineering from the University of Illinois and an M.B.A. degree from the University of Chicago.

Hans Geyer has served as a member of the Board of Directors since May 2007. Mr. Geyer served as Corporate Vice President and General Manager of Intel Corporation’s Storage Group from 2005 to his retirement in December 2006, and as General Manager, Networking and Storage Group from 2004 to 2005. Mr. Geyer joined Intel in 1980, and since held various positions, including general manager of European Operations, general manager of the 386/486 microprocessor division, general manager of the FLASH memory group, and general manager of the cellular and application processor group. Prior to joining Intel, Mr. Geyer was involved in hardware and software development for intelligent and point-of-sales terminals at Siemens AG, Germany. Mr. Geyer studied computer science and mathematics at the Technical University of Munich and holds a masters degree (Diplom-Informatiker) in computer science.

Raymond K. Ostby has served as a member of the Board of Directors since July 2006. Mr. Ostby has served as Vice President and Chief Financial Officer of NextG Networks, Inc., a private emerging wireless infrastructure company, since January 24, 2005. From July 1, 2003 until January 24, 2005, Mr. Ostby was Vice President, Finance & Administration and Chief Financial Officer at Arraycomm, Inc., a provider of multi-antenna signal processing solutions, and since June 1, 1999, he has been Vice President, Finance & Administration, Chief Financial Officer and Secretary at KBC Pharma, a privately held inactive company. From September 7, 1993 until May 31, 1999, Mr. Ostby was employed as Vice President, Finance and Administration, Chief Financial Officer and Secretary at Quickturn Design Systems, Inc., a provider of system-level verification solutions. From September 1, 1991 to September 7, 1993, he served as Vice President, Finance and Administration, Chief Financial Officer and Secretary at Force Computers, Inc., a computer products company. From June 1, 1985 to September 1, 1991, he served as Vice President, Finance and Administration, Chief Financial Officer and Secretary of Atmel Corporation, a manufacturer of semiconductor products. Mr. Ostby has been a Certified Public Accountant and holds a B.A. degree and an M.B.A. degree from the University of Montana, and completed Ph.D. coursework in Quantitative Analysis at the University of California at Berkeley.

Millard Phelps has served as a member of the Board of Directors since September 1995. Mr. Phelps is a retired advisory director of Hambrecht and Quist (H&Q), a position he held from September 1994 to July 1997. Prior to joining H&Q in 1984 as a Principal in the firm and Senior Semiconductor Analyst, Mr. Phelps spent 23 years in the semiconductor industry in various management and corporate officer positions at Texas Instruments, Fairchild Semiconductor, AMS/Intersil and Synertek. Mr. Phelps is currently serving as a director of Pericom Semiconductor and has served on several boards of private and public semiconductor companies since his retirement in 1997. Mr. Phelps holds a B.S. degree in electrical engineering from Case Western Reserve University.

COMPENSATION

The Nominating and Corporate Governance Committee reviews and recommends to the Board non-employee director compensation. We use a combination of cash and stock-based compensation to attract and retain qualified candidates to serve on our board of directors. In setting the compensation of non-employee directors, we consider the significant amount of time that the Board members expend in fulfilling their duties to Trident as well as the experience level we require to serve on the Board. The Compensation Committee annually reviews the compensation and compensation policies for non-employee members of the Board of Directors.

Cash Compensation. During fiscal 2006 and 2007, our non-employee directors received $20,000 per year as an annual retainer and reimbursement of certain expenses in connection with attendance at Board meetings and Committee meetings. In addition, each non-employee director received $1,500 for each Board meeting attended in person, the committee chairperson received $1,250 for each Committee meeting attended in person, and each other committee member received $1,000 for each Committee meeting attended in person. Each director received $500 for each Board or Committee meeting attended by phone.

Equity Compensation. Upon his election to the Board of Directors, the Board granted to Mr. Ostby an option to purchase 50,000 shares of common stock at a price of $16.34 per share, the closing sale price of our common stock reported on the Nasdaq National Market on July 6, 2006, the date of grant. This option was granted under our 2002 Stock Option Plan. The Board granted to each of Mr. Geyer and Mr. Bachman upon their election to the Board, an option to purchase 50,000 shares of common stock at a price equal to the closing sales price of our common stock reported on the Nasdaq National Market on May 22, 2007, the second trading day following the public disclosure of their respective appointment to the Board of Directors. Each such option was granted under our 2006 Equity Incentive Plan. Each of these stock options has a term of ten years and becomes exercisable in three annual installments, subject to the non-employee director’s continued Board service.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview
We design, develop and market integrated circuits for digital media applications, such as digital television or digital TV, liquid crystal display television, or LCD television, and digital set-top boxes. Our system-on-chip 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 users.
We sell our products primarily to digital television original equipment manufacturers in China, South Korea, Taiwan and Japan. Historically, significant portions of our revenues have been generated by sales to a relatively small number of customers. Our top five customers accounted for 82% of our total revenues for the fiscal year ended June 30, 2007. Substantially all of our revenues to date have been denominated in U.S. dollars. Our products are manufactured primarily by United Microelectronics Corporation (UMC), a semiconductor manufacturer located in Taiwan.
Since June 2003, we have focused our business primarily in the rapidly growing digitally processed television (DPTV) market and related areas. Since September 1, 2006, we have conducted this business primarily through our subsidiary, Trident Microsystems (Far East) Ltd., or TMFE, located in the Cayman Islands, with research and development services relating to existing projects and certain new projects, conducted by both Trident Microsystems, Inc. and its subsidiary, Trident Multimedia Technologies (Shanghai) Co. Ltd., or TMT, located in Shanghai, China. Operations and field application engineering support and certain sales activities are conducted through our subsidiary, Trident Microelectronics Co. Ltd., or TML, located in Taiwan and other affiliates. Trident Technologies, Inc., which was 99.9% owned by Trident at June 30, 2007, 2006 is in the process of being dissolved.
References to “we,” “our,” “Trident,” or the “Company” in this report refer to Trident Microsystems, Inc. and its subsidiaries, including TMT, TML, TTI and TMFE.
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 on 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. In addition to the accounting policies that are more fully described in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K, we consider the critical accounting policies described below to be affected by critical accounting estimates. Our critical accounting policies that are affected by accounting estimates include revenue recognition, stock-based compensation expense, investments, allowance for sales returns, inventories, intangible assets, product warranty, income taxes and litigation and other loss contingencies. Such accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Consolidated Financial Statements, and actual results could differ materially from these estimates. For a discussion of how these estimates and other factors may affect our business, also see “Risk Factors” In Item 1A.
Revenue Recognition
We recognize revenues in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectibility is reasonably assured. We record estimated reductions to revenue for customer incentive offerings and sales returns allowance in the same period that the related revenue is recognized. Our customer incentive offerings primarily involve volume rebates for our products in various target markets. If market conditions were to decline, we may take actions to increase customer incentive offerings, possibly resulting in an incremental reduction of revenue at the time the incentive is offered. A sales returns allowance is established based primarily on historical sales returns, analysis of credit memo data and other known factors at that time. Additional reductions to revenue would result if actual product returns or pricing adjustments exceed our estimates.
Stock-based Compensation Expense
Effective July 1, 2005, we adopted SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors, including stock options based on their fair values. SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), which we previously followed in accounting for stock-based awards. In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”) to provide guidance on SFAS 123(R). We have applied SAB 107 in its adoption of SFAS 123(R).
We adopted SFAS 123(R), which requires the measurement and recognition of compensation expense for all stock-based payment awards made to our employees and directors including stock options based on fair values. Our financial statements for the years ended June 30, 2007 and 2006 reflect the impact of SFAS 123(R) using the modified prospective transition method. In accordance with the modified prospective transition method, our financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation expense is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense recognized in our Consolidated Statements of Operations for the years ended June 30, 2007 and 2006 included compensation expense for stock-based payment awards granted prior to, but not yet vested as of June 30, 2005, based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and compensation expense for the stock-based payment awards granted subsequent to June 30, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). In conjunction with the adoption of SFAS 123(R), we elected to attribute the value of stock-based compensation to expense using the straight-line method, which was previously used for our pro forma information required under SFAS 123.
Upon adoption of SFAS 123(R), we elected to value our stock-based payment awards granted beginning in July 1, 2005 using the Black-Scholes option-pricing model (the “Black-Scholes model”), which was previously used for our pro forma information required under SFAS 123 for fiscal year 2005. 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. Trident’s stock options have characteristics significantly different from those of traded options, and changes in the assumptions can materially affect the fair value estimates. See Note 9 of the Notes to the Consolidated Financial Statements for a detailed discussion of SFAS 123(R).
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. Upon the adoption of SFAS 123(R), we continued to use historical volatility in deriving our expected volatility assumption as allowed under SFAS 123(R) and SAB 107 because we believe that future volatility over the expected term of the stock options is not likely to materially differ from the past. Prior to July 1, 2005, we used our historical stock price volatility in accordance with SFAS 123 for purposes of our pro forma information. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of our stock options. The expected dividend assumption is based on our history and expectation of dividend payouts.
For the years ended June 30, 2007 and 2006, stock-based compensation expense, before income taxes, was $15.6 million and $13.2 million, respectively, which consisted primarily of stock-based compensation expense related to employee stock options recognized under SFAS 123(R). For the year ended June 30, 2005 stock-based compensation expense, before income taxes, was $30.5 million, which was recorded under APB 25.

Results of Operations
On October 24, 2005, the Board of Directors approved a two-for-one stock split in the form of a 100% stock dividend to stockholders of record as of November 9, 2005, payable on or after November 18, 2005. Our common stock began trading on a split-adjusted basis on November 21, 2005. Unless otherwise stated, all references in the consolidated financial statements to the number of shares and per share amounts of our common stock for the periods prior to November 21, 2005 have been retroactively restated to reflect the increased number of shares resulting from the two-for-one stock split.
Financial Data for Fiscal Years Ended June 30, 2007, 2006 and 2005

Digital media product revenues accounted for all of our revenues in fiscal 2007, after representing approximately 99% of total revenues for each of fiscal years 2006 and 2005. The increase in digital media product revenues in fiscal 2007 from fiscal 2006 was primarily attributed to continued success of our digital media products comprising predominantly our Super Video Processor (“SVP”) family of products in the digital television markets. Our unit sales volume of digital media products increased by 91% in fiscal 2007 compared to fiscal 2006, however, as is typical with consumer electronics markets, the year-over-year average selling prices decreased by approximately 17% over the same time period. The significant increase in digital media product revenues in fiscal 2006 was primarily attributed to the success of our digital media products in the digital television markets. During fiscal 2006, the volume of digital media units sold increased by more than 170% while the year-over-year average selling price declined by approximately 8%.
Revenues from customers located in Asia, primarily in South Korea, Japan, China and Taiwan, accounted for an aggregate of 93%, 95%, and 97% of our total revenues in fiscal 2007, 2006 and 2005, respectively. Revenues in fiscal 2007 increased in all regions primarily due to continued success of our standalone image process controllers largely in the digital process television markets. Revenues from Europe in fiscal 2007 increased primarily due to the increase sales of SVP-CX to a major OEM customer in Europe. Revenues in fiscal 2006 increased significantly in South Korea, Japan, Taiwan and Europe, compared to fiscal 2005. Revenues in China decreased in fiscal 2006 compared to fiscal 2005 principally due to intense price competition in that particular market. We expect customers located in Asia will continue to account for a significant portion of our revenues in future periods.
During the years ended June 30, 2007 and 2006, two customers each accounted for more than 10% of total revenues. During the year ended June 30, 2005, three customers each accounted for more than 10% of total revenues. Substantially all of our sales transactions were denominated in U.S. dollars during all reported periods. Approximately 48% of revenues in fiscal 2007 were generated through sales to distributors, compared to approximately 51% of revenues in fiscal 2006 and 38% of revenues in fiscal 2005.

Gross margin decreased 2.6 percentage points in fiscal 2007 compared to fiscal 2006, primarily due to: (i) product mix shift with a higher proportion of revenue associated with SVP-PX which had a lower gross margin than some of our previous products and comprised 45% of our total revenues during fiscal 2007 as compared to 26% of our total revenues during fiscal 2006, (ii) decreased revenue and average selling price from a previous generation product that had higher gross margin (iii) higher ramp-up costs associated with our new products such as SVP-LX and SVP UX/WX, which were introduced in fiscal 2007 and in late fiscal 2006, respectively. Gross margin decreased 1.3 percentage points in fiscal 2006 compared to fiscal 2005, primarily due to increased amortization expense of intangible assets relating to the acquisition of the minority interest in TTI, completed at the end of the third quarter of fiscal 2005. In addition, we launched our SVP–PX product in fiscal 2006, which has a slightly lower gross margin than some of our previous products.
In fiscal 2007, revenues from the sale of previously reserved products were $4.5 million or 1.6% of total revenues, as compared to $4.6 million or 2.7% of total revenues in fiscal 2006 and $3.3 million or 4.8% of total revenues in fiscal 2005. Due to the previously recorded reserves, there was no cost of revenues 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. At the same time, we recorded additional inventory reserves for fiscal 2007 in the amount of approximately $2.2 million as compared to approximately $2.9 million for fiscal 2006 and $2.5 million for fiscal 2005.
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.
We believe that the prices of our products will continue to decline over time as competition increases and new and more advanced products are introduced. We expect average selling prices of existing products to continue to decline, although the average selling prices of our entire product line may remain relatively constant or increase as a result of introductions of new, higher-performance products that may have additional functionality and that may or may not have higher relative gross margins as a percentage of revenues. Our strategy is to maintain and optimize gross margins by (i) managing average selling price erosion in pricing negotiations with customers, (ii) developing new and more advanced products that can add relative value to the selling price, (iii) reducing manufacturing costs by improving production yields, (iv) aggressively developing more cost effective products and (v) negotiating with the foundry and other manufacturing partners to receive more competitive pricing. There is no assurance that we will be able to develop and introduce new products on a timely basis or that we can reduce manufacturing costs or improve margins.

The increase in research and development expenses for fiscal 2007 compared to fiscal 2006 was primarily the result of (i) increased new product development expenditures of $4.2 million relating to our SVP-UX/WX, SVP-AX and HiDTV Pro CX/FX products, (ii) increased spending on additional personnel of $3.6 million due to increases in headcount and salaries, (iii) increased depreciation expense of $1.0 million due to purchase of additional property equipment and (iv) increased stock-based compensation expense of $0.4 million. The decrease in research and development expenses as a percentage of revenues in fiscal 2007 compared to fiscal 2006 reflects revenues increasing at a proportionately higher rate than research and development expenses.
The decrease in research and development expenses for fiscal 2006 compared to fiscal 2005 was primarily attributable to decreased stock-based compensation expense of $10.4 million, partially offset by (i) increased employee-related expenses of $4.5 million resulting from an increase in employee headcount, salaries and bonuses, (ii) additional tape-out expenses of $2.5 million due to increased research expenditures relating to our SVP-LX and SVP-CX products and (iii) increased facilities expenses of $0.5 million. The decrease in research and development expenses as a percentage of revenues in fiscal 2006 compared to fiscal 2005 was primarily attributable to revenues increasing at a higher rate than research and development expenses.
We are currently planning to continue development of the next generation DPTV products as well as other advanced products for the digital television market in the United States, Japan, South Korea, China, Taiwan and Europe, and therefore we expect research and development expense to continue to increase.

The increase in selling, general and administrative expenses for fiscal 2007 compared to fiscal 2006 was primarily due to (i) increased professional fees of $18.1 million, of which $16.8 million related to the cost of the investigation into our historical stock option practices and the remaining $1.3 million represented legal, accounting and other professional fees incurred in connection with our business operations and (ii) increased third-party sales representative commission expenses of $3.1 million due to increased product sales. The increase in selling, general and administrative expenses as a percentage of revenues was attributable to increases in professional fees primarily relating to the cost of the investigation into our historical stock option practices. Although we will continue to monitor and control our selling, general and administrative expenses on an ongoing basis, we may continue to incur significant legal and other professional expenses related to the formal investigation into our historical stock option practices by the Department of Justice and the Securities and Exchange Commission.
The increase in selling, general and administrative expenses for fiscal 2006 compared to fiscal 2005 was primarily attributable to: (i) increased commission expenses of $3.1 million due to increased product sales, (ii) increased employee-related expenses of $2.8 million comprising principally increased accrued bonuses of $1.3 million, increased payroll taxes of $1.1 million associated with stock option exercises, and increased salaries of $0.4 million associated with additional headcount, (iii) increased professional fees of $1.8 million primarily relating to higher audit fees of $0.6 million for compliance with the requirements of the Sarbanes-Oxley Act of 2002 and higher legal fees of $1.4 million due to the absence of the $0.8 million benefit of a legal reserve reversal associated with the settlement of the Neomagic lawsuit in our favor in fiscal 2005, and (iv) increased amortization expense of intangible assets of $0.3 million, partially offset by decreased stock-based compensation expenses of $6.6 million. The decrease in selling, general and administrative expenses as a percentage of total revenues was primarily attributable to revenues increasing at a higher rate than sales, general and administrative expenses.

During fiscal 2005, in connection with our acquisition of the minority interests in TTI, we allocated approximately $5.2 million of the purchase price to in-process research and development which had not yet reached technological feasibility and had no alternative future use. The amounts allocated to the acquired in-process research and development were immediately expensed in the period that the acquisition was completed because the projects associated with the in-process research and development efforts had not yet reached technological feasibility and no future alternative uses existed for the technology. As of June 30, 2007, the products developed with the acquired DPTV and HDTV products technology are available for production with the exception of the HDTV-Pro product which is undergoing customer validation.

The increases in interest income in fiscal 2007 compared to fiscal 2006 and in fiscal 2006 compared to fiscal 2005 were primarily attributable to an increase in cash balances in fiscal 2007 and 2006, and to a lesser extent to improvement in interest rates. The amount of interest income we earn varies directly with the amount of our cash and cash equivalents balances and prevailing interest rates.

Other income/(expense), net included gain or loss on sale of stock of privately-held companies. The increase in other income/(expense) net in fiscal 2007 compared to fiscal 2006 was primarily attributable to (i) an increase in dividends of $1 million received from UMC, (ii) an increase in net currency transaction gains of $0.2 million due to weakness of the U.S. dollar and (iii) $0.2 million gain on the sale of investment in Afa Technologies, Inc. in fiscal 2007.
The decrease in other income/(expense), net in fiscal 2006 compared to fiscal 2005 was primarily attributable to a $0.6 million impairment loss on investments in privately-held companies, partially offset by $0.4 million of net currency transaction gains and $0.2 million dividend income in fiscal 2006 compared to a $0.3 million gain on the sale of privately-held companies in fiscal 2005.
Provision for Income Taxes

A provision for income taxes of $16.7 million, $6.3 million and $1.4 million was recorded for the fiscal years 2007, 2006 and 2005, respectively. The increase in our effective tax rate from fiscal 2006 to fiscal 2007 was primarily due to increased profits generated from our operations in foreign jurisdictions where we were subject to tax and the amortization of foreign taxes associated with intercompany profit on assets remaining within Trident’s consolidated group. The increase in our effective tax rate from fiscal 2005 to fiscal 2006 was primarily the result of an increase in our foreign operations pre-tax financial accounting income partially offset by a release of foreign operations valuation allowance. A tax benefit was recorded in fiscal 2006 as a result of eliminating this valuation allowance for deferred tax assets of $1.4 million.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations
Financial Data for the Three and Six Months Ended December 31, 2007 Compared to the Three and Six Months Ended December 31, 2006.

Digital media product revenues represented substantially all of our total revenues for the three and six months ended December 31, 2007 and 2006. The increase in revenues for the three and six months ended December 31, 2007 from three and six months ended December 31, 2006 was primarily attributed to continued success of our Super Video Processor (“SVP”) family of products in the digital television markets. Our unit sales volume of our products increased by approximately 31.2% in the three months ended December 31, 2007 compared to the three months ended December 31, 2006 and increased by approximately 40.1% in the six months ended December 31, 2007 compared to the six months ended December 31, 2006. However, as is typical with consumer electronics markets, blended average selling prices decreased by approximately 16.3% and 16.6% over the same time period. For the three months ended December 31, 2007 and December 31, 2006, three customers each accounted for more than 10% of revenues. For the six months ended December 31, 2007, three customers accounted for more than 10% of revenues while two customers accounted for more than 10% of revenue in December 31, 2006. For the three months ended December 31, 2007 and 2006, approximately 44% and 57%, respectively, of our total product revenues were generated through distributors and the remaining 56% and 43%, respectively, were generated through independent sales representatives. For the six months ended December 31, 2007 and 2006, approximately 43% and 54%, respectively, of our total product revenues were generated through distributors and the remaining 57% and 46%, respectively, were generated through independent sales representatives.
Revenues from customers in South Korea, Japan and Europe, accounted for 35%, 33%, and 19%, respectively, of our total revenues for the three months ended December 31, 2007. Revenues from customers in South Korea, Japan and Europe, accounted for 37%, 30%, and 20%, respectively, of our total revenues for the six months ended December 31, 2007. Regionally, South Korea and Japan were our two largest regions for the each of the three and six months ended December 31, 2007 and 2006. Europe was the third largest region and revenues from Europe increased significantly for the three months and six months ended December 31, 2007 compared to the same periods, primarily due to the sales volume ramp up of SVP-CX products to a major OEM customer in 2007. Revenues increased in South Korea and Taiwan for the three and six months ended December 31, 2007 compared to the three and six months ended December 31, 2006, primarily due to the continued demand of our standalone image process controllers largely in the digitally processed television markets. Revenues in Japan and China decreased in the three and six months ended December 31, 2007 compared to the same periods in 2006, principally due to increased price competition. We expect customers located in Asia and Europe will continue to account for a significant portion of our total revenues in future periods of fiscal 2008.

Gross margin for the three months ended December 31, 2007 decreased 2.2 percentage points compared to the three months ended December 31, 2006 primarily due to (i) a decrease in sales of previously fully reserved products of $1.7 million for the three months ended December 31, 2007 compared to the three months ended December 31, 2006 and (ii) decreased revenues and average selling prices from a previous generation product that had a higher gross margin.

Gross margin for the six months ended December 31, 2007 decreased 1.4 percentage points compared to the six months ended December 31, 2006 primarily due to (i) a $0.7 million increase in charges to inventory reserves for the six months ended December 31, 2007 compared to the six months ended December 31, 2006 and (ii) decreased revenues and average selling prices from a previous generation product that had a higher gross margin.
During the three months and six months ended December 31, 2007, revenues from the sale of previously reserved products
were $0.9 million and $2.6 million or 1.2% and 1.6% of total revenues as compared to $2.6 million and $2.7 million, respectively, or 3.8% and 2.0% of revenues for the three and six months ended December 31, 2006. Due to the previously recorded reserves, there was no cost of revenues 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. At the same time we recorded additional inventory reserves for the three and six months ended December 31, 2007 of approximately $0.9 million and $1.1 million, respectively, as compared to approximately $0.2 million and $0.4 million for the same respective three and six month periods of the previous year.

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 impacted significantly 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.
We believe that the prices and gross margins of our products will continue to decline over time as competition increases and new and more advanced products are introduced by our competitors. We expect average selling prices of existing products to continue to decline, although the blended average selling prices of our entire product line may remain relatively constant. Our strategy is to maintain and optimize gross margins by (i) managing average selling price erosion in pricing negotiations with customers, (ii) developing new and more advanced products that can add relative value to the selling price, (iii) reducing manufacturing costs by improving production yields, (iv) aggressively developing more cost effective products and (v) negotiating with the foundry and other manufacturing partners to receive more competitive pricing. There is no assurance that we will be able to develop and introduce new products on a timely basis or that we can reduce manufacturing costs or improve margins. In addition, the overall gross margins of our products in the future could be significantly lower as we transition from standalone image process controllers to SoC solutions.

Research and development expenses consist primarily of personnel-related expenses including stock-based compensation and engineering costs related principally to the design of our new products. The increase in research and development expenses for the three months ended December 31, 2007 compared to the three months ended December 31, 2006, resulted primarily from (i) a $1.4 million increase in stock-based compensation expense recognized in accordance with SFAS No. 123(R) and (ii) a $0.6 million increase in salary and payroll-related expenses associated with the hiring of additional personnel, offset by a $0.7 million decrease in engineering expenses related to new product development.

The increase in research and development expenses for the six months ended December 31, 2007 compared to the six months ended December 31, 2006, resulted primarily from (i) a $3.2 million increase in stock-based compensation expense recognized in accordance with SFAS No. 123(R) and (ii) a $2.3 million increase in salary and payroll-related expenses associated with the hiring of additional personnel.
We are currently planning to continue development of the next generation DPTV products as well as other advanced products for the digital media markets. We expect research and development expenses to continue to increase due to new product introductions and increased staffing of our China-based research and development centers.

Selling, general and administrative expenses consist primarily of personnel related expenses including stock-based compensation, commissions paid to sales representatives and distributors and professional expenses. The increase in selling, general and administrative expenses for the three months ended December 31, 2007 compared to the three months ended December 31, 2006, resulted primarily from (i) an additional $3.7 million in stock-based compensation expense recorded, which was related to the contingent liabilities associated with vested options of certain terminated employees, (ii) a $0.4 million increase in payroll-related expenses associated with the hiring of additional personnel, partially offset by (iii) a $0.9 million decrease in bonus due to annual bonus accruals being aligned with current projections for fiscal 2008 and (iv) a $2.1 million decrease in professional fees. The professional fees related to the cost of the investigation into our historical stock option grant practices were $2.9 million for the three months ended December 31, 2007 compared to $5.7 million for the three months ended December 31, 2006.
The increase in selling, general and administrative expenses for the six months ended December 31, 2007 compared to the six months ended December 31, 2006, resulted primarily from (i) an additional $8.5 million 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, (ii) a $0.5 million increase in payroll-related expenses associated with the hiring of additional personnel, (iii) a $0.4 million increase in sales commission due to the increase in revenues for the six months ended December 31, 2007 compared to the six months ended December 31, 2006, partially offset by (iv) a $1.1 million decrease in bonus due to annual bonus accruals being aligned with current projections for fiscal 2008 and (v) a $2.7 million decrease in professional fees. The professional fees related to the cost of the investigation into our historical stock option grant practices were $6.7 million for the six months ended December 31, 2007 compared to $9.9 million for the six months ended December 31, 2006. The increase in selling, general and administrative expenses as a percentage of revenues is primarily attributable to increases in our stock based compensation expenses.

We invest our cash and cash equivalents in interest-bearing accounts consisting primarily of money market funds, commercial paper, certificates of deposits, and high-grade corporate securities. The increase in interest income for the three and six months ended December 31, 2007 was attributable to an increase in cash on hand from $138 million as of December 31, 2006 to $185 million as of December 31, 2007, partially offset by a slightly decrease in interest rates during the three and six months ended December 31, 2007 compared to the three and six months ended December 31, 2006

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